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Will the cruise lines survive? Interesting article

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The key bit is the 1 billion a month. There was an article yesterday that based on zero cruises, CCL can last until November. The key question is, what happens if they have zero cruises through November.. borrow more?  It's not like there will be a market to sell ships for top dollar. 

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The cruise industry will be fine no matter the length of the delay. There are MANY private equity firms with billions in cash waiting to capitalize on opportunities everywhere. While the big players may encounter cash flow hurdles requiring additional debt and/or equity financing to shore up capital needs, the industry itself is quite viable.

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The $1B per month claim for Carnival to keep operating is interesting.  

While Carnival has a larger fleet now you begin to see the magic of operating mega ships and how CCL and RCL differ financially.

Last year CCL corporate had $20.8B gross sales with $2.99B of net income.  That makes expenses roughly $17.8B or $1.4B per month.  Granted that is extremely simplified.  

Last year gross sales for Royal were $10.9B of which $1.88B became net income.  That makes expenses roughly $9B or $750M per month.  Granted that is extremely simplified.  

Royal's gross sales were 52% of Carnival's yet Royal's net income was 63% of Carnival's.  How can that be?  In part it's because of mega ships, but in simple terms Royal is more efficient and generates more revenue per guest with a much smaller fleet.  Carnival PLC has just over 106 ships versus RCCL with half that.    

The cost to idle a mega ship will be close to the cost to idle a smaller ship.  Minimal fuel to putter around, cost of minimum bridge crews and marine department will be marginally higher for a mega ship compared to a small ship.  While the hotel department crew counts are much higher on mega ships much of those crew are going or have gone home.  

Normal monthly expenses include fuel consumed at normal cruise speed and supplies to feed roughly a hundred thousand guests among other things.  With ships slowly idling around and with the dramatically lower cost for oil right now their fuel costs are significantly lower.  Fuel is one of the larger operating expense during normal times when ships are running at cruise speeds.  Now?  Not so much, comparatively speaking.

While revenue is dramatically lower right now so are operating expenses.  With crew contracts ending and crew going home what's left are the marine department crews and bridge officers.  Consequently employee costs are down and there are fewer crew mouths to feed by the tens of thousands across the fleet.

It's very interesting that CCL is claiming their floor to operate right now is $1B per month.  That suggests they have shed $400M in monthly expenses. 

RCCL has lower expenses because they fewer ships to float right now, roughly half as many ships across all brands.  On the surface using CCL numbers Royal would shed $200M per month in expenses for a fleet half the size.   Fain and other executives are also cutting their salaries through September.

The magic question is what Royal's minimal cost to keep the fleet floating around and cover land based employees that are retained during this period?

Until this year's SEC filings occur that's anyone's guess but let's call it $500M per month as a SWAG.  With the secured credit to date that should last at least through the end of the year.

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5 minutes ago, twangster said:

Fuel is one of the larger operating expense during normal times when ships are running at cruise speeds.  Now?  Not so much, comparatively speaking.

Similar to our price at the pump for regular. $1.55/gal. But, there's no where to go!

 

7 minutes ago, twangster said:

With crew contracts ending and crew going home

So, what happens when Royal starts cruising again this May (hopefully)? Will there be new contractees waiting at the ports? Once on board, how long will it take the newbees to get up to speed on the ship? Or will Royal just suck it up with less crew members?

By the Way, Twangster, good info you posted. 

:27_sunglasses:

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I'm glad you brought up fuel cost @twangster. I'm assuming that there is contract pricing for most of Royals' diesel needs. As these types of contracts are often written, Royal would have to purchase a certain amount per week/month/quarter...whatever. This type of cost is reflected in the operating cost per month during shut down and is likely to be a big component. I'm guessing so big that once contracts expire, the monthly cost of operating a non-revenue generating fleet dramatically goes down.  <fingers crossed> Like maybe....it's cut in half??? I dunno...

I would like to hear some analyst ask about fuel contracts during the next earnings report conference call. How much might they make up the monthly cost, contract potential duration, and are these fuel companies requiring delivery? It would also provide insight to the plausibility of passengers paying for a fuel surcharge during a future cruise.

 

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Airlines are well known for buying fuel futures.  I'm sure the cruise lines do as well.  I've often wondered how they choose which ports to take on fuel mid-cruise.  I'm sure some have better pricing than others.  i wouldn't be surprised if they are buying up futures right now for the months after the virus ends.  For airlines fuel is the largest operating expense.  

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+1 @twangster

I would add maybe that is  a reason they took a larger credit line....to purchase fuel futures.  It may sound illogical, but it could make or break them when the industry is back in operation.  The lower fuel costs will give some breathing room.

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9 minutes ago, Pima1988 said:

+1 @twangster

I would add maybe that is  a reason they took a larger credit line....to purchase fuel futures.  It may sound illogical, but it could make or break them when the industry is back in operation.  The lower fuel costs will give some breathing room.

Hmm...interesting strategy.

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@bobroo

Actually for my Master degree thesis that was part of the thesis.  It was a study not on the cruise industry, but the airline industry.  I did this in 99.  It was a thesis about how SWA differed from the traditional airlines like United, AA and Delta.  The three key components of differentiation at that time were:  SWA purchased fuel at least 6 months out;  operated 1 specific airframe and flew in/out of unique airports.   In the end my thesis stated that SWA would become the model of the future for the airline industry.  Interesting that you can see the same for cruise lines, especially RCL

  • Traditional airlines at that time were buying 6 months out also for their projected needs, however SWA purchased more than they needed if the price was low, so if the price went up they had a cushion from fuel costs and could pass that savings along to their passengers.  Whereas, the big guys now had to purchase at the higher cost, in turn, the passenger cost flying with them went up.  Passengers decided to go to SWA'     Now if RCL does buy fuel on the cheap right now, even though they spent more capital, they will be able in 9 months from now to keep sailing with lower costs compared to, let's say NCL or CCL.  If they are smart and pass the costs along to the cruisers, than they get a bigger hold on the market in the future.
  •  SWA only operates 1 airframe.  There are multiple reasons for this.  Just like the bridge crew and maintenance officers on a ship, having only 1 airframe meant they lowered operating costs, especially from a training aspect.  Same airframe = same parts.  Same airframe = employees, be it mechanics or pilots could work on every plane.  A 737 is different than a 767.   A pilot or a mechanic can not just jump from 1 to another without additional training/certification.  Look at RCL right now, they are getting rid of their smaller older ships, albeit they are very profitable, they are taking the sale of those ships and investing in larger ones.  You could take the Captain of Celebrity Edge and throw her on as the Captain of Harmony with ease.  Same with the engineers.  That equates to lower operational costs due to training.  Same is true for parts and upgrading systems.  
  •  Little known fact about airlines, the gates at the airport are "leased".  The reason SWA flies into Love Field and not DFW is because all of the gates were leased.  Love Field is close to DFW.  BWI is their hub in the DC area.  The lease cost is lower.  Just a thought, but this also may be why the company is spending capital to build all of their new private islands.  The cost maybe high, but in the end, they are saving costs from a port tax/fee.  Plus, nobody else can sail there.  Both NCL and DCL prior to this announced they were going to expand their private islands.  Why?  Because of the success of Coco Cay.  They are now playing catch up. 
  • RCL now is dropping $$$$ in Bahama to create their own version of a beach excursion, instead of having to pay for an Atlantis excursion.  The only question that lingers for me in that situation, is tax implications for them.  Do they now get a tax break, aka lower port fees for the passengers bc the company now physically owns land in Bahama?  Regardless, to me it is a smart decision fiscally, bc Bahama is no longer a go to location, and many cruisers tend to now not get off the ship.  Having their "private beach" on Bahama may mean this is the 1st sign of a new design for cruising.  Hop on hop off.  IE build a hotel there.  Fly into Bahama hang there for 3 days at their hotel/beach, get on Navigator for a 3 night cruise and come back to Bahama.  Makes even more sense since Bahama has agreed to upgrade their port.  See above...NCL and DCL are again behind the 8 ball.  Their $$$ is tied up in competing against Perfect Day.  Part of me thinks they are taking a page out of DCL's playbook.  IE many passengers do a 3 night at Disney World and a 4 night cruise as a 7 night bundled package.

Now let's be real, RCL will always have the smaller ships in their inventory.  Baltimore is a money maker for them, but due to the bridges, they can never have an Anthem sail out of there.   Plus, there will always be passengers that do not want that "big ship" feel.  

Now after this novella, here is my question.... will RCL in the next few yrs become a pioneer again regarding ship size?  I mean, do they start building a new Lady G or Enchantment so they can sail out of smaller ports like New Orleans, Charleston, or Baltimore.  If they do CCL is in trouble.  Look at Baltimore it is only RCL and CCL.  If they build a brand new ship with the bells and whistles, but small feeling Carnival Pride does not stand a chance.  Once again, CCL is caught behind the 8 ball.

Tie it all back up and if RCL used this credit line to purchase fuel at a larger amount than they need, than that money later on will go back into their future.  The lower fuel costs can go back into building their new private islands = lower port fees = lower sailing costs = the ability to build new ships.

Thanks for reading this, and yes, that was the defense of my thesis for why SWA was a better investment than the big boys.

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I would guess they are not buying anything right now as I do not think they have any idea when they might sail again. They just took out a huge loan at 10 times the normal cost and put their ships up as collateral. One missed payment and they could end up losing ships. If they are anything like my company right now, they are not spending cash on anything they don't have to, even if it might save them money in the future. Just my opinion.

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2 things I take away from this....it said that cruise prices would be slashed?! I have seen no indication from Royal on this..if anything, everything is MORE expensive.

 

Secondly, As shown in even a poll on this site...how quickly will you start to cruise once it opens up....I think it was about 60% said right away....and that's for HARD core Royal cruise fans......just over half. Imagine how long its going to take to attract and keep new clients to cruise.

 

I am sad to see this, but I think this is a big blow to the cruise industry...not sure what it will look like in a year from now...smaller? cheaper? bankrupt? less ships and options? Hard to say......all I know is that this turned into  a pretty big deal I would say..like Epic and Historic are a couple words that come to mind..good thing I was never accused of overreacting a couple of mths ago here.....hmmmm..lol

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@scrumps

The thing is fuel is a necessity for that industry regardless of when they will sail with passengers again.  They purchased the land on Bahamas b4 the crap hit the fan.  

Nobody on this board knows what they are using that loan for... is it to buy fuel to stave off future gas prices?   The gas glut has little to do with CoVid 19.  It has a lot to do with Saudi Arabia and Russia fighting, so much so that both govts are now pressuring the US to agree to lower their oil output.    

They are actually lucky as a company.  Their employees are contracted.  Contract is up, than it is up and not being renewed.  As @twangster stated that equal less operating costs.  They are cutting costs, and bills still need to be paid, but do you really believe that the Bahamian govt is going to start foreclosure on the land tract they just purchased?  Do you really think banks are in the business of owning a ship the size of Oasis?  The banks know the likelihood of selling it to NCL or CCL is nil, those companies are all in the same boat financially!

However, by purchasing fuel at more than they need at this low price means they can actually re-sell it if they need to do so to make the payment.  If it goes up, than they have more capital.  Fuel is not perishable.  It actually is an asset for the company ledger, just like one of their ships.  Actually a better asset.

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@monctonguy  The thing is this is a cruise forum, but trust me, the entire hospitality industry will be hit just as hard, or harder, in my post I am talking about the airline industry since it is a close example of the cruise industry.

Read me out.

My husband is a retired AF flier, many of our close friends are pilots for airlines (Commercial, FedEx, UPS)  My DS is a pilot.  Airlines prior to this were recruiting so many pilots that USAF was giving a 25K yr bonus on top of their 10K flight pay to keep pilots and were still losing them at a 75% rate at the officers 10 yr point.  These USAF pilots were actually taking a pay cut to fly for the airlines bc in the long run (5+ yrs) they would be making a lot more than that 35K they were being offered.

My best friend's husband is a commercial pilot.  His flight hours have been cut from 125 hrs to 70 a month.  His airline pays them per flight/leg.  That company is doing this just so they don't have to furlough anybody.  AA today announced they are starting furloughs.  Lufthansa has announced PERMANENT cuts.  

The thing to me is that I can see the cruise industry coming out of this faster than the airline/hotel industry.  I can get to Baltimore, Cape Liberty, FLL without staying in a hotel, or taking a flight.  I understand that is not true for everyone, but let's be real.  If you live in Venice and want to go to Corfu, but not get in a flying tin can with 150 people, than a cruise is a great option.  If you live in Texas and want to go to a beach destination, such as, Cozumel, than a balcony on a ship sounds better than a hotel.  Same could be said for if you live in the UK.  

I would much rather jump on a ship that I drove to than get in an airplane.  

PS.  I fly a lot.  My husband and I just joked last night that a yr ago, we were in Madrid at this time.  Came back flew to Alabama and TX in June.  Flew to TX in July.  Just saying no way no how will I fly b4 August at the earliest, get on a cruise ship in July, yep!   Look at how clean they keep an airport the next time you are there.  Have you ever seen someone wiping down the chairs by the gate after a flight leaves?  Look at a cruise ship.  Hands down cruise ships are cleaner, but than again it might be bc they constantly live under the fear of the Norovirus.  

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34 minutes ago, Pima1988 said:

The gas glut has little to do with CoVid 19.  It has a lot to do with Saudi Arabia and Russia fighting, so much so that both govts are now pressuring the US to agree to lower their oil output.    

I thought lower demand for oil due to travel declines because of COVID-19 led to the surplus which ultimately led to the lower oil outputs.

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9 minutes ago, Pima1988 said:

Look at a cruise ship.  Hands down cruise ships are cleaner, but than again it might be bc they constantly live under the fear of the Norovirus.  

It's curious to me why one cruise line in particular was hit harder time and again.  Granted Royal hasn't escaped all COVID-19 cases but there is one line that clearly has been hit harder over and over again.  Things that make you go hmmm.  

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7 minutes ago, twangster said:

I thought lower demand for oil due to travel declines because of COVID-19 led to the surplus which ultimately led to the lower oil outputs.

That is some of it for sure..but the fight between SA and Russia is what really drove it down and is keeping it there....

 

Saudia Arabia ramped up production to max limits a few weeks ago, and Russia did as well when they couldn't agree to cut production with OPEC+....they didn't care about lower demand.

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+1 @monctonguy  The glut truly started the 1st week of March, way b4 the US went into the stay at home/save lives. 

@twangster here is an article that shows why the prices went down as fast as they did.  Now, granted,  the world staying at home to save lives is impacting the price, which in turn is why the Saudi govt wants the US to reduce their output.  

https://time.com/5806218/russia-saudi-arabia-oil/

However, here is the double edge sword for the administration.  Cut output and that means cutting jobs in the US, plus rising gasoline costs.  Don't cut it, and that means a glut and make it not as profitable for a company, equating into layoffs in the future.  An oil rig or fracking is not cheap to operate.  by buying

What person on this forum ever thought before this, that for big returns on investment would have been with the Hoberg Paper Company (they own Charmin toilet paper)?

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1 hour ago, twangster said:

It's curious to me why one cruise line in particular was hit harder time and again.  Granted Royal hasn't escaped all COVID-19 cases but there is one line that clearly has been hit harder over and over again.  Things that make you go hmmm.  

I have been musing the same thing.  Just bad da*n luck for Princess ?  ...or something fundamental ?  

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1 hour ago, Pima1988 said:

@monctonguy  The thing is this is a cruise forum, but trust me, the entire hospitality industry will be hit just as hard, or harder, in my post I am talking about the airline industry since it is a close example of the cruise industry.

Read me out.

My husband is a retired AF flier, many of our close friends are pilots for airlines (Commercial, FedEx, UPS)  My DS is a pilot.  Airlines prior to this were recruiting so many pilots that USAF was giving a 25K yr bonus on top of their 10K flight pay to keep pilots and were still losing them at a 75% rate at the officers 10 yr point.  These USAF pilots were actually taking a pay cut to fly for the airlines bc in the long run (5+ yrs) they would be making a lot more than that 35K they were being offered.

My best friend's husband is a commercial pilot.  His flight hours have been cut from 125 hrs to 70 a month.  His airline pays them per flight/leg.  That company is doing this just so they don't have to furlough anybody.  AA today announced they are starting furloughs.  Lufthansa has announced PERMANENT cuts.  

The thing to me is that I can see the cruise industry coming out of this faster than the airline/hotel industry.  I can get to Baltimore, Cape Liberty, FLL without staying in a hotel, or taking a flight.  I understand that is not true for everyone, but let's be real.  If you live in Venice and want to go to Corfu, but not get in a flying tin can with 150 people, than a cruise is a great option.  If you live in Texas and want to go to a beach destination, such as, Cozumel, than a balcony on a ship sounds better than a hotel.  Same could be said for if you live in the UK.  

I would much rather jump on a ship that I drove to than get in an airplane.  

PS.  I fly a lot.  My husband and I just joked last night that a yr ago, we were in Madrid at this time.  Came back flew to Alabama and TX in June.  Flew to TX in July.  Just saying no way no how will I fly b4 August at the earliest, get on a cruise ship in July, yep!   Look at how clean they keep an airport the next time you are there.  Have you ever seen someone wiping down the chairs by the gate after a flight leaves?  Look at a cruise ship.  Hands down cruise ships are cleaner, but than again it might be bc they constantly live under the fear of the Norovirus.  

I agree with this.  We have a June flight on a Friday that was cancelled.  The airline automatically switched us to Thursday which we can make work.  It led me to check their schedule to see how expensive our Thursday flight is on the airline's website.  The cost of the new flight is... wait for it.............  $11.  That's right and $11 fare, Indy to Orlando in June.

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There was already a low demand/high surplus of oil before Covid19 & the Arab/Russian fight. Crude Oil has been hovering around $64 a barrel & Brent Oil about $71 for a long time now, before this mess. The Saudis need oil near $90-100 a barrel to make money. Being in the $30 a barrel is devastating for oil & refineries. 

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