Personal Finance

Stay Ashore: Could Carnival Be Cruising Into Bankruptcy?

Carnival Cruise Lines, helmed by CEO Arnold Donald has extended a halt on cruises through the end of the year. Additionally, the Cruise Lines International Association group which includes cruise giants Princess, Carnival, and Royal Caribbean cruise lines, said its members have agreed to extend the suspension of U.S. sailing operations for the rest of 2020. With that in mind can Carnival stay afloat, as Donald looks to guide the cruise operator while it adapts to the pandemic challenges, in an attempt to fight off bankruptcy?

The Breakdown You Need To Know: CultureBanx reported it’s going to be difficult for Donald to steer Carnival away from the financial headwinds they are facing. The CLIA estimates that the suspension of cruises snuffed out more than $25 billion in economic activity, and 164,000 American jobs. Companies have suffered billions in losses this year, wiping out more than 70% of their value, according to The Associated Press.

Capital raises of $5.75 billion in junk bonds will help Carnival survive in the short term, though it won’t be smooth sailing. Donald told CNBC he believes his company has enough cash to survive, even if it generates no revenue for the rest of the year. 

During Carnival’s fiscal Q3 2020 the company’s revenue declined down to $31 million, from $6.53 billion during Q3 2019. They’ve burned through $770 million cash every month during Q3, but the company expects this to drop to $530 million monthly during Q4. The company could face bankruptcy if it has similar or increased cash outflows in 2020. Currently, Carnival has around $7.6 billion in cash on its balance sheet.

Sailing Into Choppy Waters: At the beginning of November, federal health officials issued new rules that will enable large cruise ships to start sailing again in U.S. waters, though not immediately. Among the CDC’s requirements is that ship owners must test all passengers and crew at the start and end of all voyages, which are limited to seven days.

Let’s not forget that Carnival Cruise Lines executives were under fire earlier this year for knowingly letting ships set sail, with the potential danger that the coronavirus posed to passengers and crew. Bloomberg reported before the world’s largest cruise operator halted new sailings in March, they didn’t take proper safety precautions until it was too late, and COVID-19 spread to over 1,500 passengers and crew members.

Donald doesn’t just have to clean up the company’s balance sheet, the coronavirus raises even more questions about corporate negligence and fleet safety due to some high-profile outbreaks on its ships. He oversees a robust cruise portfolio including its flagship line Carnival Cruise, Costa Cruises, the Holland America Line and the Princess Cruises brand.

What’s Next: As coronavirus cases surge in the U.S. and around the world, recent CDC guidelines state that in order to resume carrying passengers, the companies have to demonstrate they have procedures for testing, quarantining and isolating passengers and crew. Given the state of the pandemic, and that fact Carnival’s stock has fallen more than 68% year to date, bankruptcy still seems to be a long-term possibility.

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