Cruise lines invest billions in new ships and accumulate new debt

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Cruise lines will continue to launch new ships in the foreseeable future, striking a balancing act between refinancing debt and improving profit margins. The high cost of debt will not stop ships from putting to sea. The big three cruise lines remain optimistic about a recovery in demand.

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Cruise lines continue to order new ships despite choppy waters in an uncertain environment for consumer spending – and face the risk of racking up more debt.

Take Norwegian Cruise Lines, for example, which plans to invest $2.4 billion in shipbuilding in 2023 and projects $500 million and $1.8 billion in 2024 and 2025, respectively. Royal Caribbean Group also expects ship building costs of approximately $4.1 billion in 2023 and a total of $9.8 billion for all existing ship orders. Carnival Corporation expects $1.8 billion in contracted new construction for 2023 and is changing its capital spending outlook to reduce capital spending.

The big three cruise lines, which together have $74 billion in debt, according to Bloomberg, face competition from billionaires and hotels hoping to build their own fleets. These new entrants will capitalize on the luxury class and existing customer loyalty bases and will compete for a piece of the premium market.

After scrambling to renegotiate credit terms and snagging lifelines from governments and banks to stay afloat during the pandemic, cruise lines are now in a balancing act between paying down debt and rebuilding profit streams.

The industry has been exposed for its wasteful practices and harmful environmental impact no more than it was at the height of the pandemic. With significant backlash and pressure to address carbon footprints, cruise lines are likely to shoulder even higher costs to reduce food waste and implement additional sustainability measures. Some are unwilling to abandon newly built pipelines, but all are reassessing operational structures and strategic priorities to return to profitable growth.

“You’ve probably seen some of the actions we’ve already taken to improve our cost structure,” said Frank del Rio, Norwegian Cruise Line’s president and CEO, during the company’s recent conference call. “Normalizing marketing spend, reducing corporate overhead, optimizing itinerary, supply chain initiatives and thoughtfully streamlining product delivery. We will continue to leave no stone unturned as we identify and evaluate additional opportunities.”

What Norwegian Cruise’s assembly costs tell us

Adjusted net cruise cost based on passenger capacity compared to pre-pandemic levels. Source: Morgan Stanley Research

Norwegian served 1.7 million guests in 2022 and expects its full-year booking position to reach its highest pre-pandemic level in 2023. It’s optimistic that, despite cost-cutting plans, it can continue to receive tailwinds from marketing, pricing, and service strategies in 2022.

The cruise line operates under three brands, including Norwegian, Regent and Oceania Cruises, and plans one newbuild per brand in 2023 for a total of three new ships to join its fleet. At least one new ship is expected to be delivered every year by 2028. According to the latest annual report, around 80 percent of each ship’s contract price is funded by export credit financing, which work is underway to secure.

Export credit financing is a typical loan used to finance the construction of cruise ships. This is often negotiated with export credit facilities from countries where the shipyards are located, allowing cruise lines to place ship orders without having to pay much upfront. The bulk of the cost is due on the ship’s delivery date, which may be years later.

Measurement of cruise ship debt

Average cost of debt financing for three major cruise lines. Source: Morgan Stanley Research

Royal Caribbean Group is taking the same approach, expecting capacity to increase by about 14 percent in 2023 from 2019 levels. Its wholly-owned brands will each welcome a new ship in 2023, with Silversea introducing the first Evolution class ship, Celebrity Cruises the fourth ship in its Edge series, and Royal Caribbean International its first new class of ship in nine years.

As with Norwegian, 80 percent of the cost of each of its seven ships on order is financed through export credit agreements. The remainder will be replenished by investments up to the ship’s delivery dates. Royal Caribbean had approximately $7.6 billion in committed financing for ships on order at the end of 2022.

“Our liquidity remains strong and we are focused on expanding our margins to further improve EBITDA (earnings before interest, taxes, depreciation and amortization) and free cash flow,” said Chief Financial Officer Naftali Holtz.

Holtz hopes to return Royal Caribbean’s balance sheet to investment grade. “During the fourth quarter, we repaid $600 million of maturing debt and completed the refinancing of $2 billion of secured and guaranteed debt previously due in June 2023.” Holtz adds that $2.3 billion of its existing revolving credit facility until April 2025. The company completed a $700 million refinancing deal with RCI Holdings in early February to repay principal on debt maturing between 2023 and 2024.

After better-than-expected results in 2022, Royal Caribbean is focused on improving guest repeat rates and margins to increase cash flow and create more available capital.

Unlike Norwegian and Royal Caribbean, Carnival is reducing its fleet expansion plans, a drastic change from building multiple ships annually before the pandemic.

“We have just four ships on order through 2025, plus our second incredible Seabourn luxury expedition ship, scheduled for delivery in 2023,” said Josh Weinstein, Carnival Corporation’s president and CEO, in the company’s fourth-quarter results announcement. “This is our lowest order backlog in decades. We don’t expect any new ships in 2026 and only expect one or two newbuilds a year thereafter.”

Instead, a so-called fleet optimization plan is prioritized, which includes removing smaller, less efficient ships and improving ship operating costs per ALBD (lower berth available day, a standard passenger capacity metric). Carnival is also aiming for a leaner investment profile to increase debt reduction efforts, strengthen the balance sheet, and achieve better credit ratings. In support of these goals, a new multi-currency turret worth $2.1 billion was also announced, set to replace existing agreements from August 2024.

While the cruise line has no designs of its own in the pipeline, Carnival is in a joint venture with China to launch Adora Cruises, the first major Chinese-built cruise ship. The ship plans to sail the Maritime Silk Road, which connects mainland China with Southeast Asia, India, Egypt, the Arabian Peninsula and the Mediterranean Sea, by the end of 2023.

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