Royal Caribbean (RCL -0.76 percent), which was once trading for $43 per share, was down a startling 46 percent year to date despite a roaring resurgence in sales following the COVID-19 pandemic. The cruise line is swiftly getting back to business as usual, but its pile of debt is still a problem.
Cruising was one of the industries that was most negatively impacted by the pandemic. Passenger ships were perfect incubators for the rapidly spreading virus because of their cramped quarters and frequently inadequate ventilation. The U.S. Centers for Disease Control also issued a seven-month no-sail order to the sector in March 2020, prohibiting these businesses from operating in their most important market.
In order to raise the money it required to survive due to the sharp decline in revenue (Royal Caribbean generated an operating deficit of $4.6 billion in 2020 and $3.87 billion in 2021), the business was compelled to sell some of its older ships, issue new shares, and access the debt markets. Despite this, it appears to be seeing a strong comeback from the crisis.
The financial results for Royal Caribbean’s second quarter show how swiftly the company is recovering from the pandemic. As the corporation restarted its entire global fleet, total revenue soared from $50.9 million to $2.18 billion year over year. But because of issues like inflation and rising energy prices, operating costs continue to be high, which contributed to a $218.6 million operating deficit over the year.
As a result of Royal Caribbean’s financial sheet deteriorating over the previous few years, the bottom-line weakness is a significant issue. The business has long-term debt of $17.74 billion, which it anticipates would result in interest costs in the third quarter of between $310 million and $320 million. Despite this, the management appears upbeat about the future.
About 70% of the debt is subject to fixed interest rates, which mitigates the detrimental effects of the Fed’s rate increases on the solvency of the debt. The third quarter is projected to return to GAAP profitability, with profits per share ranging from $0.05 to $0.25, according to management. A $700 million to $750 million range for adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) is also anticipated, which would put the business in an excellent position to start managing its significant debt load.
This month, Carnival Corporation, Royal Caribbean’s main competition, announced the results of its third quarter. The company reported much less adjusted EBITDA ($300 million) compared to Royal Caribbean’s estimated $700 to $750 million for the quarter and significantly larger long-term debt ($28.5 billion vs. $17.74 billion). Royal Caribbean appears to be in a much better position to manage its debt and eventually begin generating value for shareholders.
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