The cruise-liner catastrophe could cost its owner $135 million, sending its shares plunging.
On Friday, Italian cruise liner Costa Concordia ran aground off the island of Giglio, a few hundred yards off Italy's Tuscan coast. Sadly, in yet another maritime tragedy, six people have died and 15 more are reported missing.
On the rocks
Early indications are that the 114,500-tonne, 290-metre cruise liner ran aground on rocks, leading to what's being described as a "chaotic" evacuation as 4,200 passengers and crew abandoned ship. Captain Francesco Schettino (52) has been arrested, accused of "serious human error" and faces possible charges of multiple manslaughter and abandoning his ship before the last of his passengers.
As well as being a disaster for all those involved and their families, this is also a nightmare for the liner's owner, Costa Crociere, a subsidiary of Carnival (LSE: CCL), the world's leading cruise company, which is dual-listed in London and New York.
Repairing the damage
Carnival's first problem is dealing with the ship itself, which is worth £370 million, but has listed violently, thanks to a 160-foot gash along its hull.
In a regulatory announcement released this morning, Carnival provided initial estimates of the financial impact resulting from the grounding of the Costa Concordia. Of course, the liner's hull is insured, but this policy has an excess of $30 million (£20 million). In addition, the cruise operator has insurance for third-party personal-injury liability, with a deductible of $10 million.
However, Carnival's biggest loss will be loss of use of the vessel, which it self-insures. Although it is unclear how long the liner will be out of service, the company's initial estimate for this loss is $85-95 million in this financial year ending 30 November. As a result, Carnival expects its earnings per share to fall by 11 to 12 cents.
Furthermore, as operators take bookings for summer cruises many months in advance, this highly public shipwreck has occurred at a key point in the booking cycle for cruises. Therefore, heightened public fear and uncertainty will no doubt discourage many potential passengers from booking with Carnival and rival operators.
Carnival off
As I write, Carnival's share price is down a sixth (16%) at 1,891p, having fallen as low as 1,600p when the London Stock Exchange opened at 8am.
Following this slump, the cruise operator's UK equity is valued at just over £15 billion, down roughly £3 billion this morning. Worst-hit by the financial impact of this crash is Micky Arison, Carnival's chairman and chief executive. Arison and his family own almost half (47%) of Carnival and, therefore, have lost close to £1.5 billion of their personal wealth in one morning.
Clearly, although the public will be worried about safety standards at Carnival and other cruise operators, this calamity is unlikely to have any lasting effect on the company's long-term financial performance. Carnival operates 101 ships under the P&O, Cunard and Princess Cruises brands, with the Costa Concordia accounting for a mere 1.5% of its capacity.
Even so, this latest shipping accident will do nothing to help the already-struggling European travel industry. Hence, I give Carnival's shares a firm thumbs-down once more.
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