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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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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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On 4/8/2020 at 10:39 AM, 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 was speaking to a friend of mine who was a former Hotel Director on Oasis. He’s taking a break after 20 years at sea and is now on a river boat in the PNW. 

Anyhoo, Carnival came up in conversation as they are the line (well princess) that really started this mess. He told me they were transferring crew from infected ships to other ships in the fleet. Incredibly negligent. 

Add this to the others mentioned in the article and it makes you wonder about the integrity of the line. How many times in this forum have Carnival ships come up mentioning the lack of maintance on their ships? We were ported next to one in October in Nassau. It was full of rust. The ship looked so old and unkept. I looked up the ship on Wikipedia and the ship was newer than Mariner. 

We have a Carnival ship here out of Jacksonville and it just looks tired and worn out. 

So the question remains: are they too big to fail? 

I guess time will tell. I’ve never sailed them and have no desire to ever. 

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2 hours ago, Jill said:

So the question remains: are they too big to fail? 

This is going to be interesting to see how it pans out.  Unlike a decade ago with that same questions loomed over the bank and auto bail outs, or 19 yrs ago after 9/11 and airlines, the big key is that these cruise lines are not US companies per se.  

HOWEVER,  many US cities have economies that get a bump from the cruise industry indirectly.  Here are a few:

  1.  KEY WEST.  Yes,  people go to the Keys for vacation and fun, but not at 6-9K a day (2 cruise ships)   Think of not only the artisan shops, the excursions, the hop off, hop on buses, but port fees, long shore men, pilot boats, etc.
  2.  Cape Liberty.   They can exist no problem, but again, if you have sailed out of there you know that the parking lot alone is pumping a huge amount into their city taxes from a business tax rate.  They have to employ at least 100 people just outside of the terminal, i.e. people directing you to a lane to drop off luggage, porters to take your luggage and those directing you into a parking lot.  Let alone, the porters waiting for you to debark and take it back to your car, or in processing you at the terminal.  RCL fails, those jobs are gone.
  3.  Anchorage AK.  I lived in Eagle River for almost 4 yrs.  it is right outside of Anchorage.  The cruise industry is huge in Anchorage.  Captain Cook Hotel makes it living due to cruise lines.  Princess cruises of course has their private train to Denali.  That port would be hit hard.  
  4.  Portland Maine.  Same as Key West.
  5.  Charleston?  Even small ships like Lady G or Enchantment docking brings in $$$ to their economy.
  6.  Galveston Texas....seriously, any of you going there for vacay if it wasn't tied to a cruise?  Yet, that state is getting $$$$ into their infrastructure from not only port/tax fees, but even hotels bc cruisers come in a day 4
  7.  Ever noticed the day of embarkation the forklifts of food being brought on?  Local area companies are supplying the products.  It trickles down.  You think there are chickens laying eggs on a ship?  If I recall correctly from my Caribbean galley tour, they only take on new produce from specific ports.  IOWS, they load up on food while we load up on our 1st cocktail!
  8.  Do you think any back up part that the terminals need do not employ local companies for paint supplies, replacement lightbulbs, cleaning supplies for their terminals?

My point is, that  I could hear a lot of politicians starting to scream if they don't somehow help the cruise lines even though they are not a registered US company.  Now expand that even more.  RCL has headquarters in Miami.  How much did they spend building that new terminal?  How about TX building their new terminal?  How about NCL and CCL and their impact?  

I can easily see our MoCs fighting to bail them out in some manner.  Hence,  I believe they will not fail.  Maybe, not as much as they may want, but they will bend for the economy.  

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24 minutes ago, Pima1988 said:

This is going to be interesting to see how it pans out.  Unlike a decade ago with that same questions loomed over the bank and auto bail outs, or 19 yrs ago after 9/11 and airlines, the big key is that these cruise lines are not US companies per se.  

HOWEVER,  many US cities have economies that get a bump from the cruise industry indirectly.  Here are a few:

  1.  KEY WEST.  Yes,  people go to the Keys for vacation and fun, but not at 6-9K a day (2 cruise ships)   Think of not only the artisan shops, the excursions, the hop off, hop on buses, but port fees, long shore men, pilot boats, etc.
  2.  Cape Liberty.   They can exist no problem, but again, if you have sailed out of there you know that the parking lot alone is pumping a huge amount into their city taxes from a business tax rate.  They have to employ at least 100 people just outside of the terminal, i.e. people directing you to a lane to drop off luggage, porters to take your luggage and those directing you into a parking lot.  Let alone, the porters waiting for you to debark and take it back to your car, or in processing you at the terminal.  RCL fails, those jobs are gone.
  3.  Anchorage AK.  I lived in Eagle River for almost 4 yrs.  it is right outside of Anchorage.  The cruise industry is huge in Anchorage.  Captain Cook Hotel makes it living due to cruise lines.  Princess cruises of course has their private train to Denali.  That port would be hit hard.  
  4.  Portland Maine.  Same as Key West.
  5.  Charleston?  Even small ships like Lady G or Enchantment docking brings in $$$ to their economy.
  6.  Galveston Texas....seriously, any of you going there for vacay if it wasn't tied to a cruise?  Yet, that state is getting $$$$ into their infrastructure from not only port/tax fees, but even hotels bc cruisers come in a day 4
  7.  Ever noticed the day of embarkation the forklifts of food being brought on?  Local area companies are supplying the products.  It trickles down.  You think there are chickens laying eggs on a ship?  If I recall correctly from my Caribbean galley tour, they only take on new produce from specific ports.  IOWS, they load up on food while we load up on our 1st cocktail!
  8.  Do you think any back up part that the terminals need do not employ local companies for paint supplies, replacement lightbulbs, cleaning supplies for their terminals?

My point is, that  I could hear a lot of politicians starting to scream if they don't somehow help the cruise lines even though they are not a registered US company.  Now expand that even more.  RCL has headquarters in Miami.  How much did they spend building that new terminal?  How about TX building their new terminal?  How about NCL and CCL and their impact?  

I can easily see our MoCs fighting to bail them out in some manner.  Hence,  I believe they will not fail.  Maybe, not as much as they may want, but they will bend for the economy.

I agree with this and have been thinking it for awhile. Everyone is quick to say they aren't US companies. But they still support many US jobs and industries.

 

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On 4/7/2020 at 7:21 AM, Scrumps said:

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. 

Problem is, the news just got worse and this article predates the latest announcement today (04/10/2020)  from the CDC that ALL cruise ships will be banned from April 10th 2020 for at least 100 days .  Those days may change, BUT right now, its at least 3 months before anyone is sailing into or out of the US. We're talking at least July 2020.

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1 hour ago, Pima1988 said:

 

My point is, that  I could hear a lot of politicians starting to scream if they don't somehow help the cruise lines even though they are not a registered US company.  Now expand that even more.  RCL has headquarters in Miami.  How much did they spend building that new terminal?  How about TX building their new terminal?  How about NCL and CCL and their impact?  

I can easily see our MoCs fighting to bail them out in some manner.  Hence,  I believe they will not fail.  Maybe, not as much as they may want, but they will bend for the economy.  

I don't see the public drums beating to bail out non American companies, even if they help support local economies and businesses.  The argument is they should have thought about that before this pandemic. Where do they pay their taxes and capital gains?  Where do they take their revenue??    Why do I say this?  Its clear from the Cares Act 2020 with the Paycheck Protection Program that this is an American centric program .  Just to qualify, the majority of owners and ALL employees must reside in the USA.   If that ain't a jab at foreign workers or businesses, I don't know what is. 

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Ironically the concept of cruise line bailouts started at a podium in the White House by someone who is known for stating things that never happen.  

The cruise lines never held their breath or even skipped a heartbeat thinking they would get bailout money.  They made other planes long before politicians beat their drums and made false claims that they would get bailout money.  

It's rather amusing.  If you see a politician making statements suggesting cruise lines will get bailout funds you automatically know who you can't trust.  Hint:  It's not the cruise lines.

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  • 2 weeks later...
On 4/7/2020 at 5:06 PM, twangster said:

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.  

Finally a subject I'm (somewhat) qualified to respond to.  While it does happen from time to time, you typically don't see large end users of fuel (i.e. airlines/cruise lines) purchase the physical commodity on a fixed-price basis out the curve (you'd also be hard pressed to find a seller willing to sell on a fixed price basis out the curve).  When you hear the words "fuel futures" that typically corresponds to a financial trade (i.e. a swap).  This is what we call hedging.  

Here's a simplified example of how hedging works (sometimes, not always):  For budgeting purposes, a corporation - let's say RC - wants to know exactly how much their fuel costs will be.  They decide they want to fix their fuel cost at say $3/gallon.  RC will purchase their physical fuel at whatever the market happens to be, just like we do so in our personal vehicles.  They will then enter into a fixed for floating swap with a financial institution (we will call them XYZ).  In this scenario, RC will be the fixed price payer (RC pays XYZ $3/gallon) and XYZ will be the floating price payer (XYZ pays RC whatever the "market" price is for the product).  Again, remembering that RC wants to fix their fuel cost at $3/gallon, any time the market price goes up to say $4/gallon RC will have to pay that amount for their physical product but they will also receive $1 from XYZ.  Therefore RC's net cost is $3/gallon.  

However, this bet isn't risk-free.   Using the same example above, the market price for the physical commodity has gone down and RC is now buying its physical fuel at say $2/gallon.  However, RC's financial hedge is now out of the money - they owe XYZ $1/gallon.  That's all well and good because remember, RC has budgeted for $3/gallon. 

It's safe to assume RC is burning MUCH less fuel at this point than they normally do - they are saving money on the purchase of the physical product, but the hedge with XYZ doesn't just go away.   This is why people were upset that plane tickets didn't go down to $10 last time crude crashed - the airlines were paying less for their physical fuel, but they were upside down on their hedges.  

This is a long way of me expressing my opinion that I doubt that RC has drawn on its credit line to purchase more futures.  I have a feeling they've drawn down on their credit facility in order to pay for their day-to-day expenses and refunds - they've got no money coming in the door at this point (I'm sure that's a big duh to everyone on this forum).

Again, the above is a very simplistic example of hedging and I'm sure there are financial minds on this forum will correctly point out the holes (I have no intention of debating anyone on my example...you're probably right).  There are a ton of ifs, ands and buts out there!  I believe someone mentioned force majeure earlier in this thread - you are correct that many contracts contain a force majeure provision (meaning a party is excused for performance due to circumstances beyond their control).  Unfortunately, we are in uncharted waters here as to what constitutes a valid force majeure - there will be new law arising from the current market conditions.  

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