Cruising is Back, Just in Time for Debt-Laden Cruise Companies

It was a grand show, the first in-person reunion in three years of cruise industry professionals from around the world. Three days of nonstop fun and excitement. And back in Miami Beach at last, in the newly renovated and spectacular Miami Beach Convention Center, after spending the last two years it was held (2018 and 2019) in Fort Lauderdale. It’s been a long wait.

The annual Seatrade Cruise Global convention brings together the best and brightest the industry has to offer. The exhibit floor is a cruise-lovers’ wonderland – destinations and ports on the one side, shipbuilders, engine makers, satcom companies and suppliers of every imaginable product and system on the other. There’s free handouts and tote bags and lots of regional food and drink to enjoy. Seminars are held on key industry issues, and cruise lines hold press conferences to tout their unique offerings. 

And then there are the after-hours parties, held at fancy Miami Beach hotels or night spots, where the real action is. Business gets done, and people are just glad to see each other again, partying well into the night. Fortunately, the exhibit floor doesn’t open till ten in the morning. 

Masks were few and far between, but everyone had to provide proof of vaccination or undergo a daily rapid antigen test to gain entry. You were issued an orange wristband as evidence of vaccination and had to wear it everywhere. The long arm of COVID.

State of the Industry

The highlight every year is always the opening “State of the Industry” presentation featuring a star-studded panel of industry executives and hosted by a well-known TV personality. This year was no exception. The panelists were Kelly Craighead, CEO of CLIA (Cruise Lines International Association – the industry’s umbrella group); Arnold Donald, CEO of Carnival Corp.; Jason Liberty, CEO of Royal Caribbean, and Pierfrancesco Vago, head of MSC Cruises. Befitting the international nature of the audience, the moderator was the BBC’s Lucy Hockings.

To get everyone in the mood, we were first treated to a classy video from the Italian shipbuilder Fincantieri that compared the construction of a modern cruise ship to tailoring a fine Italian suit (think Brioni). If that wasn’t enough, next came a video from CLIA, titled “Full Speed Ahead,” that captured the sheer joy of cruising and was full of facts and figures on the industry and its “resilience” (a recurrent theme) in the face of unprecedented challenges (think COVID and now Ukraine).

“The future is bright,” intoned Vago, once the panel discussion began, and indeed it is. At last count there were 240 cruise ships back on the water, and that number is growing every day. Demand is at all-time highs, and at higher prices too as vacation-starved cruisers seem willing to pay almost any price to get back on board. You can’t turn on the TV these days without seeing a cruise company ad with smiling and laughing cruisers enjoying the times of their lives. 

Carnival’s Arnold Donald pointed out that – despite differences in pricing, amenities, destinations, size of ships – cruise companies don’t really compete with one another. An ad for one company is an ad for the industry itself. Because they all offer the same thing. For years Carnival was the only cruise company advertising on TV. Now there’s at least a dozen, among them Viking, Celebrity, Norwegian, Royal Caribbean, Virgin – even smaller companies like AMA and American Cruise Lines.  

Meanwhile, the companies themselves struggle to rehire crews, get their ships back in working order and meet the surging demand in a world where many ports – particularly in Asia – continue to remain closed. They also have to continually fine-tune their COVID protocols in a fast-changing world. 

“We take a multilayered approach to safety and health,” noted one of the panel members, emphasizing that vacationers are far safer on a cruise ship than on any other type of getaway. “We’re the world’s safest holiday option,” stated another. Someone even claimed people were “80 times safer” on a cruise ship than anywhere else. 

Despite such hyperbole, there’s some truth to such claims as ventilation systems have been upgraded and there’s usually a doctor on board and hygiene standards were already quite high prior to COVID. Norovirus, for one, seems to have disappeared. And the incidence of new COVID infections on a cruise ship is, in fact much lower than in the general population.

Plugging In

The sustainability message was another recurrent theme. “We’re ready to plug in,” said MSC’s Vago, referencing the industry’s commitment to hybrid propulsion systems and shore power wherever available. 

CLIA’s Kelly Craighead noted the industry’s commitment to first achieving carbon-neutral operation and then net-zero emissions by 2050, the use of shoreside power by 32 percent of ships today and 67 percent in five years, and that CLIA will join the Global Maritime Forum’s Call to Action for Shipping Decarbonization. For the cruise industry, the Call to Action involves not just sustainable transportation (i.e., propulsion systems), but extends to hospitality on board (recycling, waste disposal) and destination management as well (shore tours, minimal environmental footprint of cruise ship passengers). 

As Joep Bollerman, Vice President of Passenger Ships for Lloyd’s Register, said to me later that day: “The idea is to leave an area exactly as they entered it, and the cruise industry is getting better and better at it.” Bollerman’s firm has the biggest share of the passenger ship market among classification societies.

Sticking with the sustainability theme, CLIA’s Craighead went on to point out that the number of LNG-powered cruise ships is growing daily and that seventy percent of cruise ships currently have scrubbers to limit harmful emissions. By 2027 LNG will power more than half of all newbuilds. She concluded by referencing a recent study that said cruise vacations generate 32 percent fewer CO2 emissions than any other form of vacation and that most people don’t seem to know this and the industry should do a better job of telling its story and burnishing its image.

So, okay, I’m in the image business and here I am telling you its story. Listen up! 

Balance Sheet Woes

All of this is all fine and dandy, and it’s good to see the cruise industry finally catching up with the rest of maritime when it comes to issues like sustainability and decarbonization. But on the financial front there’s still lots of work to do. 

In 2019, the last full year before COVID hit, there were 26 million cruise passengers – a record number – and the industry was on a roll. Forecasts for 2020 were even higher. Cruise companies were raking in profits and building new ships helter-skelter. Then COVID hit, and in March 2020 the industry completely shut down. 

Now I don’t know about you, but I’d have a tough time going almost two full years with little or no income, but that’s what the industry did, and that’s what I call true resiliency. The airline industry got massive government bailouts because it was considered an essential industry. The cruise industry – and all of maritime, for that matter – didn’t make the cut because they weren’t considered essential. 

But as LR’s Bollerman pointed out to me, the cruise industry is essential for hundreds of small, remote communities around the world that depend on it for income. It’s essential for some big communities too, like Alaska. As for the rest of maritime, one look at the current state of global supply chains tells you that maritime is about as essential as it gets. 

So to stay afloat, the cruise industry went heavily into debt, borrowed lots of money, issued new equity, sold and scrapped ships – all the while burning cash at a horrendous rate. But it survived, and while it doesn’t expect to get back to 2019 levels this year, it does expect to come close and turn cash flow positive this summer. Most industry experts say next year will be even better than 2019. 

Here’s Carnival’s Donald, CEO of the industry leader, on the company's first quarter earnings: “Despite the impact of Omicron, guests carried grew by nearly 20 percent in the first quarter compared to the prior quarter while simultaneously increasing revenue per passenger cruise day and driving an improvement in adjusted EBITDA. We expect monthly adjusted EBITDA to turn positive by the beginning of our summer season as we build occupancy and return more ships to service.”

Okay, sounds good. You’d never guess the company lost nearly $2 billion in the quarter. 

Similarly, after posting a $1 billion+ loss in the first quarter, CEO Jason Liberty of #2 Royal Caribbean had this to say: “Despite the impact of Omicron earlier in the year and the horrific conflict in Ukraine, we are encouraged by the strong demand for cruising and the steady acceleration in booking volumes. Since the beginning of March, booking volumes have exceeded the record levels achieved in 2019 and we are optimistic that 2022 will be a strong transitional year as we return to full operations and profitability in the second half of the year.”

“A strong transitional year” – I like that. And here’s CEO Frank Del Rio of #3 Norwegian: “We are encouraged that consumer demand remains robust with net booking volumes not only back to pre-Omicron levels but now approaching historical levels despite a temporary retreat due to the Russia-Ukraine conflict. Pricing remains very strong for all future periods and our value-add bundling strategy is working better than ever.”

Norwegian’s entire 28-vessel fleet is now back in operation and the company turned cash flow positive in March. It expects operating cash flow to be positive in the second quarter as well.

We’ll see. But in the meantime, it looks like full speed ahead for the industry – and not a minute too soon. Welcome back!