It's hard to paint a picture of how bleak things were for the entire cruise industry during the Covid pandemic.
To put things into perspective, multiple restaurant and retail chains filed for bankruptcy or went out of business because they had to close partially for a few weeks or months. That was such a financial burden, that a number of big-name brands simply never recovered enough to pay back the debt they took on during that period.
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The entire cruise industry wasn't just closed for a few weeks or even months. Cruising from the U.S. shut down in March 2020 and did not return until late June 2021. During the 15 months cruises were not allowed from the U.S. due to the Centers for Disease Control (CDC) "Do Not Sail" order, revenue disappeared for the cruise lines while expenses did not.
Royal Caribbean, along with its rivals, were forced to take on billions of dollars in loans at high interest rates. These companies, which always have had high capital investment costs, paused new builds, and cut expenses where possible, but cruise ships need crews and fuel, so while the industry was closed debt piled up.
It's actually a testament to the pre-Covid strength of the industry that banks continued to lend cruise lines money. During the darkest days, it did seem like people may never want to gather in tight spaces again.
Even as the industry became legal again Royal Caribbean ships sailed with low capacities (at first due to social distancing) and demand was weak. Vaccines and the general reopening of the world seemed to slowly change that, but few would have predicted that the Royal Comeback, as Royal Caribbean called its return, would happen as quickly as it did.
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Image source: Royal Caribbean
Royal Caribbean hits a milestone 18 months early
Royal Caribbean (RCL) has taken a disciplined financial approach to building back its balance sheet and paying off its debt.
"Less than two years ago, we announced Trifecta, a three-year financial performance program that created the pathway back to what we internally call base camp. We said we would deliver triple-digit adjusted EBITDA per APCD (available passenger cruise days), double-digit adjusted earnings per share, and return on invested capital in the teens," Royal Caribbean Group CEO Jason Liberty said during his company's July 25 second-quarter earnings call.
Liberty made it clear that there are some meaningful benefits of reaching this goal.
"With Trifecta accomplished and our balance sheet in a strong position, we are excited to broaden our capital allocation by reinstating a quarterly dividend of $0.40 per share. Capital returns that include a competitive dividend have always been and will continue to be a key pillar of our strategy to supplement growth as we focus on delivering long-term shareholder value," he added.
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Why Royal Caribbean's news is good for passengers
While investors will likely celebrate Royal Caribbean's success and the return of its dividend over the long term, its shares actually dropped by 7.59% on July 25. That's a fairly typical market reaction when good news is expected. Sometimes, no matter how good the news, a stock drops because it wasn't better.
Royal Caribbean's results, however, were strong and they lay a foundation for the company's longer-term growth.
"We ended the quarter with $3.8 billion in liquidity. We have been making significant progress in strengthening the balance sheet towards our goal of investment-grade metrics," CFO Naftali Holtz shared.
As the cruise line pays off its debts, it has more freedom to act.
"We plan to continue to proactively pay down debt and pursue opportunistic refinancings to manage maturities, reduce interest expense, and achieve an unsecured balance sheet. During the second quarter, we paid down the remaining balance of our debt holiday that allowed us to remove any restrictions around capital return," he said.
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Doing that lets the company go back to paying a dividend, but being in a better financial position allows it to make more passenger-facing investments. Those might be relatively little things like offering a fancier buffet on day one at lunch on Icon and Utopia of the Seas (something it used to only do on media and inaugural sailings).
It could also include decisions on how it improves older ships during their dry docks and when it builds the smaller Discovery-class ships executives have confirmed are being planned.
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