Summary

• Carnival voluntarily agreed to postpone cruises until September 15 along with the industry.
• The cruise line is burning $650 million per month whiles cruise ships are docked.
• The stock can't be touched as the postponed startup enters substantial risk into the equation of when Carnival can return to generating positive cash flows.

The cruise line sector couldn't have dealt any worse news to the sector stocks than the further suspension of cruise ships by another 45 days. Carnival Corporation (CCL) is now unable to generate revenues until at least September 15. My neutral investment thesis is further enhanced by the inability of the cruise line sector to get back to work and the inherent risks in the sector in a zero-revenue environment.

Image Source: Carnival Corporation website

Crazy Voluntary Suspension

Only two days prior to the voluntary suspension, Carnival was discussing the phased return to service scheduled to start on August 1. Now, the company is part of the Cruise Lines International Association or CLIA that agreed to a voluntary suspension until September 15.

The CDC had extended the no-sail order for cruise ships until July 24 so the voluntary agreement isn't clear whether they are front-running a further extension of the shutdown. Either way, the cruise lines make no sense in voluntarily extending a shutdown with Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH) and Carnival apparently all on board with this decision.

Back in late March and early April, people were calling for the domestic airlines to completely shutdown. Instead, the airlines pushed through and are now seeing capacity returning to over 20% of 2019 levels. The airlines now have the benefits of learning how to effectively operate in the coronavirus outbreak and have established passenger trust.

The airlines are now discussing returning domestic capacity to 50% of 2019 levels while the cruise lines are still paused. The biggest risk to the cruise lines here are the impacts on future bookings with this reinforcement of the CDC concept that the ships exacerbate the global spread of the virus. The additional risk is pushing the timeline into the more risky Fall time period where scientists fear the second wave.

Along with the Q2 report, Carnival updated 2021 bookings as inline with normal volumes, though with prices down mid-single digits. The biggest fear here are the customer deposits that are at risk. The cruise line has $2.9 billion in deposits which includes $475 million for 2H cruises that are increasingly going to be cancelled.

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