Royal Caribbean’s “Icon of the Seas,” billed because the world’s largest cruise ship, sails from the Port of Miami in Miami, Florida, on its maiden cruise, on Jan. 27, 2024.
Marco Bello | Afp | Getty Images
The demand for cruises remains to be going strong — and it doesn’t look like letting up anytime soon.
The industry was the last to recuperate from the Covid pandemic, but once it did, it has been having fun with strong pricing and booking momentum. While pricing growth is beginning to normalize somewhat, it remains to be well above the speed of inflation, said Patrick Scholes, travel and leisure analyst at Truist.
“Cruise corporations are having a moment immediately,” he said in an interview with CNBC.
Despite price increases, cruises are still cheaper than land-based lodging. That is helping the industry stand out as some weakness creeps into other areas of the travel sector. As an example, on Wednesday, Hilton CEO Christopher Nassetta said in the course of the company’s quarterly earnings call that U.S. leisure travel demand “is flat, perhaps even somewhat bit down.”
“The Cruise industry’s continued strength in bookings/demand, whilst cracks form across much of the remainder of the travel market, is primarily driven by the mix of the still significant discount to land-based vacations coupled with the relatively elevated service levels,” Barclays analyst Brandt Montour said in a note last week.
As of the second quarter, on a weighted-average basis, the massive three cruise operators reported net revenue per diems 17% above 2019, he wrote. Net revenue per diem is the online revenue per passenger cruise day. Caribbean hotel room prices are about 54% ahead of 2019 and U.S. resort prices are up 24%, said Montour, quoting figures from data analytics firm STR.
Carnival CEO Josh Weinstein agreed those so-called cracks elsewhere may also help boost his business.
“If that is true that the buyer is slowing down in other sectors, that actually bodes well for us to give you the chance to take them into our demand profile because we might be of value. We give a greater experience at a greater price than they will achieve elsewhere,” he said in an interview with CNBC’s “Money Movers” after reporting a third-quarter earnings and revenue beat on Sept 30.
Royal Caribbean is ready to release its quarterly results on Tuesday, followed by Norwegian Cruise Line Holdings‘ report on Wednesday.
Gap wider than it appears
Yet that gap has change into even wider than it appears over the past several years, her research shows. Meaning the cruise lines can have more room to grow, she said.
One reason is the rise in direct bookings for cruises since 2019, in accordance with Farley. Meaning fewer commissions paid out to travel agents, which is included in gross per diems but netted out of the online per diem line.
“While not disclosed by corporations, we consider there was a meaningful increase in passengers booking directly since 2019,” she wrote. “If the share of cruises booked directly grew by 5 to 10 [percentage points], we calculate that would add near 200bps to reported net per diems despite the fact that it could not mean any growth in gross per diems, or actual ticket price.”
Individually, all three major cruise lines have increased the bundled and presold onboard revenue since 2019, which is also included of their per diems, Farley said. That might suggest one other 300 basis point gap between cruise and hotel price growth that does not show up within the metrics, she argued. One basis point equals 0.01%.
Farley sees one other potential 350 basis point gap for Royal Caribbean due to its CocoCay private island, which has a water park, zip line and other attractions for which passengers pay an extra cost.
Royal Caribbean 12 months up to now
On top of that, all three cruise lines have been rolling out high-speed web access through Starlink onboard, which could also boost passenger revenue.
“The broader that gap, the higher the chance for the cruise lines to have upside,” Farley said in an interview with CNBC.
Meanwhile, every little bit of increased pricing helps the cruise operators. Truist’s Scholes’ proprietary research on real bookings for next 12 months shows the worth is up mid- to high-single digits. Wall Street is barely expecting about 3% growth, but it surely could easily be 5% or more, he said.
That matters since the industry has extremely high fixed costs.
“One extra point of pricing is amazingly material to profitability,” Scholes said. “Almost 90% flows through to the underside line.”
Investing in cruise stocks
Wall Street analysts are largely bullish on cruise operators’ prospects.
“If we predict back to 10 years ago before Covid, these corporations were competing against themselves,” said Scholes. Now, they’re competing against Orlando theme parks and Las Vegas vacations with more attractions available to passengers.
“They’re casting a much wider net now,” he said.
Water slides on the Thrill Island waterpark onboard the Royal Caribbean Icon of the Seas cruise ship at PortMiami in Miami, Florida, US, on Thursday, Jan. 11, 2024.
Bloomberg | Bloomberg | Getty Images
Royal Caribbean was the primary to up the private-island ante with CocoCay.
“This private island is a really extraordinary offering. It is not just a pleasant beach. It has all those amenities that they will charge for,” said UBS’ Farley, who has a buy rating on the stock.
The corporate’s Icon of the Seas, which officially debuted in January, received a whole lot of fanfare because the world’s largest cruise ship. Royal Caribbean’s latest ship, Utopia of the Seas, set sail this summer. The proven fact that the latter offers three- and four-night weekend getaways shows it is absolutely going after first-time cruise passengers, Farley noted.
“They’ve had so many home runs,” she said.
Royal Caribbean has a mean rating of obese by the analysts covering the stock, but it surely has about 1% downside to the common price goal, per FactSet. The stock has already rallied nearly 56% 12 months up to now.
Carnival also has a mean rating of obese by the analysts covering the stock and 12% upside to the common price goal, FactSet shows.
Carnival 12 months up to now
During its third-quarter earnings report, the corporate posted record operating income and raised its estimate for 2024 adjusted earnings before interest, taxes, depreciation and amortization consequently of strong demand and cost-saving opportunities. Carnival also said cumulative advanced booked positions for the full-year 2025 is above the previous 2024 record, with prices ahead of the prior 12 months.
Nearly half of next 12 months is booked — and that does not include the good thing about its latest island, Celebration Key, Farley identified. The island might be more along the lines of Royal Caribbean’s CocoCay and is ready to be launched in July, she said.
“It’s a pleasant catalyst for Carnival,” she said. “It’s making a latest destination [and] that tends to drive latest interest.”
Nevertheless, Scholes said his research shows that out of the three major cruise lines, the Carnival brand is facing essentially the most pricing competition from private cruise operator, MSC.
Shares of Carnival have underperformed the market, gaining about 13% 12 months up to now. As compared, he S&P 500 is up about 22%.
Lastly, Norwegian Cruise Line Holdings has a mean analyst rating of obese and about 4% upside to the common price goal, in accordance with FactSet.
Considered one of the firms bullish on Norwegian is Citi, which upgraded the stock to purchase from neutral on Oct. 9. The decision sent shares 11% higher that day. The firm also raised its price goal to $30 from $20, suggesting 29% upside from Thursday’s close.
Norwegian Cruise Lines stock 12 months up to now
“NCLH’s shift in strategy gives us confidence that the considerable pricing opportunity is not going to be offset by runaway costs,” analyst James Hardiman wrote in an Oct. 9 note.
Investors should anticipate a 23% compound annual growth rate for earnings per share over three years, he said. Nevertheless, that percentage could possibly be closer to 30% if Norwegian can keep its 2.5% yield-to-cost spread, he added.
While Norwegian hasn’t officially announced a CocoCay-type private island experience, Scholes is betting it should have a competitive product by 2026.
The stock has also underperformed the broader market, up nearly 16% up to now this 12 months.
