Investors in Royal Caribbean Cruise Line (RCL) equity appear to be suffering from denial. Otherwise the stock wouldn’t still be trading at a $17 billion valuation and 3x times book value when the company is hemorrhaging cash. There are many stages of grief. Denial happens to be the first stage and there should be a lot of grief coming for equity long positions in this stock.
Here are the main reasons why I am not confident the cruise line will ever return to pre-pandemic operations, or anything close to that! Skip to the customer comments, if you don’t have the patience to read the whole thing.
First, let’s start with a conversation that I had with an avid cruise ship fan. This person has been on multiple cruises and actually still enjoys them. Here are her main points.
Cruises are great right now because the ships are traveling at 60% capacity. This is part of a COVID protocol. It means you get more ship to yourself.
Passengers on a cruise ship can be COVID tested at the first sign of illness. Once they are tested, they are often quarantined in their room for 24 hours until results are clear.
Some ports are very strict on mask guidelines, with fines of $4,000 and jail time if you don’t wear a mask. Or, the ports close.
The restrictions above are short-term reasons to be bearish on the industry. Ships traveling below capacity lose money. Passengers that are forced to stay in their cabins for 24 hours will not report illness, putting everyone at risk. Traveling to a port that threatens you with jailtime is great, as long as the port doesn’t close and many of them have.
Royal Caribbean actually recently stated that they intend to be at 80% capacity soon with “50 out of 61 ships” “returned to service across its five brands.” This is a simple division exercise to get to 80% and it is not fully true. In October, cruise blogs are reporting that some ships are actually at 25% to 40% normal capacity in terms of passenger load. Saying that the fleet will be at 80% capacity is a misstatement when these ships aren’t even halfway full.
Part of the issue is a lack of demand. Back in September, with the Delta variant making headlines, CNBC reported that cruise lines were reporting double-digit drops in bookings. This came before Omicron was a headline event.
The bottom line: NOBODY WANTS TO GO CRUISING RIGHT NOW
The Balance Sheet and Income Statement
For Royal Caribbean, the business is still trying to return from shutdown, but as they do this, they are burning cash. To finance operations, the company turned to debt and equity. They are also keeping customer deposits and denying refunds. These refund denials include cruises that were booked pre-pandemic. So, essentially, they have been holding customer cash for several years and refusing to pay it back.
The customer deposits amount to $2.7 billion out of the total $3.29 billion in cash on the balance sheet. They are properly reflected as a liability on the balance sheet because they are ‘owed’ to customers. Subtracting out customer cash, the company has a cash balance of only about $590 million.
Further, in the most recent quarter, the company lost $3 for every $1 in revenue. Operating expenses ($813.6M) account for 2/3 of the loss, while marketing ($323.4M) and interest expense ($430.6M) make up a large part, as well. They are burning cash, including the cash they hold on behalf of their customers.
With cash flows getting burned by interest expense and operating costs, the company may be faced with issuing new debt or equity. Credit default swap prices have been nudging up. Clearly, bond market participants have correlated higher risk with the new Omicron variant.
By the way, severity of Omicron is not the issue. It is the perceived severity of COVID variants and the restrictions surrounding them that will hold down demand. The restrictions around disembarking at ports of call and movement around ships will affect how much people perceive to enjoy their cruises. Long-time customers will delay purchases. New customers will avoid the industry.
How soon will they need to raise cash?
In the first three quarters of 2021, the company burned $1.67 billion in cash. The adjusted cash of $590 million (cash less customer deposits) doesn’t seem to be enough to cover one quarter of activity.
Maybe this is why they won’t give customers their money back. It appears that a lot of that deposit money has been held for several years at this point. Some customers are threatening class action lawsuits to have it returned.
MAIN POINT: ROYAL CARIBBEAN MIGHT BE FORCED TO SPEND CUSTOMER DEPOSIT MONEY TO STAY AFLOAT
Apparently, this has been a big enough problem that regulators proposed new rules for cruise refunds this fall. Here’s a local news story link about it.
What are customers saying? This has been eye-opening.
Here are some comments I found at the Better Business Bureau website.
Here are some comments found on Facebook group called Victims of Royal Caribbean which is a private closed group. The names and images are blacked out to protect privacy. Notice the dates are all recent. There are too many posts to include them all.
Here are some tweets to the Royal Caribbean Twitter account. These are publicly viewable.
If you want to see these comments yourself, click this link to go to Twitter. Then ask yourself why Royal Caribbean is holding onto customer deposits with such a tight grip, refusing refunds.
It’s fairly easy to find these comments on Reddit as well.
This is just a quick view of Royal Caribbean. If you have anything to add, please feel free to comment, or send me a tweet.
Disclosure: I am short $RCL and this isn’t the first time. I was also short $RCL in March 2020. This time is different though, as there is no bailout money on the horizon.