Carnival Corp. (CCL, Financial) is a British-American leisure travel company that operates world-famous cruise lines such as Carnival Cruise Line, Princess Cruises, Holland America Line, P&O Cruises (Australia), Seabourn, Costa Cruises, AIDA Cruises, P&O Cruises (U.K.) and Cunard. The company offers vacations to all cruise destinations around the world.
The world's largest cruise service provider was badly hit by the global pandemic, with all itineraries being canceled in 2020 as a precautionary measure to ensure the safety of the public. The company released third-quarter earnings on Sept. 24, posting an adjusted net loss of $2 billion. Despite operating with a limited capacity, the company reported positive cash flows and an increase in booking volumes. These are very good signs for the company and its shareholders.
Third-quarter earnings recap and company outlook
During the quarter, eight of the company's nine brands resumed guest operations as top destinations started allowing visitors once again, and this was possible because of the successful global vaccination drive. Occupancy rates hit 54% across the cruise ships that were in service and the monthly average cash burn rate came to $510 million. With a vaccine mandate in place, Carnival Cruise Line, the company's flagship brand, achieved occupancy rates above 70% and resumed more ships out of the United States than any other cruise line. The company also recorded an increase in booking volumes for all future cruises, but not as strong as it was in the second quarter, owing to the Delta variant's impact on booking volumes in August. Customer deposits increased by $630 million to $3.1 billion. In addition, the company lowered its future annual interest expense by more than $250 million per year and completed $4 billion in cumulative debt principal payment extensions, enhancing its future cash position.
Although increasing health risks in some parts of the world are concerning, the company still believes its plan to return to 100% capacity in the spring of 2022 is achievable as pent-up demand has resulted in a significant increase in bookings for 2022 and 2023 on account of increasing vaccination rates and economies preparing to “live with the virus.” Because some destinations are expected to continue with stringent health requirements, cruise lines will operate accordingly with health and safety protocols in place. Carnival is likely to benefit from the robust demand for shorter cruises as well, which is a trend in the making.
Commenting on the recent booking trends, CEO Arnold Donald said:
“Our booked position for the second half of 2022 is at a new historical high, including our seasonally strong third quarter with all our ships planned to be in operation, despite reduced marketing spending. The broader environment for travel, while choppy, has improved dramatically since last summer and we believe it should improve even further by next summer, if the current trend of vaccine roll outs and advancements in therapies continues. We have also opened bookings for further out cruises in 2023, with unprecedented early demand.”
Carnival expects to incur incremental costs related to restarting services, such as the expense of returning ships to guest cruise operations, returning crew members to its ships and maintaining strengthened health and safety measures and, as a result, the cash burn rate in the fourth quarter is expected to remain at an elevated level.
Takeaway
Amid a reshaping travel industry, Carnival’s long-term outlook remains positive with demand for its core services at historic highs. In the short term, the company is expected to face some headwinds as it would be forced to incur additional costs to ensure compliance with health guidelines. That being said, these costs are unlikely to last for much longer, which paints a very promising picture of what the future holds for the company. As the leader of the global cruise industry, Carnival seems to be well positioned to deliver strong revenue and earnings growth in the next couple of years.
