Cruising to Recovery
A Bullish Voyage on Carnival Cruise Lines

Date of publishing: 07.08.2022

Executive Summary

  • The COVID-19 pandemic resulted in significant health challenges within society and caused financial disruptions in various industries over the past few years
  • The tourism industry experienced the most severe difficulties
  • Although the cruise industry reached pre-pandemic levels in occupancy and exceeded expectations, share prices are still below pre-pandemic levels

Market Environment

Despite the initial downturn caused by the pandemic, cruising lines have made a remarkable comeback. In 2023, the industry has successfully regained full capacity as travelers stayed true to cruising. This achievement is a testament to the cruise industry’s commitment to implementing rigorous health and safety protocols, but also the success of companies’ ticket price strategy. Some of the largest cruising lines such as Royal Caribbean, Carnival and even Norwegian Cruising lines have already reported passenger occupancy close to 100% in Q1 2023. These numbers are expected to grow even further thanks to a smart value proposition strategy as well as further expansion of onboard activities.

As the tourism industry gradually recovers, cruise companies continue to thrive, benefiting from passengers’ increasing expenditures and their eagerness to explore the world once again. The industry’s decision to order new ships and expand its offerings underscores its optimism for the future and its commitment to providing unforgettable travel experiences. During the pandemic, cruise companies took the opportunity to renew their ship fleets. In 2022, the BRS annual review reports for the delivery of 21 new ships, while 16 older ones were demolished. This signifies cruising lines’ efforts towards fleet modernization and improvement. Currently, the average age of a cruise ship is around 14 years, indicating a continuous turnover of vessels in the market. Another positive sign that reaffirms cruising industry’s confidence is the full capacity recovery since 2022. Aligned with the confirmed order book, the total global cruise capacity projections until 2028 exhibit a CAGR of almost 3.7 %.
Figure 1: Global cruise capacity projections. Source: CLIA

General economic landscape

One of the major hurdles impeding the full recovery of tourism is inflated prices. However, both the US and Eurozone are observing a steady decline in inflation levels. In Europe, inflation and interest rates remain above optimal levels, hampering the overall economic situation. Nevertheless, the outlook for tourism in Europe appears positive, as travel trends exceed expectations. Taking a deeper look at the revival of tourism, there exists a positive correlation between tourist expenditures and consumer confidence. This relationship remains relatively consistent, albeit not yet reaching pre-pandemic levels. Despite this, there has been a remarkable surge in US consumer expenditures for hotels and foreign travel, increasing by nearly 35% compared to the pre-Covid period. The first quarter of 2023 witnessed a similar trend, with international travel volumes rebounding and doubling compared to the previous year. Globally, travel volumes have reached 80% of pre-pandemic levels, indicating a significant recovery in the industry.

This trend has been particularly noticeable within the cruise industry, where passengers are not only booking cruises but also increasing their onboard expenditures. The boost in passengers’ spending on various onboard amenities, including dining, entertainment, and spa treatments, has significantly contributed to the revenue growth of cruising companies. This increase in onboard expenditures further demonstrates the industry’s ability to capitalize on the recovery phase and maximize its revenue streams.
Figure 2: Passenger revenue by segment. Source: CLIA
Upon analyzing the most frequented destinations among cruise tourists in 2022, it becomes evident that there is a substantial demand for cruises, and the cruise industry is responding with ample offerings. In terms of tourism recovery, the Caribbean region stood out in 2022 as one of the fastest-recovering regions worldwide. Some destinations within the Caribbean even surpassed their 2019 arrival numbers, while others are still striving to reach their pre-pandemic levels. On the flip side, the strategic positioning of cruise companies, including adjustments in ticket prices and additional charges for onboard expenses, has bolstered the industry’s revenue. This approach has already yielded positive outcomes, particularly in the North American and European markets, indicating a promising revenue growth for 2023. Although ticket sales contribute significantly to a company’s revenue, onboard purchases constitute the majority of the profit. Capitalizing on this reality, cruise companies impose additional gratuities and fees once passengers are onboard. Despite that, as disposable income increases, individuals are increasingly inclined to consider cruising as a viable vacation choice. With a greater financial capacity to allocate towards leisure and recreational pursuits, people may exhibit a heightened propensity to invest in vacations, including the option of cruising, in the upcoming quarters. This, in turn, significantly contributes to the industry’s augmented revenues and enhanced profitability.

Company Evaluation

Companies Overview

Figure 3: Public traded companies classified as cruise lines. Source: S&P Caplital IQ

After carefully screening all publicly traded companies under the “cruise lines” classification and applying a filter for a market capitalization above $1 billion, our analysis led us to identify six potential candidates. Subsequently, we conducted a thorough examination to eliminate general travel companies from the list, resulting in the identification of three pure cruise companies: Royal Caribbean Cruises Ltd., Carnival Corporation & plc, and Norwegian Cruise Line Holdings Ltd.

Unfortunately, like many industries, the cruise sector has been severely impacted by the ongoing pandemic, as evidenced by negative Net Income figures for the Fiscal Year 2022 across these three companies. The effects of the pandemic have proven to be long-lasting and continue to challenge their financial performance.
Figure 4: Share price performance (indexed 2018). Source: Yahoo Finance

The share prices of these three cruise companies have inevitably reflected the protracted impact of the pandemic on their operations. Among them, Royal Caribbean emerges as the company with the most significant recovery, though Norwegian and Carnival have seen their share prices stagnate at approximately 20% of their 2018 levels.

The decline in performance can be attributed to two primary factors. Firstly, the companies have incurred substantial debt to sustain operations amidst the challenging circumstances. Secondly, despite steady revenue growth, the companies remain unprofitable, which further contributes to their unfavorable financial situation.


Figure 5: Current ratio. Source: S&P Capital IQ
Figure 6: Cash ratio. Source: S&P Capital IQ
The cruising industry has been characterized by low liquidity ratios historically. However, in response to the challenges posed by the pandemic in 2020, companies within the industry made substantial efforts to bolster their cash positions. Among them, Royal Caribbean. (RCL) and Norwegian (NCLH) restored their liquidity to the low pre-pandemic levels. On the other hand, Carnival (CCL) displayed significantly higher current and cash ratios, positioning them as the company best equipped to meet short-term liabilities efficiently. These liquidity measures indicate the varying degrees of financial preparedness and resilience of each company in navigating the uncertainties brought forth by the pandemic.

Capital Structure

Next, we looked at the capital structure of the three true cruise lines to see how the companies finance their operations and to understand the companies’ risk profile and their financial stability. We focused especially on the debt/equity ratio as well as on the equity ratio and used date from S&P Capital IQ. It is striking that the D/E ratios of all three companies have risen sharply since 2020, which means the companies rely more and more on borrowed funds, potentially indicating higher financial risk. Most notably, Norwegian’s D/E ratio went through the roof in 2022; by comparison, Carnival’s and Royal Caribbean’s ratios were significantly lower. Carnival had the lowest D/E ratio of the three cruise lines, but Royal Caribbean was the only company that was already able to lower the D/E ratio again in Q1 2023.
Figure 7: Debt/Equity ratio. Source: S&P Capital IQ
As expected, the equity ratios of all three cruise lines show a downward trend, especially since 2020, and Norwegian even reported negative equity in the first quarter of 2023 due to the accumulated deficit – an alarm signal in our opinion and speaking against an investment in the company. With an equity ratio of just over 10%, Carnival had the highest ratio of the three companies, but again Royal Caribbean was the only company that was already able to counteract the negative trend. Still, in terms of the capital structure, Carnival is the most financially stable company of the three cruise lines.
Figure 8: Equity ratio. Source: S&P Capital IQ


We also looked at the most important profitability ratios as profitability is a fundamental aspect of a company’s financial health. We focused on the return on assets to see how effectively the companies utilize their assets to generate profits, on the return on equity to see how effectively the companies generate profits based on the investment made by its shareholders, and on the net profit margin to see how much of each revenue dollar translates into net income. During the corona pandemic, both RoA and RoE fell rapidly for all three companies. Since 2022, a recovery in profitability is evident, but pre-pandemic levels have not yet been reached. Royal Caribbean is the most profitable company in terms of RoA, RoE, and net profit margin and is the only company to have reported positive RoA since the third quarter of 2022. It should still be noted that the companies are not yet profitable and most of the ratios are still negative.
Figure 9: Return on Assets. Source: S&P Capital IQ


Figure 10: Amnt. Outstanding, in USD mn. Source: S&P Capital IQ
Figure 11: Debt overview. Source: Bloomberg Finance L.P.
Royal Caribbean is currently confronted with a substantial debt maturing in 2023, which poses the challenge of costlier refinancing options. The company has approximately $4 billion in debt maturing in the specified year, with a weighted average coupon rate of 6.88%. Comparatively, the latest debt issued by RCL carries an interest rate of around 10%. On the other hand, Carnival holds the highest debt outstanding among the three companies. However, CCL has no intention of further increasing its debt and is actively working towards reducing its balance sheet. Notably, the debt maturing for CCL starts from 2026 onwards and has the highest weighted average coupon rate. Meanwhile, Norwegian stands out with the lowest total debt and the lowest weighted average coupon rate, resulting in the lowest net interest expenses among the three companies.

Preliminary conclusion

In summary, we are currently still in a challenging economic environment. However, we can observe a strong recovery in tourism and in its driver, consumer confidence. This also applies to the cruising industry, which was hard hit by the pandemic: Several pre-pandemic levels have now been reached again, especially in ship occupancy, and revenues are expected to increase in all markets. However, while the industry is back to normal, stock prices are not. In particular, Carnival is trading at a very high discount, and it is the best overall fit regarding liquidity, cap structure, and debt outstanding.

Carnival Cruise Lines

Carnival Cruise Lines, established in 1974 and headquartered in Miami, stands as a preeminent global leader in the cruising industry. With a fleet of 90 ships and an impressive total passenger capacity of 245,000, Carnival has firmly secured its position as the largest global cruise company. The company boasts a diverse portfolio of brands, including Carnival, Holland America, Costa, AIDA, Seabourn, Cunard, and P&O Cruises. Notably, Q1 of 2022 witnessed a historical milestone for Carnival Cruise Lines, achieving the highest number of bookings in its history.
Figure 12: Revenue Breakdown 2022, by region and operation. Source: Bloomberg Finance L.P., Annual report 2022

The majority of the company’s revenues, accounting for nearly three-quarters, are derived from its North America and Australia cruise operations. Another significant portion, comprising one-fourth of the revenues, comes from Europe and Asia operations, while the remaining revenue is attributed to Cruise Support and Tour & Other segments.

In terms of revenue by region, North America stands out as the largest contributor, accounting for approximately 60% of the total revenue. Europe follows as the second most significant region, contributing around 30% of the revenue. The remaining revenue is generated from Australia, Asia, and other regions.

Trade Structure

In order to benefit monetarily from the investment thesis outlined thus far, we would use an options strategy, to be more precise a bull call spread – a bullish options strategy based on the simultaneous buying and selling of call options with the same maturity but different strike prices, where both the possible profit and the possible loss are limited.

We choose options expiring on January 19, 2024, which gives us an investment horizon of about 7 months. At our chosen strike prices of $17.50 and $20.00, we would make a profit from the moment the stock rises above $18.22. If the stock trades above $20 on the expiration date, we would make the maximum profit of $2,670, if the stock trades below $17.50, we would have to book the maximum loss of -$1,080, giving us a reward-to-risk ratio of 3.
Figure 13: P&L Bull Call Spread. Source: Bloomberg Finance L.P.

Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with WUTIS – Trading and Investment Society e.V.

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