“Longer-term negative impact” threat to cruise industry from Covid-19 – Clyde

Whilst other incidents have created negative publicity for the cruise industry, such as the outbreak of Norovirus, the sinking of the Costa Concordia in 2012 and the stranding of passengers and crew on the Carnival Triumph for nearly a week, the cruise industry had rebounded from these unfortunate incidents, to such an extent that in recent years it had consistently been operating at 100% capacity.

However, Covid-19 appears to be creating a longer-term negative impact, according to Marie-Anne Moussalli & Ioanna Tsekoura of legal firm Clyde & Co.

There has been a 20% increase in demand for cruise ship holidays in the past five years. reaching around 28.5m passengers chose in 2018.

However, Covid-19 has created a high degree of disquiet amongst the public as to the maintenance of health and safety on board cruise ships. There were fears within the industry that the impact of Covid-19 would affect sales for a long-time, particularly in the Asian market, which has become a very important market for cruise companies in recent years. 

The quarantining of the Diamond Princess off Yokohama for two weeks was constantly in the headlines. This was followed by widespread reporting of the MS Westerdam, with 2,000 passengers onboard, being prevented from docking by various countries over Coronavirus fears.

Then, in quick succession, the MSC Meraviglia was turned away from Jamaica, the Cayman Islands and Mexico after a crew member tested positive for influenza and cruise ships Azamara Quest and Sun Princess were greeted by demonstrators in the French overseas territory of Réunion, even though neither vessel reported any coronavirus cases onboard.

The UAE has suspended all cruise operations at the country’s ports as part of its measures to stop the spread of coronavirus, and the Grand Princess was forced to remain in international waters for five days after 19 crew members and two passengers tested positive for Covid-19.

The Asian cruise market virtually came to a halt. Norwegian Cruise Lines cancelled Asian voyages across three brands until the end of September; other cruises were cancelled until as late as mid-October. The cruise ships which were designated for these specific cruises have been “re-routed” with changed schedules (for example not calling at or departing from certain ports such as Hong Kong or Singapore). Clyde observed that, while changed schedules might be better than an outright cancellation of the cruises, changing a cruise ship’s itinerary was complicated and was largely dependent upon port and berth availability.

Clyde said that the impact on the small cruise players might be even more severe; some may be forced to exit the market.

The impact would be much more serious if it affects the Mediterranean and, given the current lockdown in Italy, Clyde said that it would not be unsurprising if the Mediterranean market also suffered severe disruption or even suspension. This could have even more of an impact than the disruption of the Asian cruise market, since in 2020 only 10% of cruise ships worldwide were to be deployed in Asia, compared to 32% in the Caribbean and 28% in Europe.

Cruise lines were expected to be paying out substantial sums to passengers in refunds, compensation and cancellation fees, subject to the relevant ticket terms and conditions. Cruise lines will also have to bear the cost of docking at ports where ships are quarantined and the cost for maintaining and operating ships, with passengers on board, that are being turned away from ports and being forced to remain in international waters.

Clyde estimated that , based on the average cabin price for next year, cancelling a full-capacity 12-day cruise on Norwegian Cruise Line from Hong Kong would cost the company around £2.3m in refunds.

As the virus spreads, the effects on the cruise industry will become more quantifiable. In the long-term – and perhaps even the short-term – this may affect repayments under financing arrangements and create general cash flow problems for the cruise companies, said Clyde.

“Cruise operators may find themselves in a position whereby they are unable to service loan repayments: failing to make a financing repayment when due may lead to a default under their financing structure which would typically result in an acceleration of the payment of any amounts due.”

Clyde said that, while lenders might show a degree of tolerance in respect of existing financings, for any new financings this would be more difficult in terms of interest margin and percentage. Cruise companies might opt to enter into discussions with their financiers which might lead to restructuring of their financing arrangements.

Cruise operators might consider putting their cruise ships into lay-up if demand decreases over a prolonged period of time. Typically, the financier’s consent would be required for this, or it could result in a breach of covenant under the financing documents.

Clyde said that financiers would be concerned because of the negative effect this has on cash flow and therefore the ability of the borrower to meet the payments required under the financing arrangements.

Clyde said that, if the cruise industry followed the aviation industry, “it could find itself in a deep crisis which will be hard to recover from and which could cause smaller and medium sized companies (if not even the larger companies) to collapse”. htwww.clydeco.com/insight/article/coronavirus-and-the-impact-on-the-cruise-industry