What happened
Cruise tourism stocks Norwegian Cruise Line Holdings ( NCLH -6.30% ) and Carnival Corporation ( CCL -5.69% ) ( CUK -6.32% ) are tumbling on anticipated higher fuel costs today, down 4.5% each as of 10:15 a.m. ET.
Rival Royal Caribbean ( RCL -3.13% ) isn't getting hit as hard, but it's still down a sizable 4%.
Image source: Getty Images.
A note from investment bank Macquarie Group out this morning highlighted the problem, as TheFly.com just reported. Cutting its price target on Norwegian Cruise Line stock by 23% to $23 per share, Macquarie warned that although demand for cruising still looks good, fuel prices are rising, and this is going to cut into the company's profitability.
How bad have fuel prices gotten lately? For the first time in history, the average price of a gallon of gas in some Californian cities has hit $5, and the "pain at the pump" could spread to other cities in coming weeks, according ABC and CBS News. And it turns out car drivers aren't the only ones hurting.
US Gulf Coast Ultra-Low Sulfur No 2 Diesel Spot Price data by YCharts.
As you can see in the above chart, the price of ultra-low sulfur diesel fuel, used to power cruise ships, is also skyrocketing -- up roughly 50% over just the past three months.
That's going to pinch cruise line profits the longer these high costs continue. According to data from Statista.com, fuel costs for a cruise company like Carnival can range from as low as 12% of total operating costs (about $1.6 billion) in a cheap year like 2019, to as much as 19.5% of operating costs ($2 billion) in a more expensive year like 2014. And these higher operating costs will mean lower operating profit margins -- and lower profits overall.
How bad will things get? Right now, with the spot price on low-sulfur diesel approaching $3, we're looking at a situation much closer to 2014 prices than to 2019 prices, and cruise line investors can expect fuel costs to represent as much as $1 out of every $5 of operating costs at the major cruise line stocks.
No wonder investors are worried.
This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis even one of our own helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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