Skift Take

Cruise lines will continue to debut new ships in the near term through a balancing act between refinancing debt and improving profit margins. The high cost of debt will not stop vessels from sailing. The three major cruise lines remain optimistic for demand recovery.

Cruise companies are still continuing with their new vessel orders despite choppy waters in an uncertain consumer spending environment — and face the risks of piling on more debt.

Take Norwegian Cruise Lines, which is planning to invest $2.4 billion in ship construction-related capital expenditures for 2023, and anticipates the figure to be $500 million and $1.8 billion for 2024 and 2025, respectively. Royal Caribbean Group also sees approximately $4.1 billion in ship construction costs in 2023 and an aggregate total of $9.8 billion for all existing ship orders. Carnival Corporation expects contracted new-builds to be $1.8 billion for 2023, and is reshaping its investment spending outlook to scale back on capital expenditures.

The three major cruise lines, with $74 billion of debt combined, according to Bloomberg, face incoming competition from billionaires and hotels hoping to start their own fleets. Betting on the luxury tier and existing customer loyalty bases, these new entrants will be vying for a chunk of the premium market.

After scrambling to renegotiate credit terms and grabbing lifelines from governments and banks to stay afloat during the pandemic, cruise companies are now in a balancing act between paying off debt and rebuilding profit streams.

The industry was exposed for its wasteful practices and detrimental environmental impact, no more so than during the height of the pandemic. Facing significant backlash and pressure to address carbon footprints, cruise lines will likely take on even heftier costs to reduce food waste and implement additional sustainability measures. Some are unwilling to give up new-build pipelines, but all are reevaluating operational structures and strategic priorities to sail back to profitable growth.

“You’ve likely seen some of the actions we’ve already taken to improve our cost structure,” said Frank del Rio, president and CEO of Norwegian Cruise Line, during the company’s most recent earnings call. “Normalization of marketing spend, corporate overhead reductions, itinerary optimization, supply chain initiatives, and thoughtful rationalization of product delivery. We will continue to leave no stone unturned as we identify and evaluate incremental opportunities.”

What Norwegian Cruise’s Mounting Costs Tell Us

Adjusted net cruise costs based on passenger capacity compared to pre-pandemic levels. Source: Morgan Stanley Research

Norwegian served 1.7 million guests in 2022, and expects its full-year book position in 2023 to top pre-pandemic levels. It is optimistic that it can continue to ride 2022 tailwinds from marketing, pricing and service strategies despite plans for trimming down costs.

The cruise line operates through three brands, including Norwegian, Regent and Oceania Cruises, and foresees one new build per brand for a total of three new ships to join its fleet in 2023. At least one new ship is scheduled to be delivered each year through 2028. According to its recent annual report, around 80 percent of each ship’s contract price will be funded through export credit financing, which it is working to secure.

Export credit financing is a typical loan arrangement to finance cruise ship constructions. This is often negotiated with export credit facilities of countries where the shipyards are located, allowing cruise companies to place ship orders without having to pay much in advance. The main portion of the cost will be due on each ship’s delivery date, which could be years later. 

Measuring Cruise Lines Debt

Average cost of debt financing for three major cruise lines. Source: Morgan Stanley Research

Royal Caribbean Group has the same approach and expects 2023 capacity to increase by approximately 14 percent from 2019 levels. Its wholly-owned brands will also each welcome a new ship in 2023, with Silversea debuting the first of the Evolution class, Celebrity Cruises welcoming the fourth ship in its Edge series and Royal Caribbean International marking its first new ship class in nine years. 

Like Norwegian, 80 percent of the cost for each of its seven ships on order will be funded through export credit arrangements. The remaining portion will be filled through capital expenditure by the time of the ship’s delivery dates. Royal Caribbean had approximately $7.6 billion of committed financing for ships on order as of the end of 2022.

“Our liquidity remains strong, and we are focused on expanding our margins to further enhance EBITDA [earnings before interests, tax, depreciation and amoritization] and free cash flow,” said chief financial officer Naftali Holtz. 

Holtz hopes to return Royal Caribbean’s balance back to investment grade. “During the fourth quarter, we repaid $600 million of debt maturities and closed on the refinancing of 2 billion of secured and guaranteed debt previously due June 2023.” Holtz adds that $2.3 billion of its existing revolving credit facility has been extended to April 2025. The company closed on a $700 million refinancing deal earlier in February with RCI Holdings to repay principal payments on debt maturing between 2023 and 2024.

After seeing better-than-expected results in 2022, Royal Caribbean is focused on improving guest repeat rates and improving margins to enhance cash flows and create more discretionary capital.

Unlike Norwegian and Royal Caribbean, Carnival is scaling back on its fleet expansion plans, which is a drastic change from when it was building multiple ships on an annual basis pre-pandemic.

“We have just four ships on order through 2025, plus our second incredible Seabourn luxury expedition ship to be delivered in 2023,” said Josh Weinstein, Carnival Corporation president and CEO in the company’s fourth-quarter earnings call. “This is our lowest order book in decades. We don’t expect any new ships in 2026 and anticipate just one or two new builds each year for several years thereafter.”

A so-called fleet optimization plan will be prioritized instead, which involves removing smaller, less efficient ships and improving ship operating cost per ALBD [available lower berth day, a standard metric of passenger capacity]. Carnival is also going with a leaner capital expenditure profile to boost efforts for deleveraging, strengthening its balance sheet and achieving better credit ratings. In support of these objectives, a new $2.1 billion multi-currency revolver was also announced to be replacing existing arrangements starting in August 2024.

While the cruise line does not have any constructions of its own in the pipeline, Carnival is in a joint venture with China to launch Adora Cruises, which will be the first large Chinese-built cruise ship. The ship’s planning to sail the Maritime Silk Road, which connects the Chinese mainland with Southeast Asia, India, Egypt, the Arabian Peninsula and the Mediterranean, at the end of 2023.


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Tags: carnival corporation, cruises, debt, norwegian cruise line, recovery, royal caribbean

Photo credit: Ships moored in dock in Gdynia, Poland. Michal Mrozek / Unsplash

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