Carnival sees cruise bookings climb amid pent-up demand

Jaime Katz, Morningstar Senior Equity Analyst joins the Yahoo Finance Live panel on the latest on travel in the cruise industry.

Video Transcript

AKIKO FUJITA: Let's turn our attention to some of those cruise stocks we've been talking about. Seeing a big pop in the session after the CDC updated its guidance to resume sailings during the busiest travel season, saying they can move forward without requiring vaccines. Let's bring in Jaime Katz, Morningstar senior equity analyst. Jaime, it's good to talk to you. It feels like this is kind of the compromise for the CDC.

There's been a lot of pushback from Florida, for example, that have said they're not going to require businesses-- or businesses are not going to require people to show proof of vaccines. But then you've also got the European operators who are saying vaccines are critical. How do you see all of this shaking down ahead of what is expected to be a very busy travel season?

JAIME KATZ: Yeah, well, it's been a really mixed bag from what the cruise operators have saying. Obviously, Carnival reported earlier this morning. They're sort of going with the idea that they will abide by whatever local regulations are. So there are some cruises that are going that are vaccinated cruises and some that are not abroad. Norwegian had announced that they're doing only vaccinated cruises to start. And Royal looks like they're saying vaccinations for adults and then negative tests for minors who can't get the shots.

So, I think the idea is to get the ships back on the water, show proof of concept that the protocols that they're implementing work to to prevent a mass outbreak, and then adjust the rules as need be so that they can also bring in passengers that maybe are a little bit more apprehensive to taking the vaccine as well.

ZACK GUZMAN: When it comes to, I guess, how debt might factor into this question-- it's one that those who are cautious on these companies always raise. I mean, when you look at these on an individual level, obviously, they had to raise billions of dollars to get through all this as they continue to bleed billions every quarter. Talk to me about maybe which one is poised best, based on the way they were able to navigate all of that, to come out of it on the other side.

JAIME KATZ: I mean, if you look at any of the three of the operators, obviously, leveraged metrics are significantly wider than where they would like to be to be back to investment grade. And it will take some time to get back to that. But I do think that there is pretty dedicated focus to thinking about how to adjust those debt service metrics over time.

And Carnival had mentioned this morning that they were looking to refinance some of the more expensive debt that they acquired or raised at the beginning of the pandemic, as rates have fallen since then. So, I don't know that there is a fast road back for any of the operators. They're going to have to sort of just chip away at the debt on the balance sheet, as the fleet returns to sail.

AKIKO FUJITA: And Jaime, we've heard so many operators talk about this pent-up demand in the market after a year of staying at home. Where are you seeing the biggest demand when you look at the picture globally? And which one of these operators stands to benefit the most from that?

JAIME KATZ: Sure. So, I think there is plenty of demand everywhere, primarily because there's no supply in the market, right? So any demand when you had 32 million cruisers expected to cruise in 2020 before the pandemic, now you have-- if that was going to continue on the same trajectory, maybe it would have been 34 this year. Now you have no capacity, really, out on the seas. And so you have this very disjointed supply and demand globally that is impacted. But if you look at a ship that's been on the water for a while now as something like Quantum of the Seas at Royal Caribbean, there is clearly enough demand to support these single destination kind of itineraries for a while.

Now, Carnival is the player that has independent brands for different regions. So if you think about Costa for Italy or AIDA for Germany and so forth and so on, P&O, Cunard, et cetera, I think they can sort of find those niche markets to get into immediately and grow from there, which maybe makes launching a little bit easier for them. And they did say they have six of their nine brands starting to sail this summer.

ZACK GUZMAN: I'm just looking at your note from last month. When we talk about valuation here and where things might go, it seems like things aren't as crazy when we talk about speculation in the market right now that you might expect for these cruise lines, given the kind of hit that they've had to deal with. But you have fair value back in March, Royal Caribbean, 60 bucks a share, trading at 91 right now. So in your estimation, is too much baked in to the recovery here for these players?

JAIME KATZ: Yeah, I think our fear is, first, obviously, the debt levels are a little bit worrisome where they are as they stand now. And second, could the return to profitability be a bit lumpy era than investors are maybe assuming, right? There are these implicit startup costs that are out there that seem to be well managed so far.

But are you going to have to ramp up ships without associated revenues? And how is that going to impact the P&L, at least initially at the beginning? So, I do think over time, you're going to wind up seeing sort of better EBITDA margins than we've seen in the last maybe few years. But I think it's going to take a while to get there.

ZACK GUZMAN: Yeah, chipping away cruise by cruise, but a lot of people standing on the sidelines, excited to get back out on the seas. Jaime Katz, Morningstar senior equity analyst, appreciate you coming on here to chat all that with us. Be well.