Royal Caribbean Group released its second-quarter earnings business update for 2022 today (July 28), a report that was well received by the financial markets. Upon release, the company’s stock price increased several dollars, decreasing slightly afterward.
The jump in stock price is not surprising; Royal Caribbean performed well over the second quarter. Increases in onboard occupancy levels, bookings looking strong, onboard revenue looking decidedly positive, and the company seeing the results of introducing newer, more efficient ships while removing older ships during the pandemic, all having a positive impact.
Royal Caribbean Group Achieves Several Important Milestones
In its drive to return the company to profitability, Royal Caribbean Group achieved two significant milestones in the second quarter of 2022. The company returned its entire fleet to operations and has gained a positive cash flow for the first time since the global pause in operations.
Although more than three million guests sailed onboard one of the Royal Caribbean ships during the first year since the industry resumed operations, the company is seeing increasing interest worldwide.
That interest has been increasingly fueled by the value that cruising offers and is shown by the 82% occupancy levels the fleet achieved during the second quarter. In some cases, this number jumped to more than 100%, particularly on cruises in the Caribbean, while European cruises lagged somewhat.
Jason Liberty, president and chief executive officer of Royal Caribbean Group: “We reached two important milestones in our recovery this quarter – returning our entire global fleet back to operations and delivering positive operating cash flow and EBITDA,”
Although the company did report a loss of 500 million USD over the second quarter, a loss per share of $2,05, onboard spending and booking levels are showing robust results at higher prices than historical records.
“Consumers’ propensity to travel and cruise remains strong. We continue to see a robust and accelerating demand environment for cruising and on-board spend. Cruising remains a very attractive value proposition for vacationers, and today we have an opportunity to further close the value gap to other land-based vacation offerings.”
“With the fleet back in service, we have the full strength of our platform as we continue to execute on our recovery and build on our capabilities for long-term success.”
Operational Ramp-Up Continues
Although Royal Caribbean’s three brands, Royal Caribbean International, Celebrity Cruises, and Silversea, are all operational with all of their ships, the company is not yet where it wants to be.
China, in particular, and Asia as a whole, is still under significant COVID-19 measures, with lockdown preventing a restart here, more than a year after most of the world opened to cruising. That has forced Royal Caribbean to divert ships scheduled to sail in the area to places where demand is significantly higher.
With China being the world’s most significant potential growth market, the lack of cruises from here means a substantial financial loss. With the losses Royal Caribbean is still making, there is work to be done.
What Does The Future Look Like?
With the entire fleet sailing, the Royal Caribbean fleet can look forward to much more favorable circumstances than it experienced in the past 2,5 years. In particular, as the company will be dropping its testing requirements as of August 8.
With the combination of removing testing requirements and bookings averaging 30% above 2019 booking volumes for 2019 sailings in the corresponding period, Royal Caribbean will be looking to increase onboard occupancy levels to approximately 95%.
Itineraries in North America (including the Caribbean, Alaska, Bermuda, West Coast, and Canada) will average at about 100% for the third quarter. Cruiser confidence becomes evident looking at customer deposits. The group’s customer deposit balance was $4.2 billion, a record high for the company, and an increase of about $600 million over the previous quarter.
Silversea will also be bringing online its newest ship, Silver Endeavour, which is scheduled to begin service in winter 2022, spending its inaugural season in Antarctica starting November 2022. Although the purchase was $275 million, the vessel can still be considered a bargain, the purchase price being significantly below the build cost of $385 million.
Cost margins are looking favorable for the Royal Caribbean Group. Although fuel prices have risen to the highest levels in history, the company is not feeling the effects yet.
With 56% of the fuel for 2022 hedged under current pricing and 36% hedged for 2023 below market prices, and costs for crewing and flights dropping now all ships are operational, costs will be above 2019 levels, but only by single digits.
This will be good news for consumers as higher costs are traditionally shouldered by guests; lower costs mean that guests will not necessarily be seeing higher prices for cruises in the immediate future.
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Does all this mean that the Royal Caribbean will be reporting a profit for the third quarter of 2022? No, unlikely. Despite hedging a significant amount of fuel, the fact is that the cost of fuel is so high right now that the company will be feeling the effects.
Couple that with currency exchange and interest rates, Royal Caribbean Group expects to make a loss over the third quarter of $0.05 – $0.25 per share. While still a loss, it is significantly less than the numbers the company showed over the last two years.