The covid pandemic forced all major cruise lines, including Royal Caribbean Group (RCL) – Get a free report and Carnival Cruise Lines (CCL) – Get a free report borrow to stay afloat. During their approximately 15-month shutdown, at least from US ports, and for many months after when operations were very limited, both companies operated at a significant deficit.
For the most part, the money didn’t come in as few people booked cruises because no one knew if they would actually take place. Additionally, cruise lines had to refund hundreds of millions (perhaps even billions) of dollars for cruises that were cancelled.
It was a bleak period that forced Royal Caribbean and Carnival to take on billions in debt on somewhat unfavorable terms. Managing that debt has become a key part of both cruise lines’ operations, and the way it’s handled has a huge impact on customers.
If Royal Caribbean (or Carnival) can’t refinance some of its debt, while slowly paying it off, the cruise lines can’t operate the way they want to. So while Royal Caribbean’s latest news might sound like a weird behind-the-scenes move, it actually has a huge impact on passengers.
Why Royal Caribbean’s balance sheet matters
Every time a passenger has a bad experience on a Royal Caribbean ship, it seems like they blame the cruise line trying to save money (or make more money). You hear it on board and you see it on the many social media groups and message boards of the cruise industry, but the reality is more complicated.
Most of the service issues on Royal Caribbean (or Carnival) ships have been due to staffing issues related to crew on board and crew members unable to work due to covid or other illnesses. Overall staffing levels have remained consistent with historical norms and there are no signs that any of the cruise lines have made significant cuts.
Both cruise lines have increased the prices of certain things, largely to make up for the fact that cruise fares haven’t fully recovered. Royal Caribbean CEO Jason Liberty has often spoken about how overall revenue has returned to 2019 levels, but it’s a gradual process.
It’s also fair to say that while there have been some small changes due to money (the shrimp at some Royal Caribbean specialty restaurants are slightly smaller) and both cruise lines have taken steps to limit the amount of lobster tails that guests customers eat free, the total cruise experience remains largely the same. That’s largely because Royal Caribbean has done an excellent job managing its debt.
Royal Caribbean has rolled back some debts
Royal Caribbean Group successfully modified and extended the majority of its two unsecured revolving credit lines, according to a company statement. The amendment has extended the maturities of $2.3 billion of the aggregate renewable capacity of $3 billion in one year to April 2025, with the remainder due in April 2024.
In simple terms, the company has pushed most of its short-term debt further on. That’s not just a technical move, it buys the company time to keep paying down that debt without having to quickly raise billions (which would hurt operations and force major cuts).
“Our liquidity position remains strong and is strengthening driven by our strong reserve position, delivering positive EBITDA cash flow generation,” Holtz added. “This extension, along with the payment of $600 million of debt in the fourth quarter of 2022, is a continuation of our proactive and methodical balance sheet improvement as we seek to return to an investment grade profile,” said Chief Financial Officer Naftali Holtz. she said.
Basically, the company’s debt outlook continues to improve and it’s reasonable to think that it can pay off most of this balance before it’s due. This is obviously good news for investors, but passengers will clearly benefit as well.
