Carnival Corporation (NYSE:CCL) has had a tough year. Even though it is a leader in the cruise ship industry the stock closed at $34.28 Friday, down 28% from a year ago. This has been blamed on investors' fears concerning the economy and rising fuel prices. As you can see from the graph below, even the S&P has outperformed it this past year.
CCL vs. S&P 500
click to enlarge
But now shareholders have something much worse to be concerned about. A terrible tragedy. Carnival released the following statement Saturday after one of its luxury ships capsized this past Friday the 13th:
On January 13, 2012, Costa Cruises' vessel, the Costa Concordia, departed from Civitavecchia, Italy with approximately 3,200 passengers and 1,000 crew members on a seven-day voyage. At approximately 10:00pm CET, the vessel struck rock off the coast of Isola del Giglio, Italy and sustained significant damage causing the ship to list severely. The order was given to abandon ship and deploy the lifeboats.Tragically, there are reports of some deaths and injuries. This is a terrible tragedy and we are deeply saddened. Carnival Corporation & plc offers our sympathies and heartfelt condolences to all of the Costa Concordia guests, crew members and their families.
This is one of 100 ships in the Carnival Collection of ocean liners. According to Bloomberg, Costa Cruise Lines, under the parent company of Carnival, built the Concordia in 2007 for $647 million. And it does not have enough insurance to cover all of the losses which could be very bad news for Carnival stockholders:
Carnival carries insurance that covers a number of risks within certain limitations, according to the January 2011 filing. The coverage includes hull and machine insurance, as well as protection and indemnity policy that includes crew and passenger injuries, shipwrecks, damage to third parties and pollution.
The company also had practiced some self insurance in the past...
The January 2011 filing that the article refers to is a 10-k in the annual report filled last January. It will probably be a while before we know the amount of damage, but it will be substantial. Probably the most damage to any large cruise ship in modern time.
The article goes on to say that Carnival does not have insurance for any of the lost revenue from future cruises that the Concordia would have made. This revenue loss will be compounded by the fact that right now is the peak time for people to make reservations for summer travel. And based on fear some will choose other types of vacations. This shipwreck will probably impact the entire cruise ship industry.
On Sunday, Bloomberg in an updated article quoted Italian news "il Sole 24 Ore", which reported:
Aon Corp. (NYSE:AON), Carnival Corp (CCL)'s insurance broker, may have to arrange payment for the total loss of 450 million euros if damages exceed the insured amount of the ship, Sole said. Costa Concordia's protection and indemnity insurance for damages to passengers and crew should cover as much as $3 billion, it said.
So will this be enough to cover the losses? One analyst believes that Carnival's additional loss will be at least $200 million or 10% of this year's profits. Something that will determine whether this amount will be even higher is the possible guilt of the captain and crew of the ship. Witnesses have said that the captain, Francesco Schettino, was seen leaving the ship before all of the passengers were evacuated. A charge that he denied.
However, the Italian press is reporting that Costa has made a statement saying that the captain made an "error in judgment" by going too close to the coastline and not following evacuation procedures. In Italy this is a very severe crime and carries a stiff 12 year prison sentence. Reportedly, he has been arrested for manslaughter. At this time 5 people are dead, 60 injured and 17 still missing.
There are also allegations that the crew did nothing to warn passengers of the impending doom of the ship, and for 45 minutes they told them to stay calm. Even though the lights were out and the ship was taking on an enormous amount of water in the hull due to a 160 foot gash in the bottom of the boat, they told the passengers that they were having technical problems. To put this in perspective, the gash is half the length of a football field, or just over 53 yards.
Then suddenly the ship flipped over on its side making it almost impossible to lower the life boats. Passengers also reported that even though the cruise began on January 7, there was never an evacuation drill. If there is any sort of silver lining to this situation it is that it happened in shallow waters near land, which ironically caused the crash. But if this accident had happened out in open sea the results would have been devastating since the ship would have sunk to the bottom and the death toll would have been much higher.
All of these things could be bad news for Carnival. If the allegations are true then the company could be considered negligent, making legal claims go sky high. And since some passengers died and numerous others were hurt these claims will be even higher. Divers have recovered the "black box" and investigators hope to have answers soon. The market will be closed for Martin Luther King Day, but when it opens Tuesday analysts are expecting major drops in the price.
Miraculously, the S&P has announced that it will not downgrade the credit rating for Carnival or any other of the major cruise lines. According to the statement it considers the fact that this will create a drop in cruise sales for 2012 which will be offset by discounted prices. However, they will continue to monitor the situation:
NEW YORK (Standard & Poor's) Jan. 15, 2012--Standard & Poor's Ratings Services said today that its ratings on Carnival Corp. (BBB+/Stable/A-2), and other rated cruise operators including Royal Caribbean Cruises Ltd. (BB/Stable/--) and NCL Corporation Ltd. (B+/Stable/--), are currently unaffected by the grounding of the Costa Concordia. The cause of this tragic event, reportedly claiming at least five lives, is unclear.
Although early reports caused a lot of investors to fear this accident could cause Carnival to go bankrupt, it appears that is not the case. The company is still very strong. If you are a Carnival stockholder I suggest that you follow the lead of the S&P 500 and continue to closely monitor the situation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.