Back in March 2020, no one could have predicted how the pandemic would play out. Stifel analyst Ben Nolan wrote at the time that “it is fair to assume it is not helpful for container shipping.” He saw liner company MSC as “specifically … at risk” because it also owned “a very large cruise operation, which you could imagine has seen better days.”
As it turned out, the pandemic was exceptionally helpful to container shipping. Supercharged consumer spending and extreme port congestion boosted rates to stratospheric heights and kept them there. Ocean carriers pocketed hundreds of billions in profits.
But early fears about cruising were spot on. The pandemic was the worst thing that ever happened to the industry. Cruise lines suffered tens of billions in losses in 2020-21.
So, what happened with MSC, the owner of the world’s largest container line and third largest cruise line?
While MSC is private and doesn’t disclose shipping results, its 2021 profits were undoubtedly in the tens of billions. Maersk, with a container fleet slightly smaller than MSC’s, earned $24 billion last year. Zim (NYSE: ZIM), with a fleet around a tenth the size of MSC’s, earned $4.65 billion.
MSC Cruises’ results are public because it has listed bonds. It posted its annual report Thursday, revealing just how large its losses have been due to COVID and just how much the parent company — enriched by the container boom — has stepped in with a lifeline.
MSC Cruises reported a net loss of $1.1 billion (935.1 million euros) for 2021. It lost $1.07 billion in 2020. The parent began funneling support to its cruise company in December 2020, after the container sector started to rev up, continuing into this year. The parent has now provided $2.13 billion in equity and debt funding to MSC Cruises, plus a pledge for a further $226 million. Total support is on par with the combined 2020-21 net loss of $2.17 billion.
Cruising’s roots in shipping
There’s a deep historical connection between cargo shipping and the cruise industry. That connection has faded over the years, with the exception of MSC.
Pleasure cruising arose after the advent of commercial aviation and demise of transoceanic passenger liners. NCL was founded by Knut Kloster, a Norwegian shipowner, and Ted Arison, whose father ran an Israeli shipping agency. (Arison ultimately split with Kloster and founded Carnival.) Royal Caribbean was initially backed by Norwegian shipowners Sigurd Skaugen and Arne Wilhelmsen and the London-based shipping company Gotaas-Larsen.
Other cruise lines — Cunard, Princess, Celebrity and Costa — were launched by the families and companies that previously ran passenger liner and cargo shipping services.
Italy’s Gianluigi Aponte founded Mediterranean Shipping Company in 1970. MSC entered the cruise sector in 1988. It began building new ships in 2003 and has been rapidly expanding its fleet ever since. As MSC Cruises grew over the decades, it remained a private family affair that operated alongside the container shipping division. MSC Cruises’ chairman is Pierfrancesco Vago, husband of Aponte’s daughter, Alexa. She is a director and her father is vice chairman.
The other three cruise giants — Carnival (NYSE: CCL), Royal Caribbean (NYSE: RCL) and NCL (NYSE: NCLH) — went public. They took over other brands and shed their ties to shipping (with the exception of a 4.5% stake in Royal Caribbean still held by Israel’s Ofer family).
Carnival, Royal Caribbean and NCL were forced to turn to Wall Street after COVID struck, selling stocks and bonds while in distress. Their share prices collapsed. MSC turned to the Aponte family parent, which had suddenly hit the jackpot in container shipping.
MSC Cruises explained in its annual report, “With the backing of the MSC Group, we have been able to offset some of the critical challenges that the pandemic brought. Thanks to the group’s financial strength and privately held and family-owned structure, we have strongly controlled our debt during the downturn [and] secured the company’s continued financial viability.”
How MSC parent supported cruise line
The parent has now extended up to $2.35 billion of support to its cruise company via equity and debt. (Currency conversions are based on the month of transaction or MSC-provided average in the case of annual and year-end conversions.)
In December 2020, the parent bought Italian travel agency Bluvacanze. It transferred it to MSC Cruises for a nominal sum, increasing the cruise company’s equity by $133 million. As part of that deal, MSC Cruises obtained $61 million in receivables in January 2021.
The same month, the parent gave its cruise company a subordinated loan for $210 million, due in 2027. The loan amount was upped to $505 million by the end of last year with a portion converted to equity.
The parent invested $237 million in new equity in the cruise group in July 2021, then another $228 million in November.
This January, the parent gave MSC Cruises a $283 million shareholder loan and committed to an additional $226 million loan in February 2023, should the cruise company need it then. In February, the parent loaned MSC Cruises $681 million, which will be used to pay down a revolving credit facility by the end of this month.
Balancing cruise and cargo
If both cruising and container shipping had simultaneously collapsed, as was feared in the early days of the pandemic, MSC would have been pummeled from both sides. Instead, MSC made so much in container shipping that it has been able to heavily support its cruise line.
Subsidizing cruise losses shaves some of MSC’s container shipping profits off the top, however, ownership in the two maritime sectors turns out to be a good hedge.
Container shipping overall suffered significant losses in the years prior to COVID. During the five years from 2015-19, when container rates were very low, MSC Cruises posted aggregate net income of $1.89 billion, offsetting market pressure on the container side.
What happens if omicron winds down and the COVID era finally ends? One theory is that consumers would spend more on services (including travel) and pare spending on goods, leading to decreased imports, reduced congestion and falling freight rates. Cruise line occupancy would rise, more ships would return to service and cruise profits would rebound. If so, MSC’s cruise income would recover just as its container income fell back to earth — another hedge.
Yet the cruise company is far from out of the woods, and there’s no guarantee it won’t need more help from the container side.
MSC Cruises has been operating under “debt holiday” agreements that defer principal payments on its newbuilds’ export credit facility loans. Its liabilities totaled $7.4 billion at the end of 2019, pre-pandemic. Liabilities had risen by $3.4 billion or 46% to $10.8 billion by the end of last year.
Cruising still operates under COVID restrictions, omicron may not be the final variant, and there’s a war in Europe, the most important region for MSC Cruises in terms of both itineraries and passenger sourcing.
“The cruise industry finds itself at a critical juncture,” the company acknowledged in its annual report. “We know well that the actions we take today will have a major impact on our prospects for decades to come.”
Click for more articles by Greg Miller
Related articles:
- Shipping mints even more money as supply chain squeeze drags on
- Shipping giant Maersk could rake in $50 billion over just two years
- Glimmer of hope: Has the ship gridlock off ports finally peaked?
- Container shipping has greatest quarter ever — with more to come
- How invasion of Ukraine could ease shipping logjam off US ports
- Supply chain whack-a-mole: West Coast eases, East Coast worsens
