NRPLUS MEMBER ARTICLE A s you walk through empty aisles in the grocery store worried that your hours might be cut back at work and wondering how you’ll manage to keep paying your bills, it might seem preposterous to think that anyone in power would be worried whether you’ll be able to still go on a cruise. Luckily, the political class is on it. On Thursday, March 12, Wells Fargo recommended that investors buy stock in Carnival Cruise Lines, the embattled company facing a potential existential crisis due to the coronavirus outbreak. Carnival is “almost ‘too big to fail,’” argued Wells Fargo, and “there probably will be broad . . . government support.” The analysts probably got that idea after President Trump repeatedly mentioned aiding cruise lines and Treasury Secretary Steve Mnuchin was reported to have asked Congress to extend loans to the industry.
In 2008, we were told that banks needed to be bailed out to prevent the end of the global banking system, and automakers needed it to prevent mass unemployment. Now investors are banking on the idea that governments are so sensitive to the economic well-being of corporations that they will bail out a luxury industry built on the promise of gluttony for retirees floating off the coast of Florida. Should cruise lines be rescued, any remaining illusion that America remains a competitive, capitalist economy will be broken. Not every company is worth saving, and especially not Carnival.
Carnival is a Florida-based company that, as of 2018, employed 12,000 corporate employees and another 88,000 crew. Of those 88,000 working on Carnival ships, only 4.4 percent come from North and Central America (they don’t specify the number of Americans). The ultra-loose monetary policy unleashed by the Federal Reserve in the wake of the 2008 financial crisis has been particularly good to Carnival, which used the resulting low-interest-rate environment to load up on debt. And while it borrowed a lot, Carnival is actually the least indebted of the major cruise lines: At the end of 2019 it had only twice as much debt as it earned in a year before interest, taxes, depreciation, and amortization, compared with about 3.5 times for both Norwegian Cruise Lines and Royal Caribbean. Last Saturday, Barron’s noted that if Carnival’s earnings decrease by 20 percent this year, that “leverage ratio” (debt to earnings) would increase from 2 to 3. A Morgan Stanley analyst thinks Carnival will be able to weather the coronavirus so long as its revenue doesn’t decrease by more than 21 percent this year.
At this point, a 21 percent decrease in revenue seems optimistic. Two of Carnival’s ships have been quarantined, older passengers disproportionately account for cruise-ship passengers, the U.S. government has advised older people not to get on cruise ships for the foreseeable future, Carnival has already suspended all cruises from North America for 30 days, and virus cases in the U.S. are likely to rise exponentially in the coming weeks. It is quite possible that all of the major cruise operators will need to declare bankruptcy. While Carnival’s stock has dropped almost 80 percent since January, it still could go a lot lower. All the way to zero, in fact.
And yet, at least one well-informed bank analyst now believes that Carnival is undervalued because it is too big to fail and will be thrown a giant buoy to stay afloat. The moral hazard created by the bailouts of a decade ago are undeniable in the hubris of this note, which suggests that investors can ignore bankruptcy risk for virtually any stock in the economy, even one premised entirely on luxury, because the government won’t let anything fail.
To be sure, some companies might warrant a bailout during an unprecedented crisis of a global pandemic. The U.S. relies on a robust domestic airline network to help power the economy, and the airline industry employs over 740,000 full and part-time workers, according the U.S. Department of Transportation. Perhaps airlines, which are also heavily indebted, need to be helped, however bitter that pill is to swallow after years of consolidation and profits. But policymakers need to draw some lines as to which companies must survive. Carnival, which employs few Americans and is of no strategic economic value, is not one of those companies. But if we are not careful, they may be rescued. Some policymakers may be persuaded that if the cruise-line operators were to default, then credit markets could dry up, and no one would be willing to issue the debt necessary to help other over-leveraged companies that would fail without new injections of cash. This alone may be enough to justify cruise lines being considered too big to fail.
But that would be a mistake. There have been warning signs even before the coronavirus that corporate debt was at unsustainable levels, and cruise lines were already aware that publicity related to viruses on ships could significantly decrease demand. Carnival and its investors knew they were taking risks in order to boost their returns. They should have to pay for that risk-taking behavior, even in the face of a black-swan event. And if Carnival is too big to fail, then surely so is Hilton, and any other big tourism company.
What message would it send to Americans being furloughed from their jobs to see the government issuing interest-free loans to ensure that 180,000-ton pleasure palaces stay afloat? Before Congress rushes to save any corporation that comes begging, it should consider if it’s right to bail out companies while Americans will be still expected to pay their mortgages, car loans, and credit-card debt. It’s looking increasingly likely that Americans may get a check in the mail, but that’s hardly the same as a loan to cover all their debts. Why should corporations get different treatment?
It would be a shame and a shock if cruise-line operators were to go bankrupt. And yet that is the nature of capitalism. Perhaps companies will learn to be less risky with debt. Perhaps in the age of global pandemics, cruise ships aren’t a great idea, or perhaps some new, better form of tourism will take their place. We accept the negative consequences because of the innovation that competition can create. If we start bailing out cruise lines, it’s more like socialism with none of the benefits of free stuff or guaranteed jobs. In a time of crisis, when events overtake rational thinking, it’s important to step back and take stock of which industries are worth saving and which, however sad, should be allowed to sink.