Betting On Cruises To Recover Faster Than Airlines
Summary
- Shares of airlines and cruises have taken beatings throughout the pandemic selloff.
- Airlines had received government-funded bailouts, while cruises sought funding in notes as Norwegian announced a "going concern" doubt.
- As travel slowly ramps up, cruises could take on more vacationers and see a recovery before airlines see fleets and passengers return to normal.
Travel has been one of the worst-faring industries to date since the pandemic status was given to coronavirus. Airlines and cruises have arguably been some of the hardest-hit names in the broader industry, with names like Delta (DAL), United (UAL) and Southwest (LUV) down 57%, 69% and 41% YTD, while cruise operators Carnival (CCL), Norwegian (NCLH) and Royal Caribbean (RCL) down 69%, 73% and 61%. Based on share price alone, airlines haven’t outperformed the cruises since mid-March, but took a softer fall during early March and February.
Airlines globally (for the most part) have received state aid/bailouts – to name a few, AirFrance/KLM (OTCPK:AFRAF) looks to get around €11 billion, Delta $5.4 billion so far, Southwest $3.2 billion, United $5 billion, Singapore Airlines (OTCPK:SINGY) S$8.8 billion, and Lufthansa (OTCQX:DLAKF) seeks a deal possibly worth over €10 billion. Ryanair (RYAAY), Qantas (OTCPK:QUBSF), Etihad and China’s three airlines are some who have not received or will not receive aid. Most of the airlines have pointed to travel recovery to pre-pandemic levels occurring near 2023.
The cruise industry sparked much controversy when the $2 trillion stimulus bill was first announced, with the primary question being, why do these cruises get federal money when they incorporated themselves offshore to avoid federal income taxes? The three major operators aren’t necessarily willing to move to incorporation here – Carnival stands with Panama, Norwegian in Bermuda and Royal Caribbean with Liberia, where the tax benefits lie.
Either way, both sectors have been met with high liquidity concerns – Delta and United had been burning through around $100 million a day each, and both expect to reduce cash burn to $40 to $50 million for the second quarter. Norwegian announced on May 5, alongside plans to raise more cash, that there is “substantial doubt about the company’s ability to continue as a going concern.” 2 days later, CEO Frank Del Rio stated that because of the $2.4 billion capital raise, Norwegian has enough cash to last 18 months on zero revenue.
Cruises and airlines are typically debt-laden as high fixed-cost, asset-concentrated industries, with vessels and planes sitting idle as demand slumps. Cash consists of just a small portion of total assets – for Delta, cash is a mere 4.8% of assets; for Carnival, cash is 1.15% and for Royal Caribbean, cash is barely 0.8% of total assets. With most of the assets in property, liquidity crunches in zero or minimal revenue environments have caused the airlines to seek bailouts, and the cruises to seek capital in the debt markets. As the current situation of reopening remains underway, a secondary grab from bailouts and debt markets does not look necessary as liquidity concerns have eased, although total debt in the industries does remain high.
Looking at debt-to-equity ratios shows that the airlines look to possibly be in better standing in the long term than the cruises, although United has about the joint-highest D/E. Due to differences in liability structures, only gross debt was used – long term and current portion. As of May 29, Norwegian has a D/E ratio of ~2.18 (based on $8.752 billion in outstanding repayments), Carnival ~1.77 (based on $21.841 billion after new note issuance), and Royal Caribbean ~1.75 (based on $19.005 billion). Delta’s D/E is a more reasonable ~1.06 (on $16.999 billion debt), United ~2.17 (with $17.681 billion), and Southwest ~0.37 (on $7.083 billion after $2 billion issued in notes).
With such high D/E ratios, these industries need customers to start flocking back pretty quickly and in a larger group if a recovery to 2019 revenues levels is to happen quickly. Since that doesn’t look to be the case, with a recovery more drawn out for both as passengers might avoid cruises to avoid being on a ‘petri dish in the ocean’ or surrounded by fellow passengers in a small plane cabin (of which we still saw full flights during supposed social distancing posted on Twitter: case 1, case 2). Viral posts like these work against building trust between the passenger and the carrier, damaging the relationship and potential reuse by those and other passengers as long as the pandemic exists uncontrolled.
It’s no wonder that the industries are struggling, with demand down to such record lows in the blink of an eye – airlines have been forced to ground flights worldwide, with fleets in service now back to almost a 30-year low. Screenings domestically through TSA have plummeted alongside flight cancellations/groundings and capacity cuts.
As long as the coronavirus remains in the global societal picture, airline capacities will have to remain low, and flights to/from affected regions will be both lower in quantity and lower in demand if still allowed to fly. A second wave of the virus could further harm the extremely slow claw-back in domestic passengers, yet capacity cuts to keep passengers safe and distanced will remain.
Airlines could see recovery first within fleets in service – a plane is of no use idle on a runway empty, and as long as passenger demand starts to increase slowly, more planes could be needed to continually enforce distancing measures (no middle seats) and keep passengers further separated. Let’s just estimate that by the same period next year, TSA screenings have grown six-fold from the ~250,000 now, and are hovering in the 1.5 million range – if there still is no vaccine or cure, and cases have not been eradicated, planes will not be able to be at full capacity, and more planes in service will be needed to carry passengers. If, by that time, a vaccine is developed, and planes are able to bump flight capacity higher and sell all seats, passenger trust will be the issue – do they trust the airline to be clean and safe, following all precautionary measures, and do they trust fellow passengers enough to confine themselves in such close quarters?
Cruises, on the other hand, were labelled ‘floating petri-dishes’ after being linked to dozens of outbreaks infecting thousands globally, with the belief that the ships possibly helped spread the disease worldwide. Backlash had been quite high, as liners like Carnival were thought to have been aware of the dangers and potential infections yet still sailing. Cruises are docked for months, with the earliest planned ‘safe’ sailings beginning August 1. As a purely discretionary (vacation) form of travel, cruises are forced into a zero-demand, zero-revenue state (also due to health reasons), while airlines are more-so a necessity in today’s day and age.
Even as a discretionary, vacation travel, cruises have the ability to carry 10 to 20 times the passenger capacity of airplanes at maximum; even though that is no longer possible for quite some time, 30% capacity on a large cruise could hold up to 2,000 passengers, while a 777 could carry maybe 100 to 150. Yet that definitely still poses a risk – hundreds to thousands more in contact aboard the same vessel, and extending multiple days or a week, while a flight would last ~5.3 hours from LAX to JFK; hence, the probability of infection could be higher due to time and passenger count.
Travel on cruises for vacation, for the most part, look to be much cheaper than a typical flight and hotel at the moment. One of Carnival’s first planned cruises on August 6, a 4-day excursion from Miami to the Western Caribbean, costs ~$270 with taxes and fees (~$67/night); a price impossible to match by flight and hotel (you’d be lucky to even get the flight for that cheap). With nearly 1 in 5 Americans unemployed, spending on vacations might not even be fiscally feasible, yet should people want to travel, spending for a flight and hotel (combined with similar exposure on a flight) could easily be double or triple that of a cruise currently.
Cruise liners like Carnival have already claimed to have strong 2021 bookings, although the validity of those claims is yet to be known; however, that still points to a possible quicker recovery than the airliners, who as a majority don’t see full rebounds until 2023. Whether cruises will recover to pre-pandemic levels by 2021 is highly unlikely, yet if trends are true and bookings are indeed strong, a recovery by mid-year 2022 could be in the cards for one or both industries. Given the damage to consumer spending power, cruises hold the advantage for cheaper vacations and higher passenger count even at lower capacity, yet airlines still remain somewhat a necessity for quicker travel domestically.
It most likely will be a long, bumpy road to recovery in share prices for companies in the two industries. Domestic travel perking up as restrictions continue to loosen, even with capacity cuts, could begin revitalizing the general public and travel, although airlines will be facing lower revenue streams from smaller fleets, idle planes, and lower capacity, with fleets probably not returning to full service for at least a year or two. Cruises are likely to benefit if the liners can prove that health and safety standards have been improved significantly, although the distaste left with many vacationers and soon-to-be vacationers on the cruises will impact their ability to attract passengers in swarms.
Cruises do have the benefit of all-inclusiveness, therefore providing a vacation for potentially cheaper than a flight+hotel+food combination. Cautious approaches like put protection for the short term in both industries to protect against potential downside risk could set up for a strong long-term growth opportunity.
This article was written by
Analyst’s Disclosure: I am/we are long CCL, NCLH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (52)
Some businesses will hire more employees, like Dunkin Donuts and Dominos and some will disappear. How that nets and with what speed can’t be known at this time. I guess glass half full and glass half empty predictions therefore will abound. I’m on the glass half full side. I truly believe that governors did not let the data guide their actions and incompetently handled the long term care population. Unfortunately some of the same governors, rationalized that the crowds assembled in protest for days after days were to be encouraged, but a barber shop or clothing store should remain closed. More seriously, in some cases the authorities stood by for days and let those very small businesses be destroyed by agitators and looters. In spite of all of that, i’m optimistic. Comparing the comeback speed of the economy now to that of 2008,9 isn’t valid in my view, because the banks and financial institutions were in good shape now and there are no credit freeze or derivatives two and three times removed on questionable home and commercial property loans.
I guess the market was correct at the S&P top of 3386 on February 19th (just before selling off 34%)?“As the high frequency data comes in daily, the market is already all knowing on what is happening and never gets it wrong.”You must be new to the investment world! The market OFTEN gets it wrong due to investor psychology - investors get overly bullish and overly bearish, and thus many times the current level of the market does not adequately reflect the fundamental outlook. I think the current rally is one of those examples where investors have prematurely assumed the “all clear”!As to the jobs report, I would strongly recommend that you go back and look at the total job losses during and right after the 2008-09 recession. This recession, certainly by job loss measurements, is far worse that the 08-09 period. It took years for job growth to overcome all the lost jobs in the past recession. Anyone who expects employment back to pre-Covid-19 levels within a year is just not looking at real life.
Moreover, given its relatively less severe mortality ratio, complete lockdown turns out to be too expensive to be an effective way of containing the virus spread and therefore to gain support for reinstallation.If you still believe in ‘this time is really different indeed’, a mentality keeping show up each crisis, you will see lifetime chance slip away from your hands forever. Again, investment thesis is about future and none evidence will be conclusive, and you can choose to wait until storms are over, and of course risk premium goes with it. X
I am short via long dated puts.
Love your profile pic 😂
