Passengers have been canceling cruise ship reservations due to fear about the omicron variant of COVID-19, hurting the revenue recovery for ports with sizable cruise operations.

But Fitch Ratings says this disruption is likely only temporary and isn’t expected to affect ratings on those ports or for cruise lines.

“This is certainly putting a damper on the passenger trajectory that we were seeing at the latter part of last year, as certain cruises are being cancelled or postponed,” Emma Griffith, senior director for infrastructure and project finance at Fitch, told The Bond Buyer.

“At the same time we are seeing a lot of pent-up demand for cruising,” she said.

The U.S. Centers for Disease Control recommended on Dec. 30 that passengers avoid cruise ships.
“Avoid cruise travel, regardless of vaccination status,” the recommendation said. “Even fully vaccinated travelers may be at risk for getting and spreading COVID-19 variants.”

Fitch believes the industry will resume its recovery before too long.

“While there are backlogs and negative pressures in the first few months, we think that will subside after Omicron and looking into the second half of the year, the industry has been indicating very strong bookings for sailings,” she said. “Given the cases that we are running for our cruise exposed ports we’re seeing 60%-65% of 2019 levels for this year. We feel that the setbacks we’re seeing right now are likely going to fall within that range.”

Fitch’s Jan. 20 report cautioned that credit pressure on cruise operators and ports could become heightened if coronavirus outbreaks and cancellations extend through the high season, leading to diminishing liquidity cushions. Both cruise operators and ports currently have substantial liquidity headroom, Fitch said.

Florida ports account for more than half of all cruise passenger volume in the United States.

The three-busiest cruise ports in the world are PortMiami, the Canaveral Port Authority at Cape Canaveral and Port Everglades at Fort Lauderdale.

Cruises accounted for 80% of 2019 revenue at Port Canaveral, 55% at Port Miami, and 35% at Port Everglades. As of 2022, these three ports have around 390, 300 and 550 days cash on hand, respectively.

Fitch thinks that 2022 will be a “transitionary year during which cruise operators will settle into an ‘endemic’ normalized operating environment.”

In October, Fitch revised the outlooks on Port Canaveral’s A-minus rating and Port Everglades’ A rating to stable from negative?, reflecting operating stability due to the resumption of cruise activity in the fall.

PortMiami’s A rating remains on negative Fitch outlook, reflecting the pressures of a still-shaky cruise recovery on coverage and leverage metrics. PortMiami negotiated coronavirus recovery riders to its long-term minimum annual guarantees with cruise operators, which provide a path to reinstatement of the MAGs.

Despite the recent cancellations, positive comments from Royal Caribbean and Carnival Cruise have indicated bookings for sailings in the second half of this year continue to be within historical ranges at higher pricing.

“While forward bookings are difficult to independently verify, they are generally consistent with recent management commentary across the travel industry,” the report noted.

Omicron and the potential emergence of other coronavirus variants drive Fitch’s conservative forecast for 2022.

“We have a pretty steady recovery trajectory that we assumed in our cases for cruise ports and they are not getting back to full force until 2024 or beyond,” Griffith said. “So even with this setback we’re probably being more conservative than we need to be.”

Fitch assumes revenues will be about 40% lower than 2019, with a gradual resumption of cruise operations and occupancy gradually improving in the second half of this year.

Capital markets have remained supportive for the large cruise operators throughout the pandemic, and near-term cancellations do not appear to be affecting capital market access, as evidenced by RCL’s recent issuance of $1 billion in 5.375% unsecured notes that was upsized and priced tighter than initial guidance.

However, refinancing risk remains a top concern, as the big three cruise operators, Royal Caribbean, Carnival and Norwegian Cruise Line Holdings, have more than $5 billion in outstanding debt maturing in 2022. Debt capital markets may become more challenging to navigate, given potential interest rate hikes amid inflationary concerns.

The big three operators own 15 cruise lines between them. The challenges facing the industry were underscored this week when Crystal Cruises, which is independent of the three big holding companies, diverted a ship from Florida to avoid its seizure for unpaid fuel bills.

Since 2011, issuers throughout the Southeast have sold about $6.5 billion of municipal bonds for seaports and marine terminals.

Miami-Dade County, Florida, issued $1.24 billion of seaport revenue bonds for PortMiami in July in the largest port transaction since the coronavirus pandemic began. The deal, priced by Wells Fargo Corporate & Investment Banking, was also the biggest municipal bond issuance in the port’s history.

Last July, Florida’s 14 ports got $250 million in federal funds funneled through the state government to help speed their economic recovery from the effects of the COVID-19 pandemic.

Fitch said that current pressures on cruise passenger activity are expected to fall within the levels of stress included in its rating cases for 2022 for ports with meaningful cruise revenue exposure.

Cargo operations and minimum annual guarantees help to temper declines in cruise revenue for the more exposed ports.

On the cargo side, Griffith said the supply disruption problems being seen across the U.S. were manageable.

“The big story is the backlogs and the bottlenecks,” She said. “So far that hasn’t necessarily been a bad thing in that the cargo has been very strong. I think it’s frustrating for shippers and customers to have to wait for their goods, but it’s affecting the whole system. I think the shippers at the ports are trying to work through that and we think it will normalize further into the year.

“Stumbling blocks that we may have to deal with are labor disruptions, there are still challenges in the labor market as there are some contract negotiations on the West Coast that are going to begin this year so there may be some issues with that,” she said. “But we do see things moving in a more positive directions and some of those backlogs are starting to clear.”

So far, the supply disruptions have affected all the ports, from West to East coasts, she said, adding there is more capacity on the East Coast to pick up some of the cargo if there are continued backlogs.

“There have also been concerns around robberies and things going on at some of the West Coast ports. To the extent that things like that persist and the backlogs persist, I would expect discretionary cargo may move away from the entry points that are causing delays or causing problems,” she said.

She noted that most of the ports have pretty stable local markets that are almost captive.

“If you’re thinking about the Los Angeles Basin, the cargo serving that very large local market is always going to come though L.A. and Long Beach. If you’re talking about cargo going to Chicago, then there’s lots more options — you might look to the East Coast or to Canada or Pacific Northwest. It’s really just a continuation of some of the same dynamics that we’ve see before when there’s a disruption — the local cargo is sticky and the discretionary cargo can come into play.”

She said cargo has outperformed to the upside.

“I think on the cargo side things did better than expected,” she said. “If you look back to the original case studies that we ran at the beginning of the pandemic, we were thinking it could be down as much as 25% with a very slow recovery. We just didn’t know what the economy was going to do in the face of the pandemic and it really was the opposite after that first blip — everyone was home and buying things so the cargo really jumped up.

“Almost across the board, our cargo ports have recovered to pre-pandemic levels if not surpassed them and have had record years in 2021.”

Almost every Florida seaport has seen record growth in cargo over the past few months — both bulk and container, Michael Rubin, president and CEO of the Florida Ports Council, told The Bond Buyer.

“We expect continued growth in both cruise and cargo — unless COVID has another twist,” he said

Griffith noted that cruising came in pretty much on target.

“On the cruise side, we had pretty conservative assumptions,” she said. “I think we have an appropriate level of conservativism built in for the cruise side of things looking ahead.”

On Jan. 15, the Centers for Disease Control and Prevention’s “Conditional Sailing Order,” mandating how ships serving the United States manage COVID-19 risks, became optional. Most cruise operators are expected to continue to follow the CDC’s guidance, although cruise lines are still subject to the CDC’s mask mandate.