A sector on a pause mode

The covid-19 contamination of the Diamond princess cruise ship and its quarantine along the Japanese coasts in February, followed by other stranded cruise ships with thousands of passengers being refused to disembark at most of the world’s ports, put the cruise sector in the headlines at an early stage of the pandemic. In the aftermath of those events, the industry has been placed on hold. Most cruise companies voluntarily stopped sailings due to port closures and travel and flight restrictions. In addition to those voluntary suspensions, the U.S. Centers for Disease Control and Prevention (CDC) issued a “no sail order” in early April for all cruise ships over 250 passengers and crew that operate in the US waters until late July. What is more, CLIA, the Cruise Line Industry Association, which represents most cruise lines, recently announced an extension of the voluntary suspension of service for ships leaving from US ports until 15 September. Florida, which hosts many home ports for ships that sail in The Caribbean, has recently experienced a spike in its covid-19 cases. Now, North American cruise passengers dominate the market, representing about half of the number of passengers. Globally speaking, while many cruise lines currently announce a relaunch of their sailing activities in the autumn, this remains subject to many uncertainties relating to the pandemic’s evolution. In that regard, river cruise companies are in a better position. They show early signs of a recovery, river cruises having already started to resume. They indeed benefit from a more local activity, limiting travel restriction and quarantine risks, and from operations on smaller ships with a more limited number of passengers, making the respect of sanitary measures more manageable.

With a possible derailment of demand, overcapacity risks are mounting

The current impact of the halting of operations is obviously very severe for the sector. One of CLIA's  scenarios, assuming that the break continues through September, suggests a loss of more than half of the industry's $150 billion in annual global economic activity. While the cruising industry is characterised by a very high level of ownership concentration, major cruise lines are facing big quarterly losses. They also face court cases from passengers who lost relatives or crew members who became ill or from authorities for having allowed contaminated passengers to disembark. Investors have also sued Norwegian Cruise Line for having lied about the severity of the disease in order to keep clients. However, while they were under severe liquidity constraints, and Norwegian Cruise Line even warned of a possible bankruptcy, those major cruise companies managed to make large bonds emissions in order to bear the consequences of the shutdowns, allowing them to currently withstand several months without revenues and face continuous costs.

Even though a Spanish unit of Royal Caribbean Cruises filed for bankruptcy in June and Carnival announced in the same month that it was planning to sell six of its ships to deal with its financial losses, those major players on the market should be able to cope with their financial constraints in the next few months. But, the resuming of the activities will only be possible when the pandemic will be over, or when a treatment or a vaccine will be found, and that date is very uncertain. The other uncertainty is the future behaviour of consumers vis-à-vis this sector which might be regarded as highly insecure in health terms, especially because of its typically old-age clients. A note of hope is given by the fact that previous virus outbreaks did not stop consumers to return and its base from expanding. Travel bookings are already well filled in for next year, and in last April bookings for next year were at least at the same level as last year at the same period (although parts of it are re-bookings instead of pure cancellations of planned cruises due to the covid-19). However, a prolonged pandemic would further deteriorate the liquidity position as operational and administrative costs keep running, increasing bankruptcy risks for weaker companies. What is more, given the solid increase of capacity in ocean cruise ships and beds foreseen for the next few years, overcapacity was already seen as the most important risk in the ocean cruise segment in the medium to long term before the covid-19 outbreak. Any derailment in demand’s growth would therefore further increase that risk. As a consequence, the permanent consolidation trend is also likely to continue in the sector.

Other risks include a possible rebound in fuel oil prices once the pandemic is over. The implementation of the new International Maritime Organization (IMO) regulation concerning the sulphur content in maritime fuel as from 1 January 2020 has implied heavy investments in scrubbers by cruise lines. Those investments could start to weight further on cost structures if they are associated with higher fuel costs.

With about one-third of all cruise ships operating in the Caribbean Basin, the region is the most important one in terms of cruise fleet deployment. But, the region is increasingly becoming home to extreme meteorological phenomena like hurricanes. Consequently, the risks of damages to ships or obligation to take measures like the cancellation of cruises, impacting the revenues of cruise companies, are rising.

Finally, mounting reluctance vis-à-vis mass tourism, to which cruise passengers are associated, is forcing companies to revise their itineraries, possibly increasing operational costs or implying less interest from their client base. For example, Royal Caribbean has recently decided to depart and end cruises from Ravenna instead of Venice as from next year.

Analyst: Florence Thiéry – f.thiery@credendo.com