On Saturday the Port of Los Angeles bid farewell to the Grand Princess, the Carnival cruise ship that had stranded a full load of passengers outside San Francisco for several days at the outbreak of Covid in March last year. It was LA’s first sailing since the pandemic began.
Because the travel and leisure sector was one of the stock market’s worst sufferers from the pandemic, many investors are now looking in that direction for the most promising winners to bounce back.
Holidaymakers’ willingness to put up with this summer’s regulatory twists and turns for the chance to dive under a foreign beach umbrella show that the demand is there and thousands, in particular, have been flocking to cruise liners. However, when the music
stopped last year travel firms were frozen in widely different financial and operational poses. Some had other activities to fall back on, others did not and debt levels varied in what were normally seasonal businesses. Last week Carnival and Saga published contrasting financial bulletins on their recovery.
Carnival
Little did Arnold Donald, Carnival’s chief executive, know what was coming when he said two years ago that bookings had been hit by “geopolitical and macroeconomic headwinds”. Back then this column advised avoiding the shares at £35.78, but are they now a “buy” at the present £17.66½? Listed in London and New York, they surged by more than £2 before the update for the quarter that ended on August 31.
Carnival, the world’s biggest cruise company, has eighty-seven ships sailing under nine brands, including those flying the P&O and Cunard flags. That’s a lot of fixed assets to keep busy and the company suffered last year. Like its rivals Norwegian and Royal Caribbean, it was kept on life support by the banks.
However, Carnival, which does its accounting in US dollars, claims to have $7.8 billion of liquidity and is intending to return to full cruising by next spring, before the vital summer season, when its 150,000 staff will be catering for up to 200,000 passengers. More than half the fleet should be at sea by the end of the financial year, two months from now, although the group’s P&O Australia operation is moribund while international travel is banned in the country.
Carnival’s shares have continued to rise since it reported on its third quarter. Voyages were cashflow-positive during the quarter, which is a start, and revenue per passenger cruise day was higher than it was two years ago. On June 1, only five of its ships were working, but over the following three months that rose to twenty-five.
The company reported a net loss of $2.8 billion, a touch less than a year ago but a world away from the $1.8 billion net income in the same quarter of 2019. The adjusted third-quarter loss was $2 billion, compared with $1.7 billion at this stage a year ago. David Bernstein, the finance director, expects to break even on a net earnings basis in the early part of 2022. Capital spending next year is expected to hit $6 billion, mainly on the new ships.
At Carnival’s size, debt management is important. It has extended repayment deadlines for $4 billion and cut the future annual interest bill by $250 million. Customer deposits rose by $630 million to $3.1 billion in the third quarter, a striking gesture of faith in the company.
Cumulative advanced bookings for the second half of 2022 are reckoned to be ahead of what was a strong 2019. However, booking volumes dipped during the summer thanks to Americans’ jumpiness over the Delta variant of Covid-19. No one can know what variants, or scares, will arise in the next year or so and that will cast a cloud over Carnival shares.
Snapping at the company’s heels is none other than Sir Richard Branson, the one-time scourge of British Airways. His Virgin Voyages is only a minor irritant as yet, but the businessman is aiming at a lucrative free-spending younger audience. And the industry historically has been prone to over-capacity, with the inevitable impact on cabin rates. That might be a problem a few years down the line.
Carnival gamely paid a 50 cent dividend for the year to last November, despite an $8.8 billion operating loss. While that was no more than nominal in percentage terms, it is an encouraging pointer to the board’s future inclinations. Its shares are the biggest bet on recovery. The risks and rewards are commensurate.
ADVICE Buy
WHY It looks poised to take advantage of pent-up demand, but Covid risks linger
Saga
With only two ships, the much smaller Saga is a very different proposition. Its attraction lies in the original idea of the founding de Haan family, to target the over-50s, a segment broadly flush with cash, with reliable spending habits and growing in number.
At first Saga was merely a travel agent, before it took the momentous decision to launch cruise ships. The company went through a phase of exploring what else it could sell to the retired crowd, eventually sticking with savings, equity release, package holidays and a magazine, all dwarfed by household, travel and motor insurance, of which the latter is the most important.
Insurance provided the group with a pandemic lifeline and continues to prosper, raising the question of whether Saga should even bother with its cruise ships Spirit of Adventure and Spirit of Discovery. They cost £581 million, paid for in instalments over 12 years at an average 3.8 per cent interest. Quite a commitment and Saga dividends will take second place to servicing that debt for some time. Arguably, the ships are a marketing asset, keeping the Saga brand in passengers’ minds, but in 2019 five times as many people took the company’s package holidays as sailed the seas.
Euan Sutherland, its chief executive, was obliged to dampen expectations when he observed last week: “Whilst bookings for 2022-23 are ahead of pre-pandemic levels, there remains some uncertainty within the travel industry surrounding the longer-term impact of Covid-19.”
In theory, Saga shares have huge recovery scope, standing at 370½p compared with a stock market float price of £27.75 seven years ago, but, just as the insurance business provided welcome ballast in the pit of the pandemic, so it may hold back the impact on the shares of a fully fledged return to holidays.
ADVICE Hold
WHY Recovery may take a couple of years to reach the bottom line
