Cruise lines budget for additional costs as they prepare to restart sailings

Cruise lines are budgeting for additional costs as they prepare to resume travel outside the United States – their main market – after a hiatus of more than a year due to the coronavirus pandemic.

Cruise lines, who cut costs last year by idling ships, laying off thousands of employees and cutting marketing spending, hope to resume U.S. crossings in July. This could be feasible if companies meet the requirements set by the Centers for Disease Control and Prevention, for example by demonstrating that they can mitigate the risk of Covid-19 on board.

Cruise lines expect to book a mix of one-time and recurring spending for improved sanitation, Covid-19 testing and other measures as they struggle to regain public trust. Coronavirus outbreaks aboard ships last year halted cruises, forcing cruise lines to raise billions of dollars in emergency funds to stay afloat.

Miami based carnival Corp.

, which operates nine brands, is forecasting additional spending of several hundred million dollars, said chief financial officer David Bernstein. The company views the costs of restarting its ships as a one-time expense, while the costs of the health protocol – a separate category of expense – will depend on how long they are needed, Bernstein added.

“[I] I wouldn’t say hundreds of millions are intangible, but I would characterize them as manageable under our liquidity status, ”Bernstein said. Carnival had $ 11.5 billion in cash and short-term investments at the end of the quarter ended Feb. 28 and does not need to raise additional funds to cover the additional costs, Bernstein said.

The company announced Thursday that three of its lines plan to resume Alaska crossings in July after Congress passed a bill allowing cruise ships to sail directly from Washington state to Alaska, temporarily renouncing a part of maritime law which requires a stopover in a foreign port. Canada, in this case. Canada currently prohibits large cruise ships from operating its waters until the end of February 2022.

Norwegian Cruise Line Holdings Ltd.

said he plans to spend around $ 100 million on health and safety. Its flagship line has pledged to cover necessary Covid-related treatments, ground quarantine and return flights in case a passenger is positive on board – a promise that would have been unthinkable before the pandemic, analysts said.

” They are not alone. We don’t just drop them off on the side of the road, ”said Harry Sommer, general manager of Norwegian’s flagship line, referring to passengers who could test positive for Covid-19.

These emergency measures are necessary to regain customer confidence, although they will weigh on margins, said Ted Sykes, the former chief financial officer of Viking Cruises who now advises other operators.

The CFO of Carnival Corp. David Bernstein.


Carnival Corp.

Norwegian expects to spend an average of $ 190 million in cash per month in the second quarter, CFO Mark Kempa said. “Restart spending is primarily related to repositioning, sourcing and staffing vessels, implementing new health and safety protocols and a measured acceleration of… marketing investments,” said Mr. Kempa earlier this month.

However, some of that expense could be wasted if the cruise industry does not quickly come to an agreement with port authorities and regulators, given the approximately 90-day delay it takes to get a ship ready to sail. Norwegian, for example, began to prepare for a potential return to service in early 2021, although crossings did not take place as major ports around the world remained closed. The company has spent around $ 45 million on stimulus-related costs in the last three months of 2020, Norwegian said in February.

There have already been signs of strain in business relations with local authorities. Norwegian said it would require all passengers and crew to be fully vaccinated before boarding a ship. The state of Florida, a cruise hub, has banned companies from requiring customers to provide documents certifying vaccination against Covid-19. Norwegian Managing Director Frank Del Rio said the company could simply move ships if necessary and operate elsewhere.

“There is still a lot of work to be done to achieve the goal of sailing from US ports this summer,” said a spokesperson for the Cruise Lines International Association trade group.

The closure of cruise lines during the pandemic had far-reaching economic consequences for U.S. ports. In this video, WSJ reporter Julie Bykowicz tours the once bustling Port Canaveral cruise terminal to learn more about the future of the industry. (Video of 03/22/21)

Cruise lines have pointed to strong demand for next year’s crossings, which could help them offset some of the additional costs. Carnival in April said future cruise bookings in its fiscal first quarter were about 90% higher than in the fourth quarter of 2020. Competitor Royal Caribbean Group said aggregate booking prices for the second half of the year 2021 are higher than they were in 2019.

Norwegian during the second quarter increased the prices of its trips, said Mr. Del Rio. “I’m just amazed at how much pricing power we have, given the difficulties we all experience,” Del Rio said on a conference call earlier this month.

Cruise lines are unlikely to offer substantial discounts to passengers due to the expected surge in demand going forward, said Steven Wieczynski, analyst at Stifel Financial Corp., the financial services firm. Some initial departures could offer incentives to encourage people to book travel, he said.

Jason Liberty, Chief Financial Officer of the Royal Caribbean Group.


Royal Caribbean Group

Next year, higher prices, coupled with more bookings, will offset increased operating costs, Sykes said. “When load factors come back, profitability comes back in spades,” he said, referring to an industry measure for passenger occupancy.

Cruise lines are also looking for additional savings. Carnival, for example, is reducing the free numbers it offers to customers to cut costs, an effort that began before the pandemic.

Royal Caribbean plans to emerge from the pandemic as a lean business, CFO Jason Liberty said in late April, stressing a simpler supply chain to cut costs through wholesale purchases. For example, it is reducing the number of banana varieties from 19 to 11, he said.

“As we get out of this there will be one-time costs in terms of scaling up our business,” Liberty said. “But we’ve spent the last 13 months evaluating our cost structure and reshaping it so that as we come out of it, we’re leaner.”

Write to Dave Sebastian at [email protected]

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