The covid pandemic forced all the major cruise lines including Royal Caribbean Group (RCL) and Carnival Cruise Lines (CCL) to take on debt in order to stay afloat. During their roughly 15-month shutdown, at least from U.S. ports, and for many months after when operations were very limited, both companies operated at a major deficit.
Money was mostly not coming in as few people were booking cruises because nobody knew if they actually would take place. In addition, the cruise lines had to refund hundreds of millions (maybe even billions) of dollars for cruises that got cancelled.
It was a bleak period which forced Royal Caribbean and Carnival to take on billions in debt at somewhat unfavorable terms. Managing that debt has become a key part of operations for both cruise lines, and how that gets handled has great impact on customers.
If Royal Caribbean (or Carnival) can't refinance some of their debt, while slowly paying down the total, the cruise lines can't operate as they want to. So while Royal Caribbean's latest news may sound like a wonky behind-the-scenes maneuver, it actually has a huge impact on passengers.
Image source: Daniel Kline, TheStreet
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 it on the cruise line trying to save money (or make more money). You hear it onboard and see it on the many cruise industry social media groups and message boards, but the reality is more complicated.
Most service issues on Royal Caribbean (or Carnival) ships have been because of staffing issues related to onboarding crew and crew members not being able to work due to covid or other illnesses. Overall staffing levels have remained consistent with historic norms and there's no sign either cruise line has made any significant cuts.
Both cruise lines have raised prices on certain things, largely to offset that cruise fares have not fully recovered. Royal Caribbean CEO Jason Liberty has talked often about how overall revenue has inched back 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 in some Royal Caribbean specialty restaurants are a little smaller) and both cruise lines have taken steps to limit how many lobster tails customers eat for free, the overall cruise experience remains largely the same. That's largely because Royal Caribbean has done an excellent job managing its debt.
Royal Caribbean Has Pushed Back Some Debt
Royal Caribbean Group has successfully amended and extended the majority of its two unsecured revolving credit facilities, according to a statement from the company. The amendment has extended the maturities of $2.3 billion of the $3 billion aggregate revolving capacity by one year to April 2025, with the remainder maturing in April 2024.
In layman's terms, the company has pushed the majority of its short-term debt further down the road. That's not just a technical move, it buys the company time to keep paying down that debt without having to come up with billions quickly (which would harm operations and force major cutbacks).
"Our liquidity position remains strong and strengthening driven by our strong booked position, and delivering positive EBITDA cash flow generation," added Holtz. "This extension, coupled with the repayment of $0.6 billion of debt in the fourth quarter of 2022, is a continuation of our proactive and methodic improvement of the balance sheet as we seek to return to an investment grade profile balance sheet," CFO Naftali Holtz said.
Basically, the company's debt picture continues to improve and it's reasonable to think that it may pay off most of this balance before it comes due. That's obviously good news for investors, but passengers will clearly benefit as well.
