Cruise Lines Ramp Up US Sailings, Even as Travel Agents Warn Delta Threatens Fall Bookings

• While the CDC has warned at-risk people from taking a cruise, even if vaccinated, the operators continue to announce more sail dates.
• A survey of travel agents by Morgan Stanley shows a significant slowdown in demand for cruises, with double-digit drops in booking volumes.
• Fully vaccinated travelers have enjoyed their return to cruising, especially with limited passenger capacity.

The cruise industry continues to sail ahead, ramping up operations even as the delta variant drives new Covid infections in the U.S. and regulators warn of outbreaks on board ships.

While there is no definitive tally of how many Covid cases have been detected on cruises so far, there have been investigations into outbreaks reported by the Centers for Disease Control and Prevention on their website. But the cruise lines are forging ahead with reopening plans.

Over the past month, cruise operators' stocks have been losing ground. Last week, the stocks logged the worst performance since mid-July. Norwegian and Carnival shares both tumbled nearly 6% and Royal Caribbean lost nearly 5% of its value. Norwegian's shares are basically flat year to date, while Carnival has gained about 8% and Royal Caribbean about 10% during the same period. 

During Royal Caribbean's earnings calls last month, the company said demand for future cruises was strong, but near-term demand was hurt by rising rates of Covid-19.

"For a couple of months, the demand for travel was above 2019 peak levels. It's subsided in the last 60 days, because of the delta variant, so, I think everybody doesn't know how this ball is going to go," said Jason Ader, CEO of SpringOwl Asset Management, in an interview with CNBC. 

"The real unknown is just outbreaks and how people react to it. I mean, just broadly, not even for the cruise line industry, the delta variant has slowed hotel and airline demand as well," Ader said.

The 7-day average of daily new U.S. Covid cases was 151,508 as of Wednesday, as the delta variant continues to spread, especially in areas with low vaccination rates. The pace is a 10% decline from last week's 7-day daily average, but it is still faster than that of the spring and early summer, according to a CNBC analysis of Johns Hopkins University data.

It is likely the stocks will continue to be impacted by trends in the ongoing health crisis. On Tuesday, results from Morgan Stanley's monthly survey of travel agents showed a significant slowdown in customer demand in August, with double-digit drops in booking volumes. The company has polled a group of less than 10 travel agents, who work for multiple outlets, every month for over a decade.

Survey says bookings taking a hit

"Our US travel agents survey shows a clear deterioration in cruise booking volumes alongside a spike in cancellations, and to a lesser degree weaker pricing, driven predominantly by concerns about the delta variant and stricter protocols," Morgan Stanley analyst Jamie Rollo said in a research note.

"Many agents seem to be spending more time dealing with cancellations than with new bookings, and requests for refunds are much higher than for Future Cruise Credits," Rollo said.

The slowdown is driven by elderly clientele, including the fully vaccinated, who are concerned about Covid and families impacted by more operators only accepting fully vaccinated passengers over the age of 12.

"While August is typically a slow booking month (as families are wrapping up their summer vacations and kids are returning to school), the results are substantially poorer than would have been anticipated," Rollo said.

The CDC set up strict guidelines for the industry to prevent large outbreaks from occurring onboard. However, in some cases, the companies have added on further safety precautions, looking to keep passengers safe and their operations running. The result is that travelers are often required to be vaccinated against Covid and they likely have to take Covid tests before boarding and sometimes during a voyage. 

Royal Caribbean, Carnival and Norwegian also require guests leaving from U.S. ports to wear masks during embarkation and debarkation. Royal Caribbean requires masks indoors, except while guests are in their staterooms or while eating or drinking, but Carnival asks for masks in certain indoor areas like entertainment venues, retail shops and casinos.

But even with these measures, the CDC came out with its harshest warnings yet on Aug. 20. It told travelers who are most at-risk to avoid cruises — even if vaccinated. This category includes those with underlying health conditions, older adults and those who are pregnant or have been recently pregnant.

"Well before Covid, we've known that infectious diseases can have outbreaks on cruise ships ... there's been many different varieties of infectious diseases transmitted on cruises, including respiratory viruses like influenza and gastroenterological viruses like norovirus," said Dr. Isaac Bogoch, an infectious diseases physician and scientist based out of the University of Toronto.

Adding layers of protection

Covid is predominantly transmitted indoors in poorly ventilated areas where people are not wearing masks, and on cruises, there are a lot of people in close contact indoors, some of which are not wearing masks, Bogoch said.

Last month, the CDC revised its masking guidance for cruises, advising against allowing fully vaccinated crew to remove their masks in areas inaccessible to passengers, designating areas for the fully vaccinated where masks and social distancing are not required or allowing passengers and crew to refrain from masking or social distancing on cruises where more than 95% of passengers are fully vaccinated. 

"[Cruise operators] are right now moving in the direction of being tougher on those requirements, but you're still not going to have people masked at all times, it's impossible," said Chris Woronka, an analyst at Deutsche Bank. "You might see tighter requirements or recommendations or requests on some of this stuff on masks on ships, but it's just not going to be perfect."

Also, even with all the protocols in place, the companies are likely to see an occassional Covid case, according to Woronka.

"It's going about as well as one could expect. I think there was never any vision that this was going to be perfect," Woronka said.

Dr. Bogoch said each rule or safety protocol adds a layer of protection. The more layers you have, the less likely it is for the virus to spread on board, he said.

"All those methods will add additional safety, but I think it's fair to say that in this current era, it would be challenging to eliminate the risk from a cruise," Bogoch said.

The measures are also changing quickly, and it isn't always the cruise lines making the changes. Recently, the Bahamas, a popular cruise stop, began requiring the ships to confirm that guests 12 and older are all fully vaccinated, with exceptions only for those with a medical condition prohibiting vaccination.

While Royal Caribbean and Carnival were allowing some unvaccinated passengers on cruises, the cruise operators still have to follow requirements set by international ports. This may mean some passengers can't visit certain ports.

Norwegian Cruise Line is trying to avoid that dynamic. It requires vaccination — not even making exemptions for children. Since all are vaccinated, guests aren't asked to wear masks.

"I think what Norwegian's done is smart. I suspect others will follow," Ader said. "It's sort of obvious that the cruise industry will eventually just have to get there."

Norwegian is so committed to sailing with fully vaccinated passengers and crew, it has challenged a Florida law banning businesses from asking for proof of vaccination. While a judge granted the cruise operator a temporary pause on the law while litigation continues, Florida has appealed the ruling.

The cruise operators have been regularly updating their guidance as more ships set sail.

"A lot of this has been just self-imposed, and the cruise lines are trying to figure it out. They want to make sure that they have all these protocols down pat before they go to full capacity," Woronka said.

'Safer on the ship'

While some may be skeptical about the safety of cruises, Ohio-based travel agent and owner of Rock Solid Travel, Jeff Rock, said that the safety protocols are working and everyone was wearing masks when they couldn't social distance on his recent voyages. 

"I actually felt safer on the ship than I actually do out in public on land," said Rock, who sailed on two Carnival ships since the reopening — the Mardi Gras on July 31 and the Horizon on Aug. 7.

Rock, who purchased his tickets for both voyages, said the staff on both ships were cleaning more than they had been before Covid. They also were enforcing mask policies.

"I have had clients on [Carnival's] Princess [cruise line], and they were tickled to death by how they handle things there as well," he said, adding that his clients said they had felt very safe.

All of Rock's clients who have traveled have been fully vaccinated and so far none have made any complaints or raised concerns after taking a cruise.

Annie Scrivanich, senior vice president at Seattle-based travel agency Cruise Specialists, has had eight staff members sail on cruises across five different cruise lines in recent weeks. The staff members were able to go on test cruises for Celebrity Cruises and Royal Caribbean, and they received discounts on Viking, Silversea and Windstar cruises.

"The common denominator amongst our staff and clients in terms of their feedback is very impressive. They're all coming back with really excellent reviews as far as the procedures," Scrivanich said. They have reported seeing more sanitation stations, higher levels of disinfecting high-contact surfaces and help at buffets, which had previously been self-service, she said.

The extra cleaning and the servers stationed at buffets are coming at a higher cost. There are also bigger expenses for things like repatriating crew members, marketing, communicating with customers more frequently and implementing testing and other medical protocols onboard, Woronka said.

The CDC requires each ship to conduct test cruises before passengers are allowed onboard. This means even ships owned by the same company are at different stages in their reopening. That makes it difficult to pin down what passenger capacities voyages are operating at.

"The reason that we reduced our third-quarter cash flow estimates is because they're incurring all these costs, almost as if the ships are full. But they don't have the revenue as if the ships were full," Woronka said.

According to Woronka, there are several ships with passenger capacity at between 60% and 75%, but it varies. Where things stand now, Woronka expects the companies could reach 75% to 80% capacity in the coming months.

Morgan Stanley expects the industry's capacity to reach around 55% during the third quarter and around 75% during the fourth quarter.

"The way to think about it from a high level is they're kind of overspending right now, just to make sure that they have smooth relaunches, and those costs will normalize over time. And that's why we're showing the companies with better results in the fourth quarter than in the third," Woronka said.

Bigger deals for near-term trips

Progress will be impacted by the ongoing health crisis. Some travel agents who responded to Morgan Stanley's survey said pricing for near-term bookings has begun to weaken, or is trending sharply lower, but 2022 pricing remains solid.

"For example, [Royal Caribbean's] Mariner of the Seas has a 5-night sailing starting at $60 per night, and industry sources say pricing was last this low post 9/11. It also has some unprecedented promotions and agency-only offers ($29 per night)," Rollo said.

A research note published by JPMorgan highlighted Norwegian's stronger pricing than the other cruise operators. The brand's ticket prices are more than 20% higher than 2019 levels for sailings in the fourth quarter of this year through the second quarter of 2022.

"At least some of this relative strength is due to NCLH's very public and unique requirement that 100% of passengers and crew be vaccinated and the peace of mind this likely gives to a large portion of its guests (and potentially an easier sell for travel agents)," said Brandt Montour, an analyst at JPMorgan.

SpringOwl Asset Management' Ader said, "It's a slow and steady walk back to the ... operation of the vessels. The pricing has been very discounted, but demand has been great."