Deleveraging the Cruise Line Industry
One of the industries hit hardest by the coronavirus pandemic has been the cruise line business. To find out how it is faring and, in particular, how its largest players — Royal Caribbean, Norwegian Cruise Line, and Carnival Cruises — are coping financially, GLG recently met with Jasbir Mann, who until November 2017 served as VP Corporate Finance and Planning at Carnival PLC. Edited excerpts of our broader conversation follow.
As a start, give us a quick overview of where the cruise industry is today.
It’s in the first of a three-stage process, namely of survival, recovery, and thriving. In March, I thought survival, which is predominantly about liquidity and cash flows, would be the issue for 2020, followed by recovery in 2021 and thriving in 2022 and onward. Now, I think each of those windows has moved forward in time, probably by around three to six months. There’s still quite a lot of uncertainty about when sailing will resume. When it does, I expect the focus will be on cash generation and paying down debt, given the impact on the balance sheets. But I think it’s also worth remembering that the fundamental drivers of this sector and demand within it remain, specifically the low market penetration versus the total holiday market, strong customer loyalty, and high repeat purchase rates.
How are the Big Three operators doing?
It looks like Royal and Norwegian are still hoping to commence sailing in November. The landscape for Carnival is somewhat more complex. One of its brands, Cunard, said it will not recommence until sometime in 2021. Other Carnival brands are looking at November sailings, and yet others are looking at December and beyond.
Carnival and Royal Caribbean each have about 12 months of liquidity. Norwegian is slightly healthier; at its current burn rate, it’s looking at 18 months. They’re all working to reduce capital and operating costs, including reductions in headquarters staff, and to a greater or lesser extent they’re looking at asset sales.
Carnival has stated publicly that it has raised $10 billion in liquidity since March with credit facilities of close to $9 billion. It has reduced capital expenditures over the next 18 months by $5 billion, reduced operating expenditures on an annualized basis by $7 billion, and has started what is probably the most significant vessel-sale program of the three majors. In its most recent update, Carnival estimated its burn rate at around $650 million per month, but it’s working to reduce that to a range of $450 million to $650 million, according to estimates I’ve seen.
In May, Royal raised $5 billion, and then another $2 billion to $3.3 billion, followed by an additional $2 billion in June. Royal has stated that its monthly cash burn rate is around $250 million to $275 million.
Norwegian has liquidity of around $3.5 billion, and raised around $2.4 billion through a mixture of debt and equity. It has reduced capital expenditures by around $500 million.
Let me ad something about debt capacity. Carnival has stated that it still has further debt capacity beyond the financing it has already done. Royal is probably the most constrained of the three, given its junk credit rating, but it has also been the most innovative in the way it has structured some of its debts. At 18 months, Norwegian has the longest time frame to meet its cash needs.
Are there ways for the three to cut expenses further?
The short answer is yes, but at the moment they’re trying to rightsize their businesses in anticipation of demand 12, 24, and 36 months from now. As far as other cost-cutting measures, remember that the biggest area of operating expense tends to be related to crew and payroll, which could be cut as fleets are resized. The price of fuel to a large degree is outside of their control, but reduced itineraries, at least in the near term, will mean reductions in fuel costs. There also may be some small opportunities for savings related to port costs and insurance, as well as savings from reductions in sales, general, and administrative expense. A slightly more problematic area that they may or may not choose to consider is agent commissions and other selling expenses. But I wouldn’t be surprised if agent commissions are probably lowest in the priority list.
A significant opportunity, which I’ve heard very little mention of in their public announcements, is to consolidate or merge non-customer-facing functions of some brands, or some international and European-specific market operations. Royal and Carnival, for example, have several brands each operating within Europe.
How quickly do you imagine that kind of consolidation could be accomplished?
Some could be realized relatively quickly, within a financial year. More substantial savings would come in one to three years, depending on the size of the transformation. These opportunities have always been there but weren’t taken in the past because market growth and market penetration opportunities were more significant, and it was easier to grow that way. Now it’s different. There also have been rumors and speculation that some brands may be up for sale.
But what about selling individual cruise ships? Is it doable? How would the process look?
It’s certainly something that’s being considered, and it has a number of facets. The Big Three operators would be looking for a trade buyer, typically a smaller operator who doesn’t have the capital to build a new ship. Or they’d be looking for a buyer who would want to use the ship in some leisure- and/or travel-related capacity, but not necessarily as a cruise liner. Scrapping a ship would be the lowest-value option.
Determining the value-generating ability of a particular ship takes time, but it’s certainly possible for a transaction to be completed within 90 days, or maybe even less, once a preliminary agreement has been reached. Generally, a trade buyer has the greatest potential to maximize the value of a ship looking to be sold.
Any takeaways on recovery?
Since the fundamentals of the sector remain compelling, the issue is going to be who can remain sufficiently liquid to survive until business returns. Remember, North America accounts for 50% — and the U.S. 45% — of global passenger sourcing, and that 40% of destinations are the Caribbean, the Bahamas, and Bermuda. So, until the U.S. market is up and running, the entire sector is going to remain challenged.
About Jasbir Mann
Jasbir Mann is currently Finance Director of Altour UK and a Non-Executive Director at The Open University, but previously served as the Vice President Corporate Finance and Planning at Carnival PLC. Jasbir worked in this capacity for nearly seven years until his departure in November 2017. In his time, he served in a number of areas across financial, operational, and transformational projects for the company. Jasbir was responsible for board support; strategic planning; profit and loss, balance sheet, and cash flow reporting; operating expense, and selling, general, and administrative expenses. Jasbir was directly involved in all aspects of capital expenditures and new-builds for the cruise ships. Finally, as part of his role, he helped develop plans and strategies for growth post-2008-09 crash. Prior to his time at Carnival, he held senior positions at Unilever, Barclays, Constellation Brands, and NHS North Central London.
This article is adapted from the August 31 GLG teleconference “Norwegian, Carnival, and Royal Caribbean: Deleveraging the Cruise Line Industry.” If you would like access to this teleconference or would like to speak with Jasbir Mann or any of our more than 700,000 experts, contact us.