47% of the cruise line industry is owned by one company, but further consolidation looks likely in a post-pandemic world.

Too-big-to-fail cruise lines will survive stimulus exemption, while smaller players struggle

Cruise lines have suffered from Covid-19 travel restrictions and will continue to see low demand in the medium term due to the close-quarters conditions they impose on their passengers.

There has been much pessimism around the lack of stimulus due to the overseas incorporation of the cruise industry’s biggest players. However, these will likely survive to acquire smaller companies.

Carnival, Caribbean and Norwegian Cruises, which owned approximately 80% of the industry in 2019, are all incorporated overseas, making them exempt from US taxes and from Trump’s April stimulus package.

Nonetheless, it is the smaller US players, fewer of which are incorporated overseas, that will suffer from the dearth of capital needed for their recovery the most.

The exemption from taxes and regulation, which has made US legislators particularly uncharitable towards Carnival, Caribbean and Norwegian, will continue to benefit them as they recover.

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These companies all had profits in excess of $1bn in 2019. Carnival Corporation with a 47% market share made $3bn. Financial strength makes these companies well-positioned to acquire those that fold.

Players both large and small will need to invest big to salvage their reputational damage

Failures among smaller players are especially likely given transferred reputational damage during the pandemic. Cruise lines have taken considerable hits in the recent past exemplified by Carnival Corporation’s various catastrophes.

From the tragic sinking of the Costa Concordia to the numerous fatal outbreaks of norovirus on its cruise ships in 2019, Carnival’s long-term share price decline reflects various PR disasters.

However, the disproportionate impact of Covid-19 symptoms on the over-65-year-olds, the most important customer-base for many operators, make the present situation uniquely damaging.

Carnival’s share price saw a steady decline through 2019 with norovirus outbreaks on its Holland America ships, but that was dwarfed in Q1 2020 by an unprecedented 82% drop.

Social distancing and personal protective equipment (PPE) now threaten to create an unattractive cruising experience as long as a vaccine remains forthcoming, making it increasingly difficult to recuperate business lost to other tourism segments.

The ensuing hold-up, which for some cruise lines will continue until the end of September at the earliest, will put players with less financial resilience in a last-man-standing scenario.

A potential post-pandemic flourish will require a single-minded deployment of significant capital

Measures can, theoretically, be taken for cruising to flourish in spite of the pandemic, but these increase the prospect of consolidation further.

With their fleets in lay-up, cruise lines have an opportunity to invest in Covid-19 safety measures that could make their vessels uniquely safe holiday destinations.

The single and entry-and-exit points, confinement of staff onboard and other controlled conditions mean that proper screening of passengers and improved protocols for containing outbreaks could return cruise lines to credibility.

However, implementing this change, which is still only a hypothesised solution being mooted around the industry, would take huge capital and organisation between players.

If smaller players cannot keep up with Covid-19 adaptations, larger players will have more reasons to acquire their assets.