Key Points
The stocks of cruise lines will continue to suffer as long as fuel prices remain elevated.
Brent crude is $27 higher per barrel than before the war started, and uncertainty abounds.
Last week, I wrote about how the war in the Middle East is hitting airline stocks hard, as it has pushed the price of jet fuel significantly higher while depressing demand for air travel. But there's another group of stocks getting hit even harder -- possibly the worst-faring stocks in the S&P 500 index since the war broke out.
I'm talking about cruise lines. Norwegian Cruise Lines Holdings(NYSE: NCLH) is down 21% since the war began, while Carnival(NYSE: CCL)(NYSE: CUK) has plummeted some 23%. Could this be a buying opportunity for investors?
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The reasons for the plunges in these stocks are similar to those of the airlines: Rising fuel prices and softening demand. Fuel is one of the largest expenses for cruise lines. A ship can consume 250 tons of fuel daily or more, at a cost of more than $100,000 per day. Right now, Brent crude, the international benchmark, is about $27 higher per barrel than it was right before the war. That's an increase of about 38%.
Carnival doesn't hedge its fuel purchases, so increases in the price of fuel directly affect the company's bottom line (that's a big reason it has fallen further than Norwegian, which does hedge). Companies hedge against fuel increases by using derivatives like futures and call options that can lock in prices and limit cost increases.
Geopolitical crises tend to depress demand for cruises
There's also the possibility of softening demand. Many cruises with Middle Eastern and Mediterranean routes have already been canceled. Analysts expect demand for cruise bookings to soften going forward, as vacationers become wary of international travel in times of war and geopolitical uncertainty.
Image source: Getty Images.
Plus, most cruise lines reserve the right to impose fuel surcharges on passengers, which would also affect booking demand. The war comes in the wake of other problems for Norwegian. It underperformed Wall Street estimates for fourth-quarter revenue and issued soft guidance for the rest of the year.
Much like commercial airlines, cruise lines will continue to suffer if fuel prices remain elevated. Where crude oil prices will go is anybody's guess at the moment. Iran doesn't seem disposed to cave to U.S. demands any time soon, and it is working to expand the conflict, with missile launches into NATO-member country Turkey this week.
As a result, I think investors should avoid both airline and cruise line stocks until there is some clarity about the war -- or better, a clear end in sight. There are just too many unknowns and too much volatility to hold these stocks right now.
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Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
