Cruise Lines Battered But Not Sunk

By Greg Sushinsky | February 23, 2009 AAA

When Royal Caribbean Cruise Line(NYSE:RCL) reported its fourth-quarter 2008 earnings , with the precipitous profit drop from 33 cents a share a year earlier to 1 cent a share at the end of January, it didn't garner much reaction from the market. Along with a dismal forecast for the cruise industry for 2009, an analyst report expressed a concern about the company's balance sheet, yet added a mild assurance that it could weather this storm. With this outlook, can Royal Caribbean stay afloat against the swelling waves?

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Ill Winds for Cruises
As every other industry has taken a hit in this economy, it makes sense that the luxury cruise industry would too. With such industries as air travel and hotels, particularly for business and corporate travel, already hard hit by cutbacks, this non-travel bug has naturally spread to the cruise industry. Articles mention "staycations", where vacationers are either staying at, or close to, home. Thus the trade-off of inexpensive, local or nearly local trips are serving as vacations for many where once an ocean cruise might have been the thing. (To learn more about what a downturn in the economy can do to companies, be sure to read The Impact Of Recession On Businesses.)

Both Royal Caribbean and Carnival Cruise (NYSE:CCL), the two dominant cruise providers, have suffered a downturn in their businesses, which were growing over the years by offering vacationers a luxurious vacation at affordable prices. Unfortunately, bookings had been sinking before the "wave season," the popular January through March months, where people head out of bleak winter habitats to head for warmer locales.

The hopeful - or at least less gloomy - prospect for the industry is that the falloff in bookings may have leveled off, even though 2009 should remain difficult overall. Indeed, Carnival Cruise is making much of offering "early booking" discounts. So while it's always discouraging to read commentaries on an industry or company with phrases such as "global economic collapse" and "plummeting earnings", it's good to see there's a sign of hope on the horizon when there's even the mild suggestion that bookings may soon even be picking up slightly.

Sea Change in Habits
The real concern for the cruise industry has to be staying afloat during this recession, then whether this change in travel habits will become a permanent trend. The shell-shocked consumer may find it easier and quicker to go to the nearby casino resort, amusement park or water park, then to pack up and head overseas, given the uncertainty of jobs, lack of available credit and personal finances.

Will they continue to do so when things get better? Cruise-related industries also feel this negative synergy. Steiner Leisure Ltd. (Nasdaq:STNR), a spa destination company that works in partnership with the cruise providers, will feel the pinch of fewer tourists pursuing their spas as the end point or part of their cruise experience. The ambivalence on the part of industry analysts stems in part from how deep the cruising habit runs and how quickly this might be revived as the economy gets better or at least as people feel it will.

The question is, how soon - if at all - will they feel like cruising again? I feel the cruise habit has become a widely ingrained part of the U.S. consumer life in the last 20 years, as the over $20 billion in annual revenues these two companies, Carnival and Royal Caribbean, generate shows. Pleasurable habits especially die hard, so I'm thinking cruising will come back strong one day as people seek to relieve themselves of the stresses they face everyday at home.

Should You Get On Board the Stocks?
Both Royal Caribbean and Carnival Cruise have had their stocks pounded in the wake of this rogue wave that rose up against the cruise industry, Royal Caribbean more so than Carnival. Royal Caribbean is near a year low trading at $6, down from $40, while Carnival, the bigger and stronger of the two, has held up a bit better, trading at $20 down from $43. Carnival's profits have held up better, but both are expected to still make money going forward. While you might not want to take the plunge yet and jump into the waters on these stocks, (particularly watch Royal's operating cash position, as it may take a couple of years to fully return to the previous industry levels), the likelihood is that both Royal Caribbean and Carnival Cruise will weather the rough seas of the recession and please their many happy passengers as they set sail onto happier, smoother seas.

To learn about companies that are expected to do better during this market downturn, read our article Industries That Thrive On Recession.

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