High Oil Prices Won’t be Enough to Stop Carnival Corporation Stock

  • In Q1 2022, Carnival (CCL) booked revenues of $1.6 billion.
  • Management expects to have its full fleet fully operational just in time for the summer season
  • Cruise lines may have to create a fuel surcharge to mitigate rising oil prices.
Carnival cruise (CCL) ship on the water
Source: Ruth Peterkin / Shutterstock.com

The travel industry still remains in the doldrums more than three years into the pandemic. The initial recovery was delayed due to the Delta and Omicron variants. However, things finally look like they are about to turn a corner.

Unfortunately, the Russia-Ukraine crisis happened which sent commodity prices sky-rocketing. This is the situation Carnival Corporation (NYSE:CCL) finds itself in. The stock is still trading at a discount with the prospect of a travel boom. But the uncertainty of high oil prices hangs over CCL stock.

CCL Carnival Corporation $18.84

Carnival’s Business is Back

After two years of difficulty due to the COVID-19 pandemic, Carnival’s business operations are on the upswing. In first-quarter 2022, the company booked revenues of $1.6 billion. This was a far cry from the $26 million in Q1 2021 when the pandemic drove the cruising industry to a halt.

However, this figure was not yet a return to normal operations for Carnival. The company experienced lower bookings and higher cancelations due to the Omicron surge early this year. The requirements and availability of pre-travel tests, as well as the positive results stemming from those tests, also caused disruption to the company’s business operations. Overall the Carnival had an occupancy rate of around 54% in Q1 2022.

Management sees these trends to continue to improve as the world finally begins to move past the Covid-19 pandemic. Weekly booking volumes have been trending up and are at an all-time post-pandemic high. According to management as of March 22, the company’s capacity utilization reached 75%. They expect to have their full fleet fully operational just in time for the summer season — the cruise industry’s most profitable season.

High Oil Prices a Tailwind

Just as when the industry is about to get back on its feet another challenge arrives. The conflict between Russia and Ukraine has caused oil prices to surge. The resulting increase is felt by many industries but the travel industry may be among the worst hit.

Like airlines, Cruise lines are a high fixed-cost business. One of the largest costs for a company like Carnival is Fuel which can be as high as 20% of its operating expenses. A small change in the price of fuel can have a material impact on Carnival’s profits. Therefore the large increase we have been seeing in recent months could easily turn Operating Income from green to red.

In the past, Cruise lines have mitigated these costs by imposing a “fuel surcharge”. Since the financial crisis in late 2007 when oil prices hit $100, Carnival has included a clause in its contract for fuel-related fees. Carnival’s contract states that it could impose a fuel surcharge of $9 per person which it can collect even if “the cruise fare has been paid in full”

The company has not yet imposed a fuel-related cost on its customers. No doubt Carnival’s management is wary of alienating customers as the industry is trying to recover from pandemic lows.

Your Takeaway

I believe that CCL stock could be a decent investment at these levels. Savings are at an all-time high due to the COVID-19 pandemic. There is a threat of inflation and lower consumer confidence. But after being stuck at home for almost 3 years, I think many people would be willing to pay the extra costs.

Carnival has shown in the past that it has been able to pass along fuel costs. If the travel industry continues to recover, there could be more upside for CCL stock from these levels. I would keep CCL stock on your watch list.

On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.

Article printed from InvestorPlace Media, https://investorplace.com/2022/04/ccl-stock-high-oil-prices-wont-be-enough-to-stop-carnival-corporation-stock/.

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