Royal Caribbean’s Icon of the Seas, billed as the world’s largest cruise ship, will set sail from the Port of Miami in Miami, Florida on January 27, 2024 on its first cruise.
Marco Bello | AFP | Getty Images
Demand for cruises remains strong and doesn’t seem to be slowing down anytime soon.
The industry was the last to recover from the coronavirus pandemic, but once it did, pricing and booking momentum were strong. Patrick Sholes, travel and leisure analyst at Trust, said while price growth is starting to normalize to some extent, it remains well above the rate of inflation.
“Cruise lines are in great shape right now,” he said in an interview with CNBC.
Despite the increase in prices, cruises are still cheaper than land-based accommodation. This is helping the industry stand out while some weaknesses have crept into other areas of the travel industry. For example, on Wednesday, hilton Chief Executive Officer Christopher Nassetta said on the company’s quarterly earnings call that U.S. leisure travel demand “may be flat or down slightly.”
Barclays said: “The continued strength in bookings/demand for the cruise industry, while cracks are appearing in much of the remaining travel market, remains a combination of deep discounts and relatively high service levels, primarily for land holidays. It is brought about by.” Analyst Brant Montour said in a note last week.
As of the second quarter, the three major cruise lines reported daily net revenue 17% higher than 2019 on a weighted average basis, he wrote. Net per diem revenue is the net revenue per passenger cruise day. Citing figures from data analytics firm STR, Montour said Caribbean hotel room prices are up about 54% compared to 2019, while U.S. resort prices are up 24%.
carnival CEO Josh Weinstein agreed that so-called cracks elsewhere could help boost his business.
“If it’s true that consumers are slowing down in other areas, it bodes really well for us to be able to incorporate them into our demand profile because we have value. “We offer consumers a better experience at a better price than they can achieve elsewhere,” he told CNBC on Sept. 30 after reporting third-quarter profit and revenue beats. He said this in an interview with “Money Movers.”
royal caribbean is scheduled to report quarterly results on Tuesday, followed by Norwegian Cruise Line Holdings‘ reported on Wednesday.
The gap is wider than it appears
The price difference between hotels and cruises is nothing new. The main reason for this is that much of the demand for hotels comes from business travel, while demand for cruises comes purely from price-sensitive leisure travelers, said UBS leisure analyst Robin Farley. I explained.
But her research shows that the gap has become wider than it appears in recent years. That means cruise lines may have more room to grow, she said.
Farley said one reason for this is that direct bookings for cruises have increased since 2019. This means that the commission paid to the travel agent is reduced and is included in the gross per diem allowance, but deducted from the net per diem allowance.
“Although the companies have not disclosed, we believe they have seen a significant increase in passengers booking directly since 2019,” she wrote. “If the percentage of cruises booked directly increases from 5 to 10 [percentage points]We calculate that this could add close to 200 bps to reported net per diems, even if it does not mean an increase in gross per diems or actual ticket prices. ”
Separately, all three major cruise lines have increased onboard revenue from bundles and advance sales since 2019, which is also included in per diems, Farley said. This could suggest an additional 300 basis points difference between cruise and hotel price growth that is not represented in the index, she argued. 1 basis point equals 0.01%.
Mr. Farley thinks Royal Caribbean could be off by another 350 basis points. That’s because CocoCay’s private island has a water park, zip lines and other attractions for which passengers pay extra.
Royal Caribbean Year to Date
On top of that, all three cruise lines are rolling out high-speed internet access via Starlink onboard their ships, which could also increase revenue for passengers.
“The wider the gap, the more upside opportunity there is for cruise lines,” Farley said in an interview with CNBC.
On the other hand, raising prices even a little would help cruise lines. Truist’s Scholes’ independent research on actual reservations for next year shows prices rising in the mid-to-high single digits. Wall Street only expects growth to be around 3%, he said, but 5% or more is easily possible.
This is important because this industry has very high fixed costs.
“Adding another point to pricing is critical to profitability,” Scholes said. “Almost 90% goes to revenue.”
Investing in cruise stocks
Wall Street analysts are generally bullish on cruise lines’ prospects.
“If you think back 10 years ago, pre-COVID, these companies were competing with themselves,” Scholes said. Now, the number of attractions available to passengers has increased, competing with Orlando theme parks and Las Vegas vacations.
“They’re casting an even wider net now,” he said.
A waterslide at Thrill Island Waterpark on the Royal Caribbean Icon of the Seas cruise ship in Port Miami, Miami, Florida, USA, on Thursday, January 11, 2024.
Bloomberg | Bloomberg | Getty Images
Royal Caribbean was the first company to raise the bar for private islands with CocoCay.
“This private island is truly unique,” said UBS’s Farley, who rates the stock a buy. “It’s not just a nice beach. It’s got all the amenities you can use for a fee.”
The company’s Icon of the Seas, which officially debuted in January, received a great response as the world’s largest cruise ship. Royal Caribbean’s newest ship, Utopia of the Seas, set sail this summer. Farley pointed out that the fact that the latter offers three- and four-night weekend trips shows that Cruise is really targeting first-time cruise passengers.
“They were hitting so many home runs,” she said.
Royal Caribbean has an average Overweight rating from analysts covering the stock, according to FactSet, but the average price target has about 1% downside. The stock is already up nearly 56% since the beginning of the year.
Analysts covering the stock have an average rating of Overweight on Carnival, with an upside of 12% from their average price target, according to FactSet.
From the carnival years to the present
The company posted record operating profits in its third-quarter earnings report and raised its 2024 forecast for earnings before interest, taxes, depreciation and amortization, citing strong demand and cost-cutting opportunities. Carnival also said its cumulative pre-order position for the full year of 2025 exceeds the all-time high of 2024, and prices are ahead of the previous year.
Nearly half are booked for next year, but that doesn’t include the benefit of the new island, Celebration Cay, Farley noted. The island will be in line with Royal Caribbean’s CocoCay, which is expected to begin service in July.
“This is a good start for Carnival,” she said. “We are creating new destinations.” [and] That tends to spark new interest. ”
But Scholes said his research showed that of the three major cruise lines, the Carnival brand faces the most price competition from private cruise line MSC.
Carnival stock has underperformed the market, gaining about 13% since the beginning of the year. In comparison, he S&P500 It has increased by about 22%.
Finally, Norwegian Cruise Line Holdings’ average analyst rating is Overweight, with an upside of about 4% to the average price target, according to FactSet.
One company that is bullish on Norwegian is Citi, which upgraded the stock from Neutral to Buy on October 9th. The call sent the stock up 11% on the day. The company also raised its price target to $30 from $20, implying a 29% upside from Thursday’s closing price.
Norwegian Cruise Line’s year-to-date inventory
“NCLH’s strategic shift provides confidence that substantial pricing opportunities will not be offset by runaway costs,” analyst James Hardiman said in an Oct. 9 note.
He said investors should expect compound annual growth in earnings per share of 23% over the three-year period. But if Norwegian can maintain a yield-to-cost spread of 2.5%, that percentage could approach 30%, he added.
Norwegian hasn’t officially announced a CocoCay-type private island experience, but Scholes is betting a competitive product will be available by 2026.
The stock has underperformed the broader market, gaining nearly 16% so far this year.
