SS Future Re-Open Plan: Timing, Testing Needs??!!

[Host Jazzbeau]

As much as I have enjoyed the community spirit of the off-topic 'frolic and detour' on this thread, it is a serious topic and we should keep it on track.

[TLCOhio]

This morning at 10 am, Royal Caribbean Chairman/CEO Richard Fain (along with two of their other top officials) did a quarterly briefing for Wall Street financial analysts.  It lasted nearly an hour and provide many fascinating, interesting details to help answer the question as to when Silversea, Celebrity, RCCL and their others ships will resume passenger sailing operations.  You can access and listen to the full audio recording at: 

www.webcaster4.com/Player/Index?webcastId=34946&g=4710ca99-e83d-46b8-a39d-12f1cb5c0933&uid=5838300&sid=

Or, go to the RCL investor web page at: 

https://www.rclinvestor.com

 

CEO Fain, who has been their head since 1988, described the overall situation as an “unprecedential challenge”, including the still on-going duty to get crew members back to their homes around the world.  He called that a very complex task and that they are now using nine of their ships to sail with 10,000 crew members in order to get them returned home.  That use of their ships has been needed as there are limits as where and how crew can disembark in certain ports and/or be able to board air flights.

 

It was summarized that much has happened in past two months and there will be many more changes and needs for dealing with these new and evolving information/conditions.  His view is that "things are starting to stabilize now", but that the cruise industry is still in its very early days for answering ALL of the various questions and needs.  I made notes as to these general points he made:  There will be a gradual opening up of future options.  There is no certainty on timing.  Everyone needs to be prepared for the wide variety of changes, many of which will elevate health and safety protocols. 

 

Here are some other key points that CEO Fain communicated: "Will not start until we are fully ready.”  From Fain as to how a return to service will be done: "Will not start all at once. Will be a gradual start like is happening now for restoring our society's other activities. There will be a start with drive-to-ports early on. We will have wide degree of variability as this process continues.”  He stress that "transparency" and "reputation" are both very important to the cruise lines in restoring and maintaining customer confidence and completing this process. 

 

 

He drew some comparisons to what happened after the Sept. 2001 attacks in NYC and DC.  Then, there was a quicker travel business recovery than expected.  Travel became different in many ways.  Things adjusted and grew.  From this current virus in 2020, the adjusting of all activities will be a changing and moving target.  There is a need to innovate for the world as it is today.   

 

Their Chief Financial Officer (CFO) noted that RCL has reduced expenses for ships and marketing, cut employees and deferred capital needs, etc.  They have obtained a freeze on payments on capital assets.  Their monthly cash burn is $250-275 million a month for operating expenses.  They will keep seeking to improve liquidity.  He said there is demand for cruising, but that customers want more flexibility.  On cruises being cancelled, 45% seek cash refund versus the 55% who will take future cruise credit. Yesterday's closing on the bonds gives them future flexibility to gain more liquidity, if needed.  They could do more equity conversions for added cash, but they are sensitive against diluting too much of the stock value.  They are especially watching what the CDC will do and allow, but it is possible that they could start some sailings earlier at locations around world.  Starts up could vary differently by region and country. He cited that RCL has sizable global infrastructure and how that can help them as they open back up.  

 

During the various questions, one concern came out as to how they do not want to start up and then have any of their passengers being stranded if future virus problems resurface.   CEO Fain was very strong in his view that they must have the "answers before doing a re-start".

 

As to balancing out refunds vs. incoming bookings, they cited the strong response from loyalty members.  They say their cruise lines have 20 million people in these loyalty groups.  About 20% of recent bookings are using Future Cruise Credits (FCC).  In general, they said those younger are more likely to want their cash back.  But, those older and the baby boomers are more likely to take and hold the FCC.  People from other countries are more likely to want the cash back versus those U.S. residents more accepting of FCC.   They view the loyalty group members as the key in staring their re-opening and getting back for future financial success. 

 

As to the question for how many ships operating does it take to break even, the RCL CFO noted that is almost impossible to answer that inquiry.  In general, a 30% load for newer ships could work.  A 50% load on older ships would be required.  The newer ship are more efficient to fuel and operate, plus having better space ratios.  He noted they have had to right-sized their operating costs to get by with those lower load factors.  This data indicates that a slower return can still work out OK.  As to scrapping older ships, he noted that a lower demand environment could push certain ship retirements at a faster pace.  New ship builds can and will also be slowed and these schedules stretched out. 

 

Currently, on average, it costs $1-1.5 million a month for the cold lay-up of a ship. It costs $2-2.5 million a month per ship for a warm lay-up.  Cold lay-up saves some money, but then costs more to return the ship to full service.  Overall, how quick of a re-start depends so much on the regulators, CDC, testing advances, consumer confidence, etc.  There was not any direct questions as relates to Silversea, other than the general reference to the "loyalty groups" that they view as so vital. 

 

MY SUMMARY: To the credit of RCCL CEO Fain, he seemed realistic and reasonable.  He was not a "salesman" just spinning happy talk or ignoring the long road that they and other main cruise lines have to navigate.  It will take time, in his view, but he believes there is a future ahead.  It will clearly take patience and the "cash flow" that they have put together during the past two months to weather this current "storm". 

 

Hope these rough notes are of interest and help.  Reactions?  Comments?  Questions?

 

THANKS!  Enjoy!  Terry in Ohio

 

 

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Edited May 20, 2020 by TLCOhio

[UKCruiseJeff]

Hi Terry,

 

Have I understood this correctly?

 

Is Fain stating that an occupancy of 30% +1 gives them a profit on a newer ship and 50% +1 on a older ship?

 

Jeff. 

Edited May 21, 2020 by UKCruiseJeff

[vcd]

Thank you very much for all the information!

[TLCOhio]

10 minutes ago, UKCruiseJeff said:

Hi Terry,  Have I understood this correctly?   Is Fain stating that an occupancy of 30% +1 gives them a profit on a newer ship and 50% +1 on a older ship?    Jeff. 

 

Good follow-up question from UK Jeff.  It was their CFO, not Richard Fain, who was answering that question and giving that operational background.  My guess/speculation was that he was referring in his response as to the actual ship operating costs for fuel, staff, food, etc.  I doubt, from his comments, that he was including capital costs, corporate overhead, administrative, marketing, etc., costs.  As you know, "costs" can be defined in a variety of manners and from different angles.  Clearly he was making the point that the newer ship are less costly to operate and would be the ones more likely to be put back in services at the earliest dates.  And, he was looking at the big picture of the RCCL fleet that includes Royal Caribbean, Celebrity, Silversea, Azamara, etc., with a combined total of 62 ships with an additional 16 on order as of March 31, 2020.  

 

From the discussions, RCCL and the others at these higher ranks know that it will be a staged re-opening over many months.  The number-crunchers needs to examine the various options as to the best ways/options to restore sailing in a cost-efficient manner. 

 

Does this help?  Added questions and reactions? 

 

THANKS!  Enjoy!  Terry in Ohio

 

 

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[Host Jazzbeau]

My assumption was that the CFO was ignoring fixed costs like HQ, marketing, interest, lay-up, etc.  So to rebuild the brand, you would operate cruises as long as the variable costs of each sailing are covered by the fares from that sailing.  

 

I had thought that the newer ships are more expensive to operate in the full-accounting sense, because their build costs are still being paid off.  So it's interesting that the newer ships are so much more efficient on a per-sailing basis.

[UKCruiseJeff]

Hi,

 

He appeared to have been asked a relatively straightforward and rational and reasonable question that was roughly how many ships were required to be operational to cover both their own costs and their proportion of the common operating costs. In other words how many ships needed to be in business to break-even. 

 

It seems that the reply provided didn't reply to that but was about what level of occupancy was required to cover the relatively low variable operating costs of a ship excluding even the costs of watering and feeding the FCC load which will have a variable cost but no revenue.   

 

I guess we will never know.

 

Well done Terry for a really comprehensive summary.  🙂

 

Jeff

 

 

 

 

[cool cruiser 14107]

Hi,

I'm not at all confident that the Silver Origin will sail August 22, are you? (Galapagos). And you were right; the July 25 was canceled!

[Stumblefoot]

Thanks TLCOhio!

[cool cruiser 14107]

What does this mean?

There will be a start with drive-to-ports early on

 

This is from Terry's posting of what CEO Fain said?

 

what's a drive-to-port?

 

thanks

[Stumblefoot]

Just now, cool cruiser 14107 said:

what's a drive-to-port?

A port whereby passengers can drive to it, rather than fly to it, from their home.

[cool cruiser 14107]

but that makes no sense; many people drive to a port; and many fly to the same port. know what I mean? It depends on where you live.

 

so if they are beginning with 'drive-to-ports'; what does that mean?

[Stumblefoot]

Don’t know what else to tell you cool cruiser 14107.  Seems really straight forward to me, based on your response, i.e. they are going to start from ports where the majority of passengers can drive to it, rather than fly to it.  Maybe someone else can provide further clarity.

Edited May 21, 2020 by Stumblefoot

[jollyjones]

7 hours ago, cool cruiser 14107 said:

but that makes no sense; many people drive to a port; and many fly to the same port. know what I mean? It depends on where you live.

 

so if they are beginning with 'drive-to-ports'; what does that mean?

 

Many people (obs not all) living on mainland USA can drive to a cruise port if they really want to cruise. Port Everglades and Manhattan come immediately to mind. (And you still have planes flying, maybe?)

I think SS mean that they can sufficiently fill a ship without having to have international pax fly to the port. Not sure you folks in mainland USA quite feel the pain of those of us totally dependent on international flights to go cruising (and wanting to avoid quarantines). 

 

 I live on an island where the airport is closed with no foreseeable date when it will reopen so I can't go cruising. Can't go anywhere. Which in 22 square miles is getting a tad claustrophobic.

 

PS In due course, the UK market may open (perhaps!) then Southampton becomes a possible port for UK pax.

Edited May 21, 2020 by jollyjones

[cool cruiser 14107]

I'm sorry; I'm not really saying it clearly; sorry for the confusion.

 

I know what a drive-to-port is PHYSICALLY; obviously a port you can drive to.

 

But:

why should the cruise lines care if you drive or fly to the port?

what do they mean by that?

do they mean the don't want people boarding their ships that have 'flown in'; is that the idea?

 

I guess if that's the idea, they just want local people; then it makes sense; but then they won't fill the ship?

thanks

 

 

[Lois R]

7 minutes ago, cool cruiser 14107 said:

I'm sorry; I'm not really saying it clearly; sorry for the confusion.

 

I know what a drive-to-port is PHYSICALLY; obviously a port you can drive to.

 

But:

why should the cruise lines care if you drive or fly to the port?

what do they mean by that?

do they mean the don't want people boarding their ships that have 'flown in'; is that the idea?

 

I guess if that's the idea, they just want local people; then it makes sense; but then they won't fill the ship?

thanks

 

 

Who knows? The life of everyone's "new normal" still has many, many questions that need to be answered.

[TLCOhio]

5 minutes ago, cool cruiser 14107 said:

I'm sorry; I'm not really saying it clearly; sorry for the confusion.  I know what a drive-to-port is PHYSICALLY; obviously a port you can drive to.  But: why should the cruise lines care if you drive or fly to the port?  what do they mean by that?  do they mean the don't want people boarding their ships that have 'flown in'; is that the idea?  I guess if that's the idea, they just want local people; then it makes sense; but then they won't fill the ship?  

 

Appreciate your clarification and follow-up.  Here would be my spectulation as to WHY??  From listening to both of the Wall Street conference calls for RCCL and NCL, plus the original message from the top Silversea Americas executive, it is the cruise folks trying to . . . be prepared for all of their many options and contingencies.  

 

Also, Florida is now over 20 million people.  If, and I stress the word "IF", the airlines are much slower to be able to restore service and/or regain consumer confidence to trust flying, then the drive-to-port options allows them to do some portion of business as they seek to stage their longer-term recovery.  Depending as to where you live, it might or might not work.  BUT, it would be a part of the "PUZZLE" to restoring their business, brick by brick.  During these conference calls, not much was discussed of testing and the progress that is needed for those improvements to be a part of the overall picture. Doubt that the cruises are fearful of customers who have flown in.  BUT, that could be a fear with some potential folks who fear the unknown risks of their fellow passengers having been exposes during long airline flights.  Lots of questions, unknowns and issues!!

 

There are a large number of "moving parts" connected with this overall challenge.  It will take more than just one or two factors being solved in order to put this complex "puzzle" back together.  

 

THANKS!  Enjoy!  Terry in Ohio

 

 

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[Bucephalus53]

TLC, your posts the last few months have been "must reads" for me. Thank you for doing the research and taking the time to post.

[mrlevin]

Probably close to 80 million people live within eight hour drive of Miami, Port Canaveral, or Galveston.  Florida residents are the lifeblood of cruise lines when there is disruption.  During summer of 2004 when we had three hurricanes within five weeks cruise lines were almost giving away cruises to Florida residents in order to make the money onboard.  The other key point about drive to ports is that the cruises need to be roundtrip.  Most of these cruises could be three to seven days.  

 

I think Florida and Galveston (and maybe San Diego) will be home ports for cruises for first few months;

 

Marc

 

PS None of these cruise lines will sell air as part of their cruises; one less worry.

Edited May 21, 2020 by mrlevin

[Stumblefoot]

46 minutes ago, cool cruiser 14107 said:

why should the cruise lines care if you drive or fly to the port?

Jolly nailed it.  Cruise lines care, because global flight capacity is down over 60% and it will be well over a year before it returns to pre-Covid levels, whereas road system capacity is the same as it ever was.  So, in the case of RCL, their largest majority of passengers are U.S. citizens.  Therefore, RCL is more easily able to increase its occupancy rate as restarts operations amongst Americans because it’s relatively easy to drive to Florida or California to board a ship, as compared to flying to Hong Kong, Singapore, Sydney, Auckland, Venice, et al.

 

Does this answer your question and make sense now?

[jollyjones]

It’s not that they don’t want pax who have flown in to the port, their problem is if pax can’t fly in to the port - their only hope of restarting cruising is if enough pax are willing to drive to the port. 

Edited May 21, 2020 by jollyjones

[Lois R]

Hi, remember cruises also sail out of Seattle and Bayonne, NJ..........along with Manhattan and Brooklyn. The Tri state

area has ALOT of people who can drive to all 3 ports.  And from Seattle, you can drive to Vancouver quite easily. 

[jpalbny]

Good points, Lois. Have done a few of those trips to/from New York. The Manhattan pier is so simple - just drive down the West Side Highway, park on the pier, and walk to your ship. Brooklyn isn't so nice, and the parking lot looked sketchy the last time we were there (2008 or 2009?) but easy enough to drive there. Haven't tried Bayonne yet. 

[Host Jazzbeau]

I think the 'drive-to' port issue also deals with passenger fears.  Fear of cruising is one fear.  Fear of flying is another.  Some passengers may be willing to risk cruising, but wouldn't also risk flying to the cruise.   

[UKCruiseJeff]

It seems to me to be a perfect first-step back into business. 

 

As long as they comply with all CDC guidance and have processes that cover any infection after a passenger arrives  and/or  during a cruise then they can operate some growing business with a customer base that they (RCI)  needn't worry about getting to the ship or back home.  Basically it means they can always get back to base and passengers all being in home country can resort to any medical treatment they need in the hopefully unlikely event of any desease.  Most of the origins of the cruise business was US customers so that is where there will be a lot of latent demand.  The only slight cloud is that the US is slightly behinf the rest of world with respect to where it is in this pandemic.  But that aside .....

 

It might be a slower start but it gives them a chance to get started whilst all that they need to do whilst the start is underway is construct ex-US worldwidewide operations as each set of rules and challenges changes.  

 

It's a positive first sign.

 

Jeff 🙂