Carnival Corporation saw its share prices fall by as much as 80% in late 2019 as the world struggled to respond to the global pandemic. With ships stranded in port and clearance procedures ongoing, the cruise operator continued to focus on a series of improvements launched before the pandemic transformed markets.
These changes could help right the proverbial ship and return Carnival to smooth sailing.
Carnival calls for calm seas
The apparent loss of revenue during the early days of the pandemic had lasting consequences, as major cruise lines provided any passengers unable to travel with credit vouchers toward future voyages. These vouchers continue to reduce profitability on each cruise, but they represent a fixed cost that can quickly decrease over time.
Similarly, cruise lines have now absorbed much of the cost of cleaning, certifying and modifying ships to meet the new vacation challenges created by the pandemic.
Carnival’s 2016 energy efficiency improvements helped boost its continued profitability in the years leading up to the pandemic downturn, and the company invested $350 million to further hedge against rising fuel prices and reduce overall consumption.
The cruise line also announced in September that pandemic boarding requests had ended in most markets. Between these changes and the reduction in the number of credit coupons remaining, it appears that most of Carnival’s immediate profit loss from the implosion has passed.
Bringing things back home
The introduction of Carnival’s Service Energy Packages, first announced in August, offers one of the latest sets of initiatives designed to reduce costs. By installing and enabling these improvements across its fleet, Carnival hopes to reduce fuel costs and reduce greenhouse gas emissions.
Service Energy Packages include upgrades to HVAC systems for greater efficiency and a switch to LED lighting systems. Technical changes and remote monitoring should improve overall results and provide a return on investment. Carnival expects this rollout period to take place over the next five years, with shipboard fuel consumption rates falling by up to 10% by 2023.
Beyond reducing energy costs, which remain a major factor in cruise profitability, the latest initiatives include a push to return full capacity to guest services. Lines are now operating at 95% capacity, according to Carnival’s September earnings report. New bookings continue apace, and Carnival’s most recent quarter saw a return to $4.8 billion in future cruise deposits, down sharply from $4.9 billion in the country during the same quarter of 2019.
Never try to catch a falling knife
Conventional wisdom says that any stock that sees a big drop like Carnival should be viewed with the utmost caution. Carnival’s recovery includes many initiatives that were already underway before the pandemic, but those costs may have slowed its recovery as revenue dried up. While Carnival continues to show some strength and a comeback may be on the horizon, the company has yet to reach its core markets.
competitor Royal Caribbean Groupfor example, it offers a strong alternative and a greater opportunity for sustainable profitability sooner than Carnival.
Royal Caribbean predicts a move to positive earnings per share this year versus Carnival’s expectation for 2023. Royal Caribbean’s share price, currently around $48 versus Carnival’s $8, has taken less of a hit this year. Market patience with the cruise line recovery appears to be lacking, indicating reduced confidence in the near-term return to profitability. But that smaller bump also means less upside for those looking to invest.
Cruises seem poised for a comeback
The cruise market remains in a period of growth and recovery. Grand View Research estimates that cruise revenue could double from the current $7.67 billion to more than $15 billion by 2028. This represents a lot of potential for cruise executives. Investors looking for proven cruise line stocks with plenty of upside are likely to see promise in Carnival.
With travel deposits approaching 2019 levels, profitability may follow. Carnival’s share price at that time was six times higher than today’s price, showing that this company can deliver. Carnival stock does not appear to be a falling knife, but instead may offer a rare opportunity for those looking to buy and hold.
