Short Read

Coronavirus: The iceberg that could sink the cruise industry

In today’s economic climate, where most of the world is stuck at home and groups larger than a small family are banned, it would seem logical that the first industries to struggle would be ones based on travel and/or large gatherings of people. So, cruise liners, being the perfect blend of the two with an average of 3,000 guests per ship, look like they may not stay afloat for much longer. Since the news broke about the Diamond Princess which recorded 712 infections and 11 deaths onboard, disaster has been rife within the industry with little in terms of relief.

One major shock was the fact that cruise-liners were left out of the Federal Government’s $2 trillion stimulus package. President Trump’s administration did indeed decide not to include this huge industry, generating an estimated $126 billion of revenues a year, with Senator Richard Blumenthal, Democrat of Connecticut and prominent critic of the cruise industry, saying, “I have to admit I was surprised, given the President’s support for the cruise industry.” However, there are many valid reasons why they were left out, mainly because they are foreign companies. Whilst the three largest cruise liners are all headquartered in Miami, Royal Caribbean, Norwegian, and Carnival are registered in Liberia, Panama, and Bermuda respectively. This allows them to take advantage of the more relaxed labour laws and enables them to benefit from a provision in the tax code which largely exempts them from paying US federal income tax. Carnival cruises in 2019 paid, worldwide, taxes of $71 million on $20.83 billion revenues, Royal Caribbean paid $36.2 million on $10.95 billion in revenue, and Norwegian showed a tax benefit where it is owed £18.86 million with $6.46 billion in revenue. Moreover, these companies have a poor environmental record which has led senators and environmental groups to urge congress to refrain from bailing out these heavy polluters. In 2016, a subsidiary of Carnival cruises, Princess cruise lines, received a fine of $40 million for illegally dumping waste into the sea, following this, in 2020 they were fined a further $20 million for dumping plastic into waters around the Bahamas. Lastly, the cruise industry is being punished for its weak response to the coronavirus outbreak on ships. The Diamond Princess, for a short period, had the highest concentration of coronavirus cases outside of mainland China, and despite this, the precautions taken to mitigate the spread of the virus were few and far between leading to a warning from the US state department against boarding cruises and a halt in US operations for cruise liners for 30 days.

The most obvious reason why this industry is failing is that people are not booking cruises and people who have already booked them are cancelling. Cancelation rates were at around 50% before the US ban on European travellers and this is largely due to the demographic driving the demand for cruises. In 2018 19% of all cruise passengers were between 60-69 years old and 14% were over 70 years old. So, we can see that the elderly are the main customers and considering Covid-19 is a virus that has been shown to be vastly more dangerous to the elderly (with the death rate being 10 times higher than average for people over 80 years of age) it is pretty obvious why. Moreover, the US is by far the largest consumer of cruise liners with 14.24 million cruise passengers originating from North America in 2019. All of this has led to what is now being called “The Cruise lines 9/11.” The three main cruise companies have been forced to suspend voyages and ships that were on the water when the news broke are were denied entry to ports. These shocks have led to huge losses in revenue and Carnival Cruises reported a drop-in stock price of nearly 60% making it the FTSE 100’s biggest loser year to date, and the aggregate value of Carnival is £2.5 billion lower than it was 17 years ago. Caribbean and Norwegian have reported losses of about 80% in value over the last few months. All of these issues are made even worse by the fact that they have struck in the “Wave season” which is the industry’s key quarter where the companies battle for early bookings.

However, the stock market appears to be optimistic about the outlook for the sector after Carnival succeeded to raise $6bn in the form of debt and equity to bolster its balance sheet. Also, the cruise sector has recovered from negative shocks in the past and scandals such as the outbreak of Norovirus, as well as the many outbreaks of gastrointestinal illnesses linked to not having fresh food and living in close proximity to thousands of people. So once coronavirus fears will have blown over, and travel normalises back to about 10% of global GDP, the cruise ships’ will most likely recover and live to fight another day as they have done many times in the past. Cruise lines have a lot of die-hard aficionados and according to the Carnival CEO, 76% of people having to face cancellation of cruises this year opted to postpone rather than just cancelling voyages altogether, so once the lockdowns implemented around the world are lifted there will still be many people who will decide to go floating home. Lastly, according to the online cruise marketplace cruisecomplete.com there has been a 40% increase in bookings for 2021 compared to 2019, and the swiss bank UBS has come out saying that cruise booking volume is up 9% from what it was at the same time last year.

To conclude, whilst in the current economy cruises are severely struggling, once  we start to convincingly address the virus threat, so too should we see a revival of cruise liners and we should see a steep upturn in bookings which will be good news for the cruise economy as well as the global economy which relies so heavily on tourism.

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