Cruise Ships Reward You for Investing. Is it Worth It?
Cruise ships give shareholders spending money. Should you take the bait? Or is it more like those free vacations, where you go home with a timeshare (money pit) that you didn’t know you wanted, and can’t get rid of? Are cruise ships an adventure, a treasure trove, a great investment, CO2 horrors or a huge money pit?
Cruise ships are definitely back in business. According to the Royal Caribbean blog, when cruise ships started up after the pandemic, occupancy rates were sometimes as low as 30%. Today, the Big 3 (Royal Caribbean Group, Norwegian Cruise Line Holdings, and Carnival Corporation) are all at 100% capacity.
If we line up the revenue, the business looks downright exciting, with year-over-year revenue growth of 60-86%. 2023 annual revenue should be close to the pre-pandemic highs in 2019. Cruise ships are turning a profit this year for the first time since 2019 – before the pandemic. The companies are buying new ships (to retire old ones), are setting out asea with all of their cabins full, and are reducing debt. The goal for many of the companies is to return to investment grade in their credit rating.
However, before we get excited and slide into a pool of the mandatory 100+ shares for an extra $100-$250 of spending money on our next cruise, it’s important to understand some of the significant challenges that cruise ships face. In this blog, we’ll take a closer look at how they survived the pandemic and what rules, regulations and debt are part of the industry’s post-pandemic world. Here are some of the things we’ll cover.
Operating in the Red
Junk Bonds & High Fuel Costs
Natural and Unnatural Disasters
And here is more information on each point.
Operating in the Red
Norwegian and Royal Caribbean both lost over $2 billion in 2022, while Carnival lost over $6 billion. The 2023 revenue growth and full-to-capacity cabins will help the 2023 margins to recover. However, the entire industry is heavily indebted – spending more on interest than on fuel, which is typically the largest line-item.
Junk Bonds & High Fuel Costs
The Top 3 cruise ship companies all carry junk bond ratings. Interest rates on their debt can run as high as 11.5%. Gasoline costs for Royal Caribbean are expected to be $1.14 billion this year, with interest at $1.27-$1.28 billion. The top three companies have over $60 billion in debt, with Carnival carrying the largest load at $29.5 billion in long-term debt.
Oil prices are very high, at $85.35 a barrel. With so much war and economic uncertainty in the world, and with OPEC cutting production, the U.S. Energy Information Administration is forecasting $95/barrel oil prices in 2024. Higher fuel prices could raise fuel costs by 11% in 2024, which amounts to a hundred million dollars or more for each company – if the EIA projections are spot on. This will make it challenging for cruise ships to return to investment grade – particularly if anything causes occupancy rates to fall.
The low credit quality, massive leverage and rising fuel costs are likely the culprits that are causing the share prices of Carnival and Norwegian to trade close to their 5-year low. Royal Caribbean has a slightly higher share price on the 5-year range, and also a slightly higher credit rating, at BB- (still junk status).
Natural and Unnatural Disasters
Cruise ships are a very safe form of travel. However, having every cabin full and people packed in can also be a breeding ground for viruses. The pandemic was one of the worst disasters to hit the cruise ship industry since the sinking of the Titanic, when passengers were marooned and confined to their cabins before the industry was ultimately shut down. However, cruise ships have also made headlines for food poisoning (salmonella and e coli) and violent storms. (Click to see a report of a torrential downpour that flooded hallways and made many passengers very nauseated from May 29, 2023.) There has also been a post-pandemic spike in the Cruise Ship Virus – Norovirus – that causes diarrhea outbreaks, according to the CDC.
While everyone is excited at the first profits cruise ships have shown since 2019, could the cause of profits (people packed into every square inch) also come with health risks? We’ve seen an increase in very severe storms in the Caribbean and elsewhere. Will this negatively impact voyages during Hurricane Season, cutting into revenue forecasts?
Not only is gasoline expensive on a balance sheet, it’s very, very hard on the planet. (Greta Thunberg took a sailing ship when she came to speak at the UN about climate crisis.) Cruise ships use almost half a million gallons of gasoline for a 7-day cruise for 3000 people. While a 747 averages about 91 mpg/passenger, a cruise ship is more like 14 mpg/passenger. Will potential customers be put off by the CO2 footprint?
On a cruise ship, a lot of the time is spent on the ship doing things that you might do in Vegas – eating, gambling or playing in a swimming pool. In a lot of ways, it’s just Vegas on water. For many cruises, the port of call stops last only a few hours – meaning you’re limited to tourist destinations near the harbor, rather than immersing yourself in the local culture. Sure, you get to gaze out at sea, if you want to brave the high winds to do that – something most people avoid.
Is there an adventure we might take with friends, family and our sacred beloved that is affordable and planet-friendly – one that will become a treasured memory? Are we just jumping onboard the cruise ship because we think it is low-cost? Have we added in all of the mandatory taxes, tips and port fees, and “extras,” like costs for specialty restaurants, alcoholic drinks, excursions, exercise classes and even WIFI?
Cruise ships aren’t the only companies to offer incentives to their shareholders. Berkshire Hathaway has a bazaar at its meetings, where many of the companies owned by BH offer discounts on their products. However, an investment in Berkshire is trading close to its 5-year high, while many of the cruise ship stocks are down -40% (Royal Caribbean) to -75-80% (Norwegian and Carnival). Are we being penny wise and pound foolish in purchasing cruise ship shares for a cash credit on our vacation?
While 2023 is a recovery year for cruise ships and the first year of profits since 2019, it’s not all smooth sailing for the companies or their shareholders. The headwinds for the industry include hurricanes, pandemics, foodborne and airborne diseases, massive debt, high fuel costs and an astonishingly high CO2 footprint.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.