Listen to the sound of the sea to sleep every day, get up with the sound of the sea, rippling in the sea, this is a kind of travel that many people yearn for. This is how cruise tourism developed. Indeed, as a way of tourism, cruise tourism has the advantages of not having to change hotels every day, not worrying about food and drink, having plenty of time for recreational activities on board, getting off the ship and enjoying the scenery of various places, and so on.

In recent years, the global cruise industry has developed rapidly. according to the forward-looking Industrial Research Institute, the global cruise tourism market reached 46 billion US dollars in 2018, and more than 26 million people worldwide chose cruise holidays, an increase of 3 per cent compared with 2017. According to forecasts, 30 million people will board cruise holidays in 2019.

Had it not been for this epidemic, the cruise industry would have continued its golden age.

In early February, the epidemic was well contained at home, but abroad, a super-large cruise ship called the Diamond Princess came into view. As the governments of the United States, Japan and Britain play ball, pass the buck and act slowly, the number of confirmed cases continues to rise day by day. According to the lilac doctor, as of the morning of March 6, the cumulative number of confirmed persons on board the Diamond Princess was 706, with 6 deaths.

One wave after another, in March, the same script was staged again, and the cruise ship "Princess Supreme" also appeared diagnosed tourists. The shares of CCL, the parent company of the two cruise ships, have fallen for several days in a row, and their market capitalization has fallen by tens of billions of dollars.

Apart from the Diamond Princess and the Supreme Princess, many cruise ships have been hit by outbreaks one after another recently. The global cruise industry has been hit hard, and the market value of listed companies has fallen by more than half. In the US stock market, the relatively large cruise companies are mainly Carnival Cruise (CCL), Royal Caribbean Cruise (RCL) and Norwegian Cruise (NCLH), while the Hong Kong stock market is mainly Genting Hong Kong (678.HK).

Since the incident, the share prices of the three cruise companies have fallen by more than half.

How is the operation of a cruise company different from that of an ordinary travel company? How hard has the epidemic hit cruise companies?

I. the business model of cruise companies

The cruise industry is a notoriously asset-heavy industry with a high market threshold and requires a lot of capital investment. The upstream, middle and lower reaches of the whole industry involve many industries and a wide range of channels, cruise enterprises must have a strong ability to integrate resources. Take CCL, the world's largest cruise company. CCL also owns a ship repair and maintenance facility company called Grand Bahama and a port company called White Pass.

The heaviest asset of a cruise company is a cruise, which costs $500 million to $600 million, according to online public information. In general, cruise companies will use the way of financial leasing to pay rent to the shipyard in installments to obtain ship ownership. In addition to the chartering fees for cruise ships, cruise companies also have to pay for port leasing fees, oil prices, and other expenses, including some operating expenses, and so on.

Although the capital investment is huge, the return is not small. Generally speaking, the operation mode of cruise companies is to sell tickets in advance, usually 1-3 months in advance, and the basic fees will be collected before passengers get on board, and the tickets may also include other transportation expenses. such as air and other means of transportation to and from the airport near the ship's home port.

Take the Diamond Princess in this accident as an example, the lowest price for a six-day and five-night trip is about 6500 yuan, which includes boat tickets and restaurant meals, excluding transportation to the port. The whole ship has 18 floors and can hold 2670 passengers. Assuming the whole ship is full, Carnival can receive a zero-interest loan of about $2.5 million in advance. This estimate is a rough estimate. Different rooms charge different rates. At the same time, tickets packaged to travel agencies are relatively cheap, and a boat is less likely to be full, etc.

All in all, in its fiscal 2019 report, CCL mentioned that the company currently has 104 cruise ships and received an advance deposit of $4.9 billion in 2019, a large amount of cash flow that can be used to maintain internal operations, repay loans and even buy ships. In addition to stable cash flow, cruise companies are also profitable, with CCL making a profit of $3 billion and a profit margin of 14.4% in fiscal year 2019. In terms of the entry threshold of the cruise industry, it is necessary to say that it is a good business to take root in the industry and have stable cash flow and income.

However, the epidemic has cast a shadow over the entire cruise industry, closing the space for cruise ships, making it difficult to supply, being refused to land, and so on. The epidemic has not only hit the share prices of cruise companies in the United States, but also had other impacts.

II. Losses caused by the epidemic to cruise companies

After the outbreak, the market capitalization of the three cruise companies fell by more than half, but this is just the beginning, and the following problems will follow.

1. Compensation: I will send you a cruise after a full refund.

First of all, there is the issue of compensation. Princess Cruise issued a statement on February 10, saying that passengers who were affected by the epidemic and could not disembark at the port of Yokohama in Japan would receive a full refund, including the ticket itself, air tickets, train tickets, taxi fares and hotel fees before and after the voyage, as well as paid services on board and sightseeing fees for disembarkation. All expenses incurred on board the ship after February 4, which were originally scheduled to disembark, are also free of charge. Double compensation for appointments made before February 28th because they cannot be honoured. At the same time, all guests of this voyage will receive the same amount as the tickets purchased in the future voyage, etc.

The current huge compensation is just the beginning, and the Diamond Princess may face high litigation damages in the future. In addition, the cancellation of the voyage in the next few months also requires a refund of the customer's deposit. Affected by this, the entire cruise industry will face the same problem, the need for compensation, the cancellation of the route, the refund of the deposit.

2. Will the cash flow be urgent?

So what kind of blow is this to cruise companies that rely heavily on cash flow? Here, from a simple point of view of the current ratio, the current ratio measures the ratio of a company's current assets to current liabilities. generally speaking, a current ratio of less than 2 indicates that the liquidity is not very good. Less than 1 indicates that the existing current assets are insufficient to repay the debt due within one year.

From the point of view of the current ratio of the three cruise companies, all of them are less than 0.3. however, because the cruise company will confirm in advance the deposit of tourists as a short-term debt, and gradually confirm that in the cash flow of business activities, take Carnival Cruise as an example, the customer deposit of income in 2019 is as high as $4.9 billion, but the customer deposit recognized in the cash flow of operating activities is only 390 million, so it is not very scientific to look at the liquidity ratio alone.

But in terms of cash flow debt ratio, Carnival Cruise has the highest ratio of the three cruise companies at 0.6. If you look at it from this point of view, the cash flow on the account will last for some time.

But this should not be too optimistic. after all, it is not clear when the epidemic will end, and the next wave of ticket sales will continue, and it will take time for cruise tourism to rise again in the future. after all, it is not so easy to restore consumer confidence. the experience of "terrorist cruise" will also last for a long time, and cruise companies derive most of their income from passenger tickets or ship affairs.

Looking back on the previous impact of SARS on the tourism industry, the impact lasted for more than one year. Some cruise companies have already filed for bankruptcy. On March 2, Kobe Night Cruise Company of Japan announced that due to the impact of the epidemic, a series of orders had been cancelled since January and the company had filed for bankruptcy. However, according to Japanese media reports, in the past two years, cruise companies have frequently suspended flights under the influence of earthquakes and typhoons, coupled with rising fuel prices, the COVID-19 epidemic has become the last straw. The total debt of Night Cruise is about 1.24 billion yen ($12 million), according to Imperial Database, a Japanese credit research company.

Summary

At this time to see whether the cruise company will go bankrupt, it should not be in the short term. After all, the cash on the account can still pay off the major short-term liabilities, but the situation will be different if the epidemic continues in the future. The current epidemic situation in foreign countries has not yet been brought under control, and cruise ships floating at sea continue to sail, and some of them are even refused to land, and the cold winter of the cruise industry has just begun.