BofA warns cruise demand eroding

[kangforpres]

 

 

https://financenews.upexampaper.com/cruise-stocks-may-face-trouble-as-demand-seems-to-be-eroding-bofa-more-finance-news/

 

Inflation and Covid. I've noticed at least a 30-40% increase in airfare, hotels seem to have gone up by that much too. I never pay retail for a cruise, I don't think anybody does so it's hard for me to gauge the increase in cruise fares.

 

-Paul

[Mary229]

It has been predictable for the last 12 months.  I usually only book one cruise at a time.  Right now I have a full slate, my idea was to lock in 2020/2021 prices.  I locked air prices as soon as they became available too.  Currently HAL and American do not have a fuel surcharge except as reflected in the fare.  Aside from the frequent flight changes and airport turmoil, both of which I can adapt to I certainly enjoy the lower population density on the ships.  Yes, you forego certain amenities and conveniences but as a bit of a crowd-phobic i can tolerate  that also.

[Guest ldtr]

The head of IHG was on CNBC a couple of days ago.  He indicated that they are seeing no pricing resistance in the higher end premium properties.  These are properties above $1000 per night.

 

I expect that you are going to see a splitting of the travel market.  Those aimed at mass market are going to be pressured due to the impact of inflation (especially gas prices) on their customer base.

 

The premium and higher end basically deal with customers that a less impacted.

 

The mass market cruise lines (Carnival, Royal, Celebrity, NCL, Princess, HAL, etc) Are going to face problems from all sides.  Their debt is very high and they current operating profits are not sufficient to cover it.  They have problems staffing their ships.  There are clearly signs that the operations and the quality of the experience is not where it was pre-Covid.  Any slow down in bookings are going to put the cruise lines under even more financial pressures.

[DaveOKC]

The fact that Carnival (CCL) just paid 10% plus for its newly issued bonds scares me as this is almost double the rate that healthy companies are paying.  On old saying on Wall Street is "watch the bonds" to see how healthy a company is.

 

[Mary229]

27 minutes ago, DaveOKC said:

The fact that Carnival (CCL) just paid 10% plus for its newly issued bonds scares me as this is almost double the rate that healthy companies are paying.  On old saying on Wall Street is "watch the bonds" to see how healthy a company is.

 

That is interesting in that the US government is now paying 9.5% on their ultra safe I-bonds

[chisoxfan]

6 minutes ago, Mary229 said:

That is interesting in that the US government is now paying 9.5% on their ultra safe I-bonds

Ultra safe that you will get dollars back...not sure what their future purchasing power will be. Even so if purchases weren't limited to 10k a year there would be a run on these. 

 

Have to agree with posters that the cruise industry is facing incredible headwinds and it seems as if their pricing power is already strained.  

[Guest ldtr]

58 minutes ago, Mary229 said:

That is interesting in that the US government is now paying 9.5% on their ultra safe I-bonds

The difference is that I-Bonds pay the inflation rate, which is not linked to the debt market.  Where as the rate at which  CCL borrows is determined by their credit rating and the debt market.

[Mary229]

1 hour ago, chisoxfan said:

Ultra safe that you will get dollars back...not sure what their future purchasing power will be. Even so if purchases weren't limited to 10k a year there would be a run on these. 

 

Have to agree with posters that the cruise industry is facing incredible headwinds and it seems as if their pricing power is already strained.  

It is as safe as anything except high demand skilled trades.   I was just making a comment on the interest rate not the quality of CCL debt.

 

One I own, one I don’t 

Edited June 9, 2022 by Mary229

[mjdenn]

1 hour ago, Mary229 said:

That is interesting in that the US government is now paying 9.5% on their ultra safe I-bonds

Those I bonds have a lengthy list of fine print attached and the rate was subject to change yearly.

[Mary229]

1 minute ago, mjdenn said:

Those I bonds have a lengthy list of fine print attached and the rate was subject to change yearly.

I understand the i bonds but again I was just commenting on interest rates not making an investment recommendation.  The point is 9.5% is not that uncommon now and will soon be very common. 

[Guest ldtr]

Just now, Mary229 said:

I understand the i bonds but again I was just commenting on interest rates not making an investment recommendation.  The point is 9.5% is not that uncommon now and will soon be very common. 

However, you used I-Bonds as an example, which are not linked to the debt market and as such are not an indicator of interest rates, only that inflation is high.

 

 

As a comparison 10 year treasuries are paying 3.04%

 

Even Corporate A rated bonds are about 4.92%

 

CCL on the other hand is at B1 about four levels into the Junk range.

 

Even good junk bonds are around 7%

 

Part of the pricing with CCL is that these where non-secured.  Probably did not have any assets they could secure them with.

[Mary229]

@idtr  CCL is has the strongest market position and they keep a full tank and pay their fuel bills.  HAL has excellent crew who I trust with my safety. If you want to cruise the CCL lines are a good option.  As an investment I have no opinion, I own enough to receive my shareholder credit and have owned that for years.  I do not take or give investment advice.  I was making a comment on interest rates and if you think rates below 5% are the future I respectfully disagree 

[Guest ldtr]

10 minutes ago, Mary229 said:

@idtr  CCL is has the strongest market position and they keep a full tank and pay their fuel bills.  HAL has excellent crew who I trust with my safety. If you want to cruise the CCL lines are a good option.  As an investment I have no opinion, I own enough to receive my shareholder credit and have owned that for years.  I do not take or give investment advice.  I was making a comment on interest rates and if you think rates below 5% are the future I respectfully disagree 

No one is talking about the future.  We are talking about the recent CCL debt offering  which is in the past, and the current interest rates companies and the government is paying. Which are the rates to be compared with CCLS most recent rate.

 

US Treasuries 10 year bond are easily available and public they are clearly not above 5 percent, and instead are selling a little over 3%

 

The amounts corporations pay are also well document.  Those that are rate A are selling their bonds at around 4.92%

 

Not saying anything about them as an investment, only how the credit houses rate CCLs credit and it is well into the junk bond range.

 

Good attempt on trying to make things look good by giving the I Bond rate, which is linked to inflation, not the debt market.  The only problem is that it has nothing to do with the current level of interest rates that corporations are paying.

 

If one was to look at CCL financials they (the same as RCL and NCLH) are not generating enough cash flow to cover their debt, as a result all of them are going to be borrowing at higher than market rates.

 

 

 

 

Edited June 9, 2022 by ldtr

[rkacruiser]

CCL has gotten slammed by some who don't understand why they refinanced some of their debt into bonds that paid 10%.  It was to pay off debt that was at a higher interest rate as well as providing for some additional cash.  

[Guest ldtr]

58 minutes ago, rkacruiser said:

CCL has gotten slammed by some who don't understand why they refinanced some of their debt into bonds that paid 10%.  It was to pay off debt that was at a higher interest rate as well as providing for some additional cash.  

So are you are saying the CCL voluntarily went with a higher rate than they needed to when they refinanced?

 

Lets be serious CCL refinanced at that rate because they could not get a better rate.   They refinanced because they had debt coming due and they did not have the cash to avoid having to refinance.  

 

Not slamming anybody, just pointing out that the interest rate they are paying is in the junk bond range, and not even good junk bonds.  

 

Yes they did have some debt that was even higher, but that was from when they were shutdown and there was no sign at all of when cruising would restart.

 

Now what exactly that I said above is incorrect:

 

Is the 10 year treasury different 

How about the level for bonds for A rated companies

How about the rate for higher rated junk bond companies

How about is CCL not making enough to cover bond payments?

 

So exactly what I stated is incorrect.

 

On the other hand while CCL did have some higher interest rate debt from early in Covid the 8k does not state that they are retiring that debt, but instead it states that it will be used to cover debt payments and well as some general corporate use.  So it appears to be general debt payments, not for the purpose of retiring all of their higher level debt.  At least according to SEC  filings.

 

While some of it will probably go to retire some of the 4 billion in 11.5% debt that CCL took out on April 8 2020.  That Debt does not come due until April 2023.

It does not appear that CCL is retiring any of that debt early,  

 

 

Edited June 10, 2022 by ldtr

[Guest ldtr]

Keep in mind that when CCL took out the 4 billion in April of 2020, it was just after cruising shutdown, and the CCL was faced with about 7 Billion is cruises booked, but not yet taken, while only having about 2-3 billion in total cash.  Prior to this point the cruise lines, not just CCL used the money received for deposits and bookings for operational purposes even before the cruises occurred.  That money basically funded their expansion.  As long as cruising continued it was not a problem because their was always more coming in and they got more value in using the money instead of leaving it in an account until the cruises occurred.   Then came the shutdown and the need to refund or to get people to accept FCCs. Since there liability far exceeded their cash on hand they needed the money to cover that and in addition to the 5.25 convertible offering  on April 6, they got a 3 year secured note at 11.5% for 4 billion.  That gave them enough cash to cover their refund liability.  They also did other financing moved during the shutdown.

 

The real question at this point is has CCL gone back to their old financing practice and using the moneys received for cruises not yet taken (that would be approximately 1/12 of annual sales and using that to offset some debt).  Will have to see how cash on hand compares to booking in their next 10Q.

 

Considering that 11.5% was paid when they were under severe pressure and absolutely needed the cash for refund, and their business was shutdown entirely.  Though at that time no one expected how long it would be shutdown, the fact they they are paying 10.5%, after their business has restarted and good junk bond companies are refinancing for around 7% is not exactly a strong endorsement, even if some of that money may retire some of the 11.5% notes in April of 2023.

 

To put this in perspective RCL's last financing was for 1 billion in senior notes at 5.375% due  2027.

 

Now the recent CCL notes were not secured and were callable with a due date in 2030.  Better than the terms on the 11.5% notes in 2020 which  were secured and only 3 years, but clearly at a much higher interest rate than RCLs notes at 5.375%. 

Edited June 10, 2022 by ldtr

[BermudaBound2014]

18 hours ago, ldtr said:

To put this in perspective RCL's last financing was for 1 billion in senior notes at 5.375% due  2027.

 

Now the recent CCL notes were not secured and were callable with a due date in 2030.  Better than the terms on the 11.5% notes in 2020 which  were secured and only 3 years, but clearly at a much higher interest rate than RCLs notes at 5.375%. 

 

This begs the question: How much has investor faith in the cruise industry eroded since RCL's last financing? I believe RCL last refinanced in January of 2022? Since then, all three company's have released alarming quarterlies. 

 

Personally, I believe RCL is positioned best financially to weather this storm. Initially I had faith in CCL also, but at this point the more ships that are sailing, the faster debt is racking up. Demand is eroding even further. Prices dropped 2.6% last month with the outlook remaining bleak into 2024.

 

Numbers are alarming. CCL stock has dropped 63% since last June. That's a 63% decline since ships started sailing again. Stock prices are approaching March of 2020 with ships sailing. And now we have a 20 year record high inflation rate which certainly won't help CCL's mainstream lines.  

 

 

 

 

https://finance.yahoo.com/news/cruise-stocks-may-be-in-trouble-as-demand-seems-to-be-eroding-bof-a-200745167.html

Royal Caribbean, Norwegian Cruise Line, and Carnival all saw capacity-weighted sequential ticket pricing declines from May to June, according to new data from BofA Global Research. Price declines ranged from 1% to 3% compared to May, with Carnival seeing the largest drop (2.6%).

 

The pricing softness looks to be extending into 2023 and 2024, BofA noted, as ticket pricing for all three cruise lines fell 2.6% on average for 2024 in the latest survey

[DaveOKC]

IMO, cruising demand will continue to decline until the cruiselines are able to make the experience less of a hassle and worry.  There are just too many other options out there to spend vacation money on.

 

[sfaaa]

I concur with the inflation part. Comparing to prices earlier this year, cruise, airfare and hotel room rates have all gone up in 2023 and 2024. I am now holding back and taking a wait and see approach on my future cruise bookings.

[Guest ldtr]

3 hours ago, BermudaBound2014 said:

 

This begs the question: How much has investor faith in the cruise industry eroded since RCL's last financing? I believe RCL last refinanced in January of 2022? Since then, all three company's have released alarming quarterlies. 

 

Personally, I believe RCL is positioned best financially to weather this storm. Initially I had faith in CCL also, but at this point the more ships that are sailing, the faster debt is racking up. Demand is eroding even further. Prices dropped 2.6% last month with the outlook remaining bleak into 2024.

 

Numbers are alarming. CCL stock has dropped 63% since last June. That's a 63% decline since ships started sailing again. Stock prices are approaching March of 2020 with ships sailing. And now we have a 20 year record high inflation rate which certainly won't help CCL's mainstream lines.  

 

 

 

 

https://finance.yahoo.com/news/cruise-stocks-may-be-in-trouble-as-demand-seems-to-be-eroding-bof-a-200745167.html

Royal Caribbean, Norwegian Cruise Line, and Carnival all saw capacity-weighted sequential ticket pricing declines from May to June, according to new data from BofA Global Research. Price declines ranged from 1% to 3% compared to May, with Carnival seeing the largest drop (2.6%).

 

The pricing softness looks to be extending into 2023 and 2024, BofA noted, as ticket pricing for all three cruise lines fell 2.6% on average for 2024 in the latest survey

Clearly there have been changes after Feb of 24.  But the RCL loans were in line with good Junk bond rates when they did their last loan.  I expect that if they did it today they would probably be 1-1.5 points higher.

 

This whole discussion of interest rates started when one person tried to say that the rate was not bad and referenced to I-Bonds.  Instead of referencing it to something that is actually tied to the debt market and not tied to inflation like the I-Bond.

 

No doubt about it the all three of the holding companies will not have an easy time of it when one considers their current debt loads, staffing issues, service quality issues, inflation and potentially a recession in 2023 or 2024.

[Horizon chaser 1957]

It’s not surprising that demand is declining. For the last two decades, cruise lines have been building ships less and less like ships and more and more like land based amusement parks. The target market has shifted away from travelers and towards those wanting a stationary vacation.

Post Covid ( if we’re even at that stage yet) travelers still want to travel and have come back to the ships. The amusement park vacationers are suddenly aware of the difference between being on land and being at sea are more attracted to resorts they can drive away from any time they choose.That big new megaship market they’ve developed is falling away.

Edited June 10, 2022 by Horizon chaser 1957

[Mary229]

15 minutes ago, ldtr said:

Clearly there have been changes after Feb of 24.  But the RCL loans were in line with good Junk bond rates when they did their last loan.  I expect that if they did it today they would probably be 1-1.5 points higher.

 

This whole discussion of interest rates started when one person tried to say that the rate was not bad and referenced to I-Bonds.  Instead of referencing it to something that is actually tied to the debt market and not tied to inflation like the I-Bond.

 

No doubt about it the all three of the holding companies will not have an easy time of it when one considers their current debt loads, staffing issues, service quality issues, inflation and potentially a recession in 2023 or 2024.

I did not say the rate wasn’t t bad.  That is drawing a conclusion.  I simply made an off hand comment about the current and coming interest rate environment.   As I said earlier I don’t take investment advice from strangers on the internet and I certainly don’t give it either 

[rkacruiser]

23 hours ago, ldtr said:

So are you are saying the CCL voluntarily went with a higher rate than they needed to when they refinanced?

 

It is my understanding of what I read the new debt issued was to replace debt which had a higher interest rate.  It was a refinancing from a higher rate of interest to a lower interest rate.  Was what they are having to pay "good news" for the CFO and us shareholders?  Well, of course not.  But, that is what the other two Companies are experiencing.

 

 

14 minutes ago, Horizon chaser 1957 said:

For the last two decades, cruise lines have been building ships less and less like ships and more and more like land based amusement parks.

. 

Agree and that they have overbuilt for the demand that exists.  With more such vessels on the ways and in the orderbook.

 

 

16 minutes ago, Horizon chaser 1957 said:

The target market has shifted away from travelers and towards those wanting a stationary vacation

 

Inflation and its related causes may find this is most practical currently.  And, maybe in the near future.

 

18 minutes ago, Horizon chaser 1957 said:

The amusement park vacationers are suddenly aware of the difference between being on land and being at sea are more attracted to resorts they can drive away from any time they choose

 

Let's not limit your very good comment to "amusement park vacationers".  From what I have read, the interest of visitors to our National Parks has increased in recent years.

 

18 minutes ago, Horizon chaser 1957 said:

That big new megaship market they’ve developed is falling away.

 

If this is true, all three of the cruise companies are really in serious trouble.  Many assets invested in hardware that attracts decreasing interest.  (Reminds me of the Edsel of several decades ago.)  

[BermudaBound2014]

27 minutes ago, Horizon chaser 1957 said:

It’s not surprising that demand is declining. For the last two decades, cruise lines have been building ships less and less like ships and more and more like land based amusement parks.

 

.That big new megaship market they’ve developed is falling away.

 

I agree that it's not surprising demand is declining, but I suspect it has much to do with current covid protocols and especially the possibility of quarantine.

 

The new megaship market is more likely to include unvaccinated populations (if only based on age). Since unvaccinated cruisers need to jump thru some additional loopholes, I believe that again, it's the covid protocols most suspect.

 

And once we remove all covid protocols, cruising is left with the image of a 'petri dish' which could take decades to erase.

 

And then there is inflation. Another nail.

 

I understand that there isn't one easy answer. Ships held to different standards if only because, unlike hotels, they do not have plausible deniability. 

 

It's a hot mess.

Edited June 10, 2022 by BermudaBound2014

[sfaaa]

22 minutes ago, Horizon chaser 1957 said:

It’s not surprising that demand is declining. For the last two decades, cruise lines have been building ships less and less like ships and more and more like land based amusement parks. The target market has shifted away from travelers and towards those wanting a stationary vacation.

Post Covid ( if we’re even at that stage yet) travelers still want to travel and have come back to the ships. The amusement park vacationers are suddenly aware of the difference between being on land and being at sea are more attracted to resorts they can drive away from any time they choose.That big new megaship market they’ve developed is falling away.

Not to mention they misread the China market which turned out to be less profitable than originally anticipated.