Falling more than 86% from its peak in 2018, the cruise line company Carnival Corporation (CCL -1.40%) has endured a tough few years along with the rest of the travel industry as a result of the pandemic. However, the easing of COVID-19 restrictions combined with pent-up travel demand may just provide the boost this cruise line needs.
A leader in sailing
Taking 37.1% of all cruise revenue last year, Carnival Corporation leads the industry in market share. Carnival also carried over 42% of all cruise passengers worldwide in 2021.
As a leader in both market share and passengers carried, Carnival can justify calling itself “The World’s Most Popular Cruise Line.” The company operates Carnival Cruise Lines, Princess Cruises, Holland America Line, Cunard Line, Seabourn and others.
Carnival’s stock performance reflects the industry as a whole and the company’s position as an industry leader. Before the global pandemic, cruise industry growth was growing at a rate of 6.8% per year. Carnival’s closest competitors are Royal Caribbean Group AND Norwegian Cruise Line.
Image source: Carnival Corporation.
Prevailing winds and possibilities
COVID-19 was a major blow to the cruise industry in particular with passenger volumes initially dropping by 80%. Cruise-ready customers were subjected to strict vaccination and mask requirements during the pandemic, which did not help repeat business. To make matters worse, the fear of being stranded for weeks on a quarantined cruise ship weighed heavily on demand. Many potential travelers couldn’t see themselves booking a cruise during this time.
As a result, companies in the industry suffered a tidal wave of debt. At the end of the second quarter, Carnival’s debt totaled $35.1 billion. The company must now weigh how quickly it can pay off this debt as cruise demand grows.
Fuel prices and inflation are also big for Carnival, which add to the company’s operating costs along with increased spending on adhering to strict health and safety protocols. To combat high fuel prices, Carnival has focused on optimizing fuel consumption with more efficient fleets.
Amid all these headwinds, Carnival also has to deal with the negative impact its ships have on the environment. The US Department of Justice has fined Princess Cruises more than $60 million since 2017 for violating environmental rules. Long-term, Carnival is committed to halving its emissions by 2030 with a goal of net zero emissions by 2050.
Positive current
Despite its challenges, Carnival has made recent strides with second-quarter revenue up nearly 50% from the previous quarter. Cruise occupancy increased from 54% to 69% in the same period.
The company also restarted 20 ships in the second quarter. At the end of June, CFO David Bernstein noted that 91% of the company’s fleet was operational. And demand for Carnival’s cruise offerings in the second half of 2022 has been extremely high, at levels that even exceed 2019 bookings. Because of this “tremendous pent-up demand,” as CEO Arnold Donald describes it , the company saw almost twice as many bookings in the second quarter as in the first.
And with cash from operations now turning positive, Carnival appears to have changed course in the right direction. With its more efficient and effective fleet, nearly a quarter of which are brand new vessels, the company anticipates a return to profitability along with a return on its fleet upgrade investments.
A notable windfall for the cruise industry came last month when the CDC stopped tracking COVID-19 cases on cruise ships. As a result, Carnival began to loosen its procedures for COVID-19, dropping its pre-vaccine requirement and pre-cruise testing for vaccinated guests on most cruises.
Valued at $7.3 billion last year, the cruise industry is projected to reach $15 billion by 2028. With the recovery on the horizon, it may be time to load up the boat on Carnival stock.
