Carnival Cruise Line (CCL): Signs of progress, but room for improvement

On March 27, 2023, Carnival Cruises announced its performance for the first quarter of 2023.

Net Loss: Under U.S. GAAP, the company's net loss for the first quarter of 2023 was $693 million, or $0.55 per diluted share; the adjusted net loss was $690 million, or $0.55 per diluted share, Better than the company's previous guidance range for a net loss of US$750 million to US$850 million.

Revenue: $4.4 billion in Q1 2023, 95% of 2019 levels.

Record Bookings: The company recorded its highest bookings for any quarter, breaking bookings records in the North America and Australia ("NAA") and Europe segments.

Record Total Deposits: Total customer deposits reached a record $5.7 billion in the first quarter (ended February 28, 2023), 16% higher than the record $4.9 billion in the first quarter (ended February 28, 2019) %.

Cash from operations: Cash from operations turned positive in 1Q23. The company expects continued growth in currency from operations to be the driver of debt repayments over time.

Liquidity: Q1 2023 ends with $8.1 billion in liquidity.

The considerable capital investment puts the cruise industry in an oligopoly competition.

There are many similarities between the cruise and airline businesses, not least because they are both asset-heavy industries. Companies must initially invest much capital to purchase cruise ships and supporting facilities. Once the money is invested, the company must rely on operating capabilities to generate revenue to recover the initial investment. Just as airlines need to use more aircraft to increase revenue, cruise companies also need to minimize the time cruise ships spend in port to increase revenue. Therefore, improving operation level and efficiency is very important to the long-term development of cruise enterprises.

Due to the epidemic, Carnival Corporation's revenue fell to zero from mid-2020 to mid-2021. It had to use debt and equity sales funds to increase its liquidity to offset negative cash flow. While incomes have recovered somewhat, they are still below their 2019 peaks, especially when inflation is factored in. Inflation has also caused Carnival's costs to grow much faster than its revenues, making it more difficult for the company to return to the operating income levels seen in 2018-2019.

Profit margins are low despite the increase in revenue. Before the pandemic, the company was highly profitable, with gross margins of over 35% and EBITDA margins of over 20%, which kept operating cash high. There is a slight improvement in the first quarter of 2023, with a gross profit margin of 12.18% and an EBITDA margin of 8.62%, but it cannot make Carnival a profitable company.

Results for the first quarter of 2023 exceeded the company's expectations due to more robust pricing and in-flight spending, higher occupancy rates, and favorable operating cost timing. Although the number of bookings has broken any record in history, it can improve profitability in the long run. Still, the company's debt has reached its highest level due to factors such as the epidemic.

The company's long-term debt has more than tripled since the start of 2020, from about $10 billion to $32.7 billion.

Interest expense for 1Q23 was $539m (vs. $369m last quarter) due to the recent increase in long-term debt, and interest expense for the entire 2022 soars to $1.54bn. That aside, cash from operations in 2022 is negative $1.67 billion, while capital expenditures hit $4.94 billion. That means the company is losing money very quickly. (Carnival's capital expenditures will decline in 2020 (3.62 billion, -33.3%) and 2021 (3.607 billion, -0.4%), in 2018 (3.749 billion, +27.3%), 2019 (5.429 billion, +44.8%) and 2022 (4.94 billion, +37.0%). While cash from operations turned positive in 1Q23, it still needs some attention.

Carnival Cruise Line's current market capitalization of $11.1 billion depends more on the company's brand and leadership in the cruise industry than on the return the stock provides to shareholders. While revenues are recovering, gross profit and EBITDA margins are well below pre-pandemic levels. Furthermore, more than the profitability recovered in 2019 is needed to maintain the company's current balance sheet due to higher interest expenses.