Cruise liners: fear and floating

Cruise ship owners owe a debt to makers of Covid-19 vaccines. Companies such as US-listed Royal Caribbean Group, which launched a $1.5bn equity offer on Monday, know all about having dues to pay. Cruise companies have sold more than $12bn in debt since the pandemic began, 39 per cent more than their issuance in the previous 10 years, according to Dealogic. Yet strong bookings should mean a decent reception for Royal Caribbean’s shares.

Cruise lines claim bookings are up sharply this year. They need to be. Royal Caribbean has lost money in the past four quarters. Its net debt to estimated 2022 ebitda ratio is a scary 6 times, above Carnival Corporation’s near-5 times. But it is not alone in issuing healthy shipping forecasts. Saga, the UK travel group targeting older customers, already claims 70 per cent occupancy from June for its two cruise liners. Repeat customers, the key to about 80 per cent of the North American market, should fill vacant cabins.

Still, full berths are only half the picture. Costs will be higher as a result of extra medical staff on board and limited port availability. Few places boast the UK’s high rate of vaccination, at about 30 per cent for at least one dose. Never mind the two jabs demanded of Saga passengers. Ship owners talk of “bubble ” excursions when visiting foreign shores. Note that Tui has continued to run its cruise trips in the Baltics and Canary Islands, though admittedly at half capacity.

Undeterred by the state of their balance sheet risks, some investors have marched up the gangplank. Share prices have jumped in the past six months, led by Norwegian Cruise Lines’ 80 per cent increase. But it remains almost half of its pre-pandemic level. Last spring, investors correctly priced cruise companies at half their book value. On average, shareholder equity per share subsequently halved.

Heed the foghorn warnings. Ship values themselves look unlikely to climb much. Cruise ship supply, given the delivery schedule, should cap prices. Cruise liners offer a leveraged bet on travel recovery but it is better to stay on the dock and wave them off.