Royal Caribbean’s “Icon of the Seas”, known as the world’s largest cruise ship, set sail from the Port of Miami in Miami, Florida on January 27, 2024 for its maiden voyage.
Marco Bello | AFP | Getty Images
Demand for cruise ships remains strong and doesn’t appear to be weakening anytime soon.
The industry was one of the last to recover from the coronavirus pandemic, but once it did, it has enjoyed strong pricing and bookings momentum. Truist travel and leisure analyst Patrick Scholes said that while price growth is starting to normalize to some extent, it remains well above inflation.
“Cruise lines are in a good time right now,” he told CNBC.
Despite the price increase, cruises are still cheaper than accommodation on land. That helps the industry stand out as some weakness spreads across other parts of the travel industry. For example, on Wednesday, Hilton Chief Executive Christopher Nassetta said on the company’s quarterly earnings call that U.S. leisure travel demand is “flat and maybe even down a little bit.”
“Bookings/demand for the cruise industry continues to be strong, while much of the rest of the travel market is showing cracks, driven by a combination of land holidays remaining heavily discounted and relatively high service levels,” Barclays said. Analysts Brandt Montour said in a report last week.
As of the second quarter, daily net revenue for the three major cruise operators was up 17% on a weighted average basis compared with 2019, he wrote. Net daily revenue is the net revenue per passenger on the cruise day. Quoting data from data analysis company STR, Montour said hotel room rates in the Caribbean have increased by about 54% compared with 2019, and resort prices in the United States have increased by 24%.
carnival Chief executive Josh Weinstein agreed that so-called cracks elsewhere could help drive his business.
“If consumer growth does slow down in other industries, that’s a really good sign for us that we’ll be able to include them in our demand profile because we’ll have value. We’ll offer better products at better prices than they do.” The experience is elsewhere,” he said in an interview on CNBC’s “Money Movers” on Sept. 30 after reporting better-than-expected third-quarter earnings and revenue.
royal caribbean Quarterly results are scheduled to be released on Tuesday, followed by Norwegian Cruise Line Holdings“Reported on Wednesday.
The gap is wider than it looks
However, her research shows the gap is wider than it has been in years past. That means cruise lines may have more room to grow, she said.
One reason, Farley said, is an increase in direct bookings for cruise ships since 2019. This means a reduction in the commission paid to the travel agent, which is included in the gross per diem but deducted from the net per diem.
“While the company does not disclose it, we believe the number of passengers booking directly has increased significantly since 2019,” she wrote. “If the share of cruises booked directly increases by 5 to 10 percentage points, we calculate that the reported daily Net allowances are likely to increase by nearly 200 basis points, although this does not imply any increase in total daily allowances or actual fares.
Farley said that since 2019, all three cruise lines have increased onboard bundling and pre-sale revenue, which is also included in per diems. She believes this may indicate a 300 basis point gap between cruise and hotel price growth, but this gap is not reflected in the indicator. 1 basis point equals 0.01%.
Farley believes Royal Caribbean has a potential 350 basis point gap because its CocoCay private island features a water park, zip lines and other attractions for which passengers pay extra.
Royal Caribbean Year to Date
On top of that, all three major cruise lines have launched high-speed internet access on board ships via Starlink, which may also increase passenger revenue.
“The wider the gap, the greater the opportunity for cruise lines to get upside,” Farley told CNBC.
At the same time, every bit of price increase is good for cruise operators. Truist’s Scholes’ proprietary research on actual bookings for next year shows price increases in the mid-to-high single digits. He said Wall Street was only expecting growth of about 3%, but it was likely to be 5% or higher.
This is important because fixed costs are extremely high in this industry.
“That extra point in pricing is extremely important for profitability,” Scholes said. “Almost 90 percent goes to the bottom line.”
Invest in cruise stocks
Wall Street analysts are generally bullish The outlook for the cruise industry.
“If we think back 10 years ago, before COVID-19, these companies were competing against themselves,” Scholes said. Now, they are competing against Orlando theme parks and Las Vegas resorts to offer passengers More attractions.
“They are casting a wider net now,” he said.
A water slide is seen at the Thrill Island waterpark aboard the Royal Caribbean Icon of the Seas cruise ship in PortMiami, Florida, United States, Thursday, January 11, 2024.
Bloomberg | Bloomberg | Getty Images
Royal Caribbean is the first to up the ante on private islands with CocoCay.
“This private island is a truly unique product. It’s not just a nice beach. It has all the amenities you can charge for,” said UBS’s Farley, who has a buy rating on the stock.
The company’s Icon of the Seas officially debuted in January and has attracted widespread attention as the world’s largest cruise ship. Royal Caribbean’s newest cruise ship, Utopia of the Seas, sets sail this summer. Farley noted that the fact that the latter is offering three- and four-night weekend getaways shows that it is indeed attracting first-time cruise passengers.
“They hit a lot of home runs,” she said.
Royal Caribbean’s average analyst rating on the stock is “overweight,” but its average price target is about 1% lower than the average, according to FactSet. The stock is up nearly 56% so far this year.
According to FactSet, the average analyst rating on the stock is Carnival Overweight, with an average price target that is 12% higher than the average price target.
Carnival this year so far
In its third-quarter earnings report, the company reported record operating income and raised its forecast for adjusted earnings before interest, taxes, depreciation, and amortization in 2024 due to strong demand and cost-saving opportunities. Carnival also said that cumulative advance bookings for the entire year of 2025 are higher than the record in 2024, and prices are also higher than last year.
Farley noted that nearly half of next year is booked — and that doesn’t include the benefits of the new island, Celebration Island. The island will be more similar to Royal Caribbean’s CocoCay and will launch in July, she said.
“It’s a great catalyst for Carnival,” she said. “It’s creating a new destination and often sparks new interest.”
However, Scholes said his research shows that of the three major cruise lines, the Carnival brand faces the most intense pricing competition from private cruise operator MSC.
Carnival’s shares have lagged the market, up about 13% year to date. In contrast, he S&P 500 Index Up about 22%.
Finally, Norwegian Cruise Line Holdings has an average analyst rating of “overweight,” which represents an upside of about 4% to the average price target, according to FactSet.
Citibank is one of the companies that is bullish on Norwegian Air, which raised its rating on the stock from “neutral” to “buy” on October 9. The company also raised its price target to $30 from $20, which represents a 29% upside from Thursday’s closing price.
Norwegian Cruise Line’s year-to-date inventory
“NCLH’s shift in strategy leads us to believe that the huge pricing opportunity will not be offset by runaway costs,” analyst James Hardiman wrote in an Oct. 9 note.
He said investors expect earnings per share to grow at a compound annual growth rate of 23% over three years. However, he added that if Norwegian could maintain a cost-to-yield margin of 2.5%, the ratio could be closer to 30%.
While Norwegian has yet to officially announce a CocoCay-style private island experience, Scholes is confident the airline will have a competitive product by 2026.
The stock has also underperformed the broader market, rising nearly 16% year to date.
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