Carnival plc (CCL) Ordinary USD1.66
HL comment (23 March 2022)
Carnival had an underlying net loss of $1.9bn in the first quarter, with Available Lower Berth Days - a measure of capacity - at 60%. The impact of Omicron means the group was held back by lower bookings and increased cancellations.
As of 22 March, 75% of the group's capacity had restarted guest cruise operations, and the full fleet is expected to be back in action for the summer season.
Ongoing uncertainty, including rising fuel prices, are having a negative effect on "the company's liquidity, financial position and results of operations". Carnival expects to report a net loss for the full year.
The shares were unmoved following the announcement.
Cruise ships come with very high fixed costs. Costs that must be paid whether they leave the port or not. That operating structure means the group took a hammering during lockdowns. And just when we thought profit was on the horizon, ongoing uncertainty and rising fuel costs means Carnival now expects to report a full year loss once more.
Even now, after a huge round of cost cuts and 75% of capacity in operation, Carnival's burning through cash every month. As you can imagine, that leaves a large mark on the balance sheet.
Carnival's debt position is a concern. Refinancing efforts will help the situation, pushing back repayment dates and reducing interest expenses. But even so, that level of debt is much higher than we're comfortable with.
Getting the balance sheet under control is going to be the main priority and will hold the business back for years to come. Commentary on bookings has flip-flopped a little, with the most recent update suggesting recent bookings have been held back by Omicron, and trends don't look particularly spritely until 2023.
Even as Carnival returns to the seas, it's operating below capacity, and this will continue for some time. Positive tests, or a lack of testing availability altogether, has proved a thorn in the side more recently leading to increased cancelations. Even once passengers are safely onboard, floating around with thousands of people in close quarters requires a great deal of spend to ensure compliance with public health regulation - not to mention high oil prices will add to the cost to cruise.
Longer term reservations look promising for both demand and pricing. We'd been concerned that pricing would have to drop to attract customers back. It's welcome news that this hasn't been the case, considering last we heard operating margins were alarmingly negative.
We're also supportive of efforts to streamline operations. Smaller, less efficient ships are being cast aside and permanent cost savings are being uncovered.
Ultimately though, Carnival's future depends on how quickly the travel industry rebounds, and the group's competitive position when it does. Carnival's brands cater to specific populations (for example Carnival targets families and Seabourne luxury travellers), something competitors try to blend by straddling the two price points. And with ports located within 5 hours of much of the US population, Carnival has carved out a unique value proposition in its largest market.
The now leaner organisation leaves room for more profit potential when the full fleet is back in action. The crucial summer period will be key for assessing where demand is, and how well the group's positioned to act on it. Given the uncertainty ahead and the group's difficult financial position, investors should proceed with caution.
First quarter results
Revenue per passenger cruise day was up 7.5% compared to pre-pandemic levels. That reflects "exceptionally strong" onboard and Other revenue. Occupancy was at 54%, with 20% more passengers carried than the final quarter of the last financial year.
Cumulative advance bookings for the second half of 2022 are at the lower-end of the historical range. This is expected to return to normal levels in 2023.
Total customer deposits increased to $3.7bn, from $3.5bn as of 30 November 2021.
Carnival expects fuel consumption per Available Lower Berth Days (ALBD) to fall 10% once full operations are back up and running. However, total underlying cruise costs, excluding fuel, per ALBD are expected to rise by low double-digit percentage for the full year, compared to pre-pandemic. That reflects ships that have been unable to sail, costs associated with restarting operations and increased health and safety measures.
A further three ships will leave the fleet in 2022, in-line with the group's ongoing efficiency drive.
The first quarter ended with $7.2bn of liquidity, including cash, short-term investments and available credit.
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