Transcripts

"Reviving the Economy: What Should Business Do?"-The Cruise Industry

SUSIE GHARIB: As consumers cling to their cash during the downturn, cruise lines are offering bigger ships and better deals to attract new passengers. As we continue our series "Reviving the Economy: What Should Business Do? Jeff Yastine looks at how the cruise industry is trying to stay afloat.

JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It sounds like a movie trailer, an industry turned upside down. Consumers holding on by their fingernails, a handful of companies once celebrated for their profitable business models struggling to pay for the newest, biggest, most grandiose cruise ships ever built. But perhaps it's not quite the disaster you'd think. The industry's largest cruise company, Carnival, saw the highest number of net weekly bookings in the company's history in February and no wonder. Carnival, along with Royal Caribbean and others has slashed prices for cruise vacations by 30 percent or more. They're trying to coax reluctant U.S. consumers to open their wallets and get back on the high seas. David Brams owns Florida-based Worldwide Cruises. His firm sells over $20 million in cruise vacations every year. And this year?

DAVID BRAMS, PRESIDENT, WORLD WIDE CRUISES: The month of February was really good. December and January were terrible. I have to say, people just weren't going but for some reason, the cruise lines have lowered their prices and people I guess are getting stressed out about the economy. So maybe it's time to take a vacation.

YASTINE: So bookings are up for now, but cruise lines still face choppy waters. Royal Caribbean has $6.5 billion worth of new ships to pay for in the next four years. Carnival's obligated to pay for 17 ships worth $9 billion, over the same period. Those demands for cash are one reason credit rating firms have downgraded the bonds of both cruise lines in recent months. Carnival is rated A negative, Royal Caribbean's double B. S&P credit analyst Ben Bubeck says those ratings could fall further.

BEN BUBECK, CREDIT ANALYST, STANDARD & POOR'S: The industry in general and certainly Royal and Carnival are bringing on a lot of capacity and spending a lot of money, much of it debt-financed to expand their fleet. And so cash-flow declining with debt going up, drives leverage higher which certainly signals weaker credit quality.

YASTINE: In order to conserve cash, both companies have stopped paying dividends. And Carnival CEO Mickey Arison recently declined a 2008 bonus estimated at $3.2 million. Analysts say the cruise lines are cutting back on longer, expensive Alaska and European itineraries and concentrating their biggest ships on shorter, cheaper routes to the Caribbean and Mexico. Despite the turmoil, industry veterans like David Brams believe the business model for the cruise industry remains intact.

BRAMS: People will always be taking vacations. They're just looking really for the best value now.

YASTINE: Those discounts are helping to fill the industry's biggest ships. But S&P's Bubeck says those rock bottom prices will squeeze cash- flow this year which means a return to smooth sailing for the cruise lines is still over the horizon. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.