Earnings

Carnival share price slides after $4.4bn loss

CMC Markets

Earlier this month, huge declines in the Carnival share price meant the cruise line operator found itself falling through the trap door of the FTSE 100, as investors dumped shares over concern that the business might not survive a prolonged shutdown.

Carnival share price under pressure

Carnival has already shelved most of its 2020 cruise season as a result of the pandemic, though the company does have plans to restart US operations on 1 August. In the current environment though, this deadline could well slip back, especially since fellow cruise operator Norwegian pushed back its restart date to the end of September or beginning of October. Should this scenario play out, it's hard to see an improvement in Carnival's share price in the immediate future.

Coming so soon after Carnival posting record profits at the end of last year, the change in outlook could not be starker. The company also has a lot of questions to answer in terms of how to restore customer trust, after it was criticised for its handling of the initial coronavirus outbreaks on board its cruise ships earlier this year.

While 2021 bookings are looking good, these have been at heavily discounted prices, with the company’s biggest problem at the moment being cash flow, or rather the lack of it. With a huge fleet to maintain, the business had been haemorrhaging cash at a rate of up to a $1bn a month at one point, though steps have been taken to ameliorate this, with the furloughing of some positions, and plans to reduce the size of its fleet well advanced.

Carnival was able to raise $6.4bn in April to help tide it over, but had to pay through the nose to do so with a yield of 11.5%, well above the 1% it paid last October, when it raised €600m in the European debt market. As a result, we can expect to see further job cuts in the coming months, with 450 positions already set to go at its Southampton HQ, with the prospect that more could come, unless lockdown restrictions get eased soon.

Q2 losses worse than expected

Today’s sobering numbers serve to highlight the scale of the problems facing the business, with net losses coming in well above expectations, at $6.07 a share, or $4.4bn, including a $2bn non-cash impairment charge, well above all of the worst expectations. Total revenues for Q2 collapsed, coming in at $700m, down from $4.8bn a year ago. Expectations of cash burn remain unchanged, with the company looking to accelerate its ship disposal plan, from the preliminarily agreed 6 ships, which are due to be removed in the next 90 days, to a much higher number in the months ahead.

Total liquidity at the end of Q2 stands at $7.6bn, which seems a lot, however when you’re burning through cash at the rate of $1bn a month, getting that amount down can be difficult. As part of this morning’s announcement, it is hoped to get this number down to $250m once all of its ships are in a paused state, which it is expected should happen sometime in Q3.

Cruise sector faces uncertain outlook

All in all these are awful numbers for Carnival, as well as the cruise line sector in general, and with concerns about a second wave likely to increase as we head towards the end of the year, the outlook for the sector looks highly uncertain, even on a best case scenario where lockdowns and restrictions are lifted.

Lifting the various lockdowns may well be the easy part, but the hard part is likely to be persuading people to get back on these floating theme parks. It could be in the future the size of the cruise sector is likely to be somewhat smaller in the short term, however as the market leader, Carnival still looks well placed to survive for now. 

 

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