There was more bad news yesterday for cruise line stocks, after an already brutal sell-off last week continued amid new warnings from the very top of the US government.
The State Department issued a statement that “U.S. citizens, particularly those with underlying health conditions, should not travel by cruise ship.”
Shares of the three largest operators – Carnival, Royal Caribbean Cruises and Norwegian Cruise Line Holdings – dropped significantly on Monday in the latest blow to the troubled industry.
Carnival closed yesterday at $21.74, down nearly 20%. Royal Caribbean was down 25.75% and Norwegian fell 26.90% to $19.81.
This comes after a brutal sell-off last week that saw the Carnival lose 17%, Royal Caribbean lose 20.2% and Norwegian drop a stunning 27% in just 5 days.
Year-to-date, Carnival is down 57.63%, Royal Caribbean is down 64.15% and Norwegian is down 66.32%.
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Adding to investor fear is the news that at least two cruise ships, one the Carnival Grand Princess and the other the Carnival Regal Princess, are being kept at sea while crew members are being tested for COVID-19, the coronavirus.
The Grand Princess, floating off the coast of Oakland, California, has already had a former passenger die from the coronavirus and 21 people aboard the ship have tested positive.
The Regal Princess, sailing in circles off the coast of Ft. Lauderdale, Florida, is being held at sea while two crew members who previously worked on the Grand Princess are being tested for the coronavirus.
Can the Cruise Industry Survive the Coronavirus?
The question that investors now have to ponder is can the major cruise lines survive this latest outbreak?
Bookings are down and cancellations are up. Without ships sailing, and particularly without full ships sailing, the companies can’t generate revenue.
A Japanese cruise operator, Luminous Cruise, filed for bankruptcy protection a week ago, citing a drop in demand since February 1st due to the coronavirus outbreak.
If the coronavirus drags on through the summer cruise season, things could get quite scary for the major cruise lines.
The quick ratio is a simple ratio that measures a company’s solvency, or their ability to meet their short-term obligations with cash on hand. Anything less than 1.0 is problematic as it means the cash coming in from their operations isn’t enough to cover their current liabilities.
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Looking at each of the major cruise lines quick ratio, we get the following numbers:
Royal Caribbean: 0.125
And these were the numbers before the coronavirus outbreak. The numbers going forward will likely get worse as the drop in bookings and increasing cancellations take a toll on the companies ability to generate cash.
Bankruptcy or Bailout
If the State Department warning leads to a prolonged slowdown in the cruise industry, it might not be long before we have a major cruise line file for bankruptcy protection.
The alternative is that Washington could step in and give the industry a bailout to prevent massive job losses and keep the vital tourism industry afloat, particularly in President Trump’s (new) home state of Florida. It’s been reported that the bailout could come in the form of deferred taxes for companies in the travel industry.
Either way, the short-term future for the cruise industry looks bleak and we wouldn’t be calling a bottom in cruise line stocks just yet.