COVID-19 has devastated the cruise industry, but one company may emerge stronger: Carnival. A case study by Stuart Gilson reveals how the cruising juggernaut is navigating the pandemic. On February 1, 2020, a passenger who had been on Carnival's Diamond Princess ship docked in Japan tested positive for the COVID-19 virus. Soon afterward, 700 people on the ship contracted the virus-the largest coronavirus outbreak outside of China at the time. Within weeks, 25 other cruise ships reported infections. By mid-March, Carnival, the largest cruise line in the world, suspended operations across the globe. Yet it took weeks to get its 260,000 guests and 80,000 employees who were floating at sea back to their homes in more than 130 countries. The COVID-19 pandemic devastated service industries, including bars and restaurants, retailers, and hotels, forcing many to close their doors for good. But while many service-oriented companies were permitted to gradually reopen with precautions in place, the cruise industry had to come to a screeching halt that lasted for more than a year-and it's still unclear when many ships will set sail again. HARVARD BUSINESS SCHOOL EVERY YEAR." Compounding the challenge of losing customers has been the lack of government aid. Unlike other companies that were able to stay afloat through pandemic-related government assistance, most cruise ships are registered outside the US, including those run by Carnival's American subsidiary, so they weren't eligible for loans. "There was a lot at stake, with $20 billion in annual revenues and hundreds of thousands of passengers transported every year," says Stuart Gilson, the Steven R. Fenster Professor of Business Administration at Harvard Business School, who studied Carnival's predicament. He points out that in March 2020, Carnival's bonds were trading at around only 70 cents on the dollar, at which point companies are often considered financially distressed. "Indeed, early in the pandemic, with the financial markets in turmoil, Carnival reportedly entered into discussions with a group of private equity and hedge fund investors-who typically specialize in buying the debt of financially distressed companies-over a prospective $4 billion to $6 billion debt investment in the company," he says. Carnival also faced a flurry of lawsuits from passengers alleging that the company didn't do enough to keep them safe. Slashing expenses to weather rough seas Remarkably, in spite of these hardships, Carnival has survived and has even emerged stronger-says Gilson, who chronicled the company's travails in the new case study Carnival Corporation: Cruising Through COVID-19, co-written with research associate Sarah Abbott. The case highlights important lessons for any business that encounters an unexpected economic blow, Gilson says. "There's something that's very distinctive about the economic shock we've just gone through," he says. "It's remarkable how much cash public companies have been able to raise in the capital markets in a very short period of time." "IT'S REALLY A CASE ABOUT CRISIS MANAGEMENT, ACCEPTING THE REALITY OF THE SITUATION AND TAKING BIG ACTIONS RELATIVELY QUICKLY." Carnival's success has been due in part to investors' faith in the company's ability to right itself but "IT'S REALLY A CASE ABOUT CRISIS MANAGEMENT, ACCEPTING THE REALITY OF THE SITUATION AND TAKING BIG ACTIONS RELATIVELY QUICKLY." Carnival's success has been due in part to investors' faith in the company's ability to right itself, but corporate leaders also made some savvy business decisions to prepare for the long haul, Gilson says. "It's really a case about crisis management," Gilson says, "accepting the reality of the situation and taking big actions relatively quickly." Now, as the pandemic starts to wane and cruise companies are hopeful that at least a limited number of ships can embark on trips this summer, the company's long- term success may depend on how much its customers feel safe going back into the water. When the company first shut down in March 2020, many cruise executives were hopeful that governments would lift restrictions, and they would sail again by October 2020. Nevertheless, says Gilson, CEO Arnold Donald prepared for an extended, indefinite lockdown. The company cut its annual operating expenses by $1 billion, as well as its capital costs by hundreds of millions. While some of those reductions came from laying off 820 people and furloughing an additional 537 for up to six months, Carnival also restructured operations to make them more efficient, and sold off older, less productive ships. "Some of that weeding out of less-efficient capital may have happened eventually, but this really accelerated that process," Gilson says. Shoring up cash until the pandemic ends At the same time, Carnival moved aggressively to restructure its debt. "At a high level, the reason companies become financially distressed is pretty straightforward they don't have enough cash relative to what they owe their creditors," says Gilson, whose research focuses on strategies companies use to HARVARD BUSINESS SCHOOL addition to aggressively cutting expenses, Carnival also negotiated with its existing creditors to extend debt maturities, waive restrictive covenants, and exchange outstanding debt for new common stock-all while raising over $10 billion in new debt and equity capital. What accounts for investors' willingness to fund a company that was in near-total lockdown, and to do so on such a scale? According to Gilson, several factors could be responsible, including the massive infusion of liquidity and confidence into capital markets that took place under the Federal Reserve's and US government's various COVID-relief programs, a belief in the long-term growth prospects of the cruise industry generally, and renewed confidence in Carnival's own prospects based on the financial discipline that management exhibited in responding to the pandemic. And, unlike the uncertain prognosis following the 2008 global financial crisis, the pandemic-related economic collapse appears to have an endgame, thanks to vaccines, which made the prospect of a cruise industry rebound a question of "when" rather than "if." The future looks bright Now with an estimated $8 billion in cash on hand, Carnival seems well poised to recover-even if it takes some time before ships are sailing at regular rates again. "That's assuming, of course, some other challenge or crisis doesn't arise," Gilson warns. After all, the cruise industry's success depends on two factors: the inherent risks of international travel, including political unrest and geographical calamities, and the loyalty of customers, 60 percent of whom are repeat visitors. While no one can predict a global disaster, Carnival appears to be sailing smoothly with its customer relationships, Gilson says. "THE INDUSTRY CLEARLY BENEFITS FROM HAVING A LOYAL BASE OF ENTHUSIASTIC REPEAT CUSTOMERS WHO LOVE THE CRUISING EXPERIENCE." When cruises were canceled last year, some 45 percent of customers opted for vouchers for a future cruise in place of a refund, contributing to $2.4 billion in deposits. An independent survey of cruise customers in May 2020 found that 67 percent were planning to rebook a cruise or travel once restrictions lift-while only 2 percent said they'd never cruise again, the case says. Bookings for later this year, the company recently reported, are "at the higher end of historic ranges." Company officials have said they need 50 percent occupancy on ships to break even. All of that bodes well for Carnival and the survival of global cruising in general, which, in a typical year, generates $45.6 billion and serves 30 million passengers. "The industry clearly benefits from having a loyal base of enthusiastic repeat customers who love the cruising experience," Gilson says. "It's a passion for them."