Cruise holidays are heavily discounted right now. But Andrew Snyder says that’s not a good sign for cruise liners like Royal Caribbean (NYSE:RCL). Demand for luxury holidays is in freefall, and advance bookings mean that cruise liners cannot cut operations in the short term. RCL shares may look cheap today, but Andrew says the company faces more misery this year.

This from Today’s Financial News:

Thinking of going on a cruise? It is a perfect opportunity to buy tickets at the best prices in decades.  Thinking of investing in a cruise company? Think again. Even with share prices of some lines trading just above ten-year lows, cruise companies are still not as cheap as they will be.

During a day when advancing stocks outnumber decliners by a margin of more than 5 to 1, shares of the nation’s largest cruise operators are barely moving or are deep in negative territory. Royal Caribbean (NYSE:RCL), the hardest hit of them all, is down by double-digit proportions, thanks to a rough analyst downgrade.

Barclays Capital cut the company’s price target from $20 to just $1, saying chances are high it will run into serious liquidity issues as demand for cruises plummet. Shares of the $2 billion company dropped from yesterday’s closing price of $10.40 to an intra-day low of $8.75. Expect even more action when the company announces its latest quarterly results tomorrow.

Consensus estimates show the company should announce per share earnings of $0.08. But Barclays thinks the figure will swing to a loss, a sizeable loss, of $0.10 per share. If anything close to that happens, look for a much larger drop.

A boom-or-bust industry

When consumers lose their jobs, stop spending and start hoarding, it does not take an MBA to figure out cruise demand will drop. Unfortunately, too many investors have underestimated the drop.

Ironically, this issue is very similar to the railroad industry piece I wrote yesterday. Investors are looking at one small chunk of the company’s cost and revenue streams, when they should be looking at much more.

Too many folks cite lower fuel prices for a reason shares should remain steady or even rise. But fuel costs are such a small portion of the company’s business model, they are almost not worth looking at. Besides that, when we look at fuel prices per passenger, the industry is paying just as much , if not more, than last year.

For example, it still takes 3,000 gallons of fuel to get from point A to point B. If there are just 1,000 passengers onboard and fuel prices are just $2 per gallon, the company is still paying $6 per person. But if there are 2,000 people onboard and the company pays $3 per gallon, the per-head cost is just $2 per person.

But like I mention, investors should not even concern themselves with fuel prices. What they need to realize is, just like the railroad industry, the cruise industry has little ability to adjust its short-term operations to meet demand.

The economy has imploded over the last six months and demand has plummeted, but companies like Royal Caribbean can do very little to adjust their “supply” of cruises. Most of their trips are scheduled at least a year in advance and cannot be adjusted. They must wait until next year to lower their production.

That is why we are hearing the news that Royal Caribbean is pulling one of its cruise ships from Alaska, not this year, but in 2010. The cruise season does not start along Alaska’s southeast coast for another 15 months, but that is as fast as the company can react to a changing market. Unfortunately, by the time it fully adjusts its capacity, the market could have staged a turnaround.

Horrible timing

Between 2004 and 2007, North America’s cruise industry has grown from $16.9 billion in revenues to over $22.8. It was an average annual growth rate of over 10%. During those years, cruise lines added all the capacity they could find. Now that the economy has stopped in its tracks and is jogging backwards, the capacity is costing operators dearly.

Royal Caribbean has nearly $2.5 billion in liabilities due over the next twelve months. Unfortunately, it has just $1.05 billion in liquid assets to pay those bills. If the company does not find some cash flow soon, there could be some very stormy seas ahead for the company and its investors.

There is a saying in the industry that says cruise ships are filled with either “the newlywed or the nearly dead.” Risk your money in companies like Royal Caribbean and you certainly will not feel like you are on a honeymoon.

Source: Do the cruise lines need to be “bailed” out?