It is not surprising that cruise line operators have faced the brunt of the Covid-19 pandemic. They are an epitome of what can spread coronavirus in a near perfect way – a multinational crowd concentrated on a single isolated vessel, using a host of common services. Take Carnival Corp (NYSE: CCL) for example. Its stock has fallen nearly 70% this year and it is burning cash paying its fixed expenses and refunding advance bookings. That’s expected. But a critical question remains – Can Carnival Corp’s stock recover to its pre-pandemic levels? For that to happen, the demand shock must wane and the pre-pandemic growth trajectory must resume, which can take well over a year. But does Carnival Corp have the liquidity to survive this phase? We think that in a pessimistic scenario, the company might just be able to pull it off without additional financing if it can completely slash dividends and make deep capital expenditure cuts (-70%). Our dashboard Does Carnival Corp Have Enough Liquidity To Survive Covid-19 Demand Shock examines the company’s cash flow generation ability and financing requirements in two different demand recovery scenarios.
Scenario One: If COVID-19 Demand Shock Recovers By Q3/Q4 Of 2020
In this scenario, we assume a revenue decline of 30%, and a 50% cut in capital expenditures. In addition, we assume that Carnival will stop share repurchases and give dividends only from cash flow generated during 2020 – provided capital expenditures have been covered. This scenario, while not ideal, does not exactly spell doom for the company. We find that given its cost structure, Carnival will still manage to generate $500 million in free cash flow on revenue of $15 billion, before distributing any dividends to shareholders. However this will require strong financial discipline resulting in cutting capital expenditures in half, amounting to nearly $2.7 billion.
Scenario Two: If COVID-19 Demand Shock Recovery Is Blunted By Spending Pullback
This is where things get trickier. Even if by Q3/Q4 there is complete control over the pandemic, there is a good chance that discretionary spending could fall significantly. Economic uncertainty could linger, encouraging consumers to save more. The impact could be more pronounced for the retired elderly (over 60 years old) who tend to account for almost one-third of cruise line customers. Additionally, the fear that big cruise ships can be festering grounds for germs, as made evident by the COVID outbreak on cruise ship Diamond Princess, could discourage cruise bookings among the most vulnerable. In this scenario, we assume 50% decline in revenue and 70% cut in capital expenditures. This scenario can result in an accounting loss of $800 million for the full year. But Carnival just might be able to pull through if it reduces dividends to near zero and employs a 70% cut to capital expenditures ($1.6 billion). This would imply focus on maintenance of the existing assets. However, additional financing would be required to fund dividends and grow capex, or refinancing of existing debt.
Prior to the pandemic, cruise operators were betting on seeing their long term growth on baby boomers and international demand. While those fundamentals still remain, their impact could be attenuated, thus making a near term stock recovery a difficult task. There could also be pressure from the US government to make ships more sanitary, which could increase operating costs for cruise line operators.
What If The Demand Does Not Pick Up At All?
What happens in an extreme case where there is absolutely no demand for the rest of the year? Check out our dashboard to see how much operational runway does Carnival Corp have if it gets no further bookings. The dashboard also outlines how much demand shock can Carnival takes before it starts losing money.