Norwegian cancels all December cruises, sending sector lower

Alexis Christoforous and James Hardiman, Wedbush Leisure analyst, discuss cruise outlook after Norwegian extends cancellations.

Video Transcript

ALEXIS CHRISTOFOROUS: Norwegian Cruise Line surprised investors today when it announced it was extending the suspension of its voyages for another month, through December 31. Norwegian’s cruise brands are Oceania, Norwegian Cruise, and Regent Seven Sea Cruises. This news comes just a couple of days after the CDC chose not to extend its full no-sail order. Instead, it announced a phased-in approach to resuming cruise operations. When that news came out on Friday, we saw shares of the cruise companies rallying. Not the case today.

Let’s talk about this now with James Hardiman, leisure analyst at Wedbush. Hi, James. Were you surprised to hear this news today from Norwegian? Because heading into the market today, I thought cruise lines were going to have a pretty nice day.

JAMES HARDIMAN: No, I’m not. I’m really not surprised to hear it. At the end of the day, even though you’re right, in that the CDC did remove the no-sail order that’s been in place for some time, it was replaced with what they’re calling a framework for a conditional sailing order. And so while one major hurdle– I think a hurdle that everybody was honed in on– was removed, it was essentially replaced with a series of smaller hurdles, but hurdles, nonetheless.

And at the end of the day, we’re sort of running out of runway here, right? And I think the likelihood that a significant number of cruises would depart from the United States before year end was already dwindling. And so I think Norweigan, with the news today, ultimately ripped that Band-Aid off.

ALEXIS CHRISTOFOROUS: James, what’s your outlook right now on these cruise line stocks? And is one company you think better positioned to weather this storm and ride out the pandemic than another?

JAMES HARDIMAN: I’ve always been a big believer that Royal Caribbean is the best positioned for a number of reasons. A, I think they had the best momentum heading into the pandemic. Really, no reason to think that they won’t have the best momentum as we exit.

And then additionally, if you think about the capital moves that the companies have made over the last handful of months– issuing equity, layering on significant amounts of debt– all three have had to do some of that. Royal Caribbean, the least. And so when we finally exit from this, they’re going to be saddled, I think, with the least amount of incremental interest expense and have the least amount of equity dilution for shareholders.

ALEXIS CHRISTOFOROUS: What do you think about consolidation in the industry? There are only a few big, major players, but might they start have to look– might they have to start looking at combining just to stay alive?

JAMES HARDIMAN: Yeah, I’d be surprised if I saw any of the big three– Carnival, Royal, and Norwegian– join forces. But there are a handful of other, smaller players that may get gobbled up here in the coming year. And to some degree, really, all three of those major companies have made significant acquisitions in recent years. I would expect that to potentially continue.

Obviously, capital is at a premium right now. So the focus will be, obviously, heading up into the election and beyond, minimizing the extra capital that’s needed to make it to the other side. But I have been a big believer that after the capital raises that these companies have had in the spring and early summer, that they should make it to that other side.

ALEXIS CHRISTOFOROUS: So you’re not foreseeing any of these major players having to file for bankruptcy, or perhaps going under altogether?

JAMES HARDIMAN: I’m not. I’m not. I mean, basically, the position that they’re all in is that they should be able to make it to at least the end of– or at least towards the end, I should say– of 2021, even in this lay-up scenario, where the industry is largely closed. Now hopefully, we won’t get to that. And you know, who becomes president may play a role in that, ultimately. But certainly, the hope is that we can begin to have cruises again– with people onboard, importantly– over the course of the next few months.

ALEXIS CHRISTOFOROUS: Are you getting any indication that people are willing to get back on a cruise ship maybe before a vaccine is actually readily available? I mean, we’re seeing some people return to the skies. Do you think that we’re going to see that pent-up demand once the cruise lines say, OK, we’re going to start doing some meaningful sailings now?

JAMES HARDIMAN: It’s been one of the most surprising aspects of this story all along, and that has been the willingness of consumers to at least, you know, put down a deposit and sign up for a cruise in 2021. Now, as you would imagine, those bookings ramp materially the later in the year we get. And so what consumers are basically telling us is that they think that there’s going to be– that the industry is going to be back open for business, with or without a vaccine, by call it early summer, June timeframe. Whether or not that happens, I guess, remains to be seen.

But booking activity, and ultimately, pricing, has been remarkably resilient. And it’s a message that we’re hearing really pretty uniformly from from all three of the main cruise companies.

ALEXIS CHRISTOFOROUS: It is wild. I mean, they really do have a very loyal customer base, so we’ll see how it all plays out. James Hardiman, leisure analyst at Wedbush, thanks for your time today.


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