Royal Caribbean’s “Icon of the Seas,” billed as the globe’s biggest cruise liner, cruises from the Port of Miami in Miami, Florida, on its first cruise ship, onJan 27, 2024.
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The need for cruise ships is still going solid– and it does not seem slowing down anytime quickly.
The market was the last to recuperate from the Covid pandemic, once it did, it has actually been appreciating solid prices and reservation energy. While prices development is beginning to stabilize rather, it is still well over the price of rising cost of living, stated Patrick Scholes, traveling and recreation expert at Truist.
“Cruise companies are having a moment right now,” he stated in a meeting with.
Despite rate boosts, cruise ships are still more affordable than land-based accommodations. That’s assisting the market stick out as some weak point sneaks right into various other locations of the traveling market. For circumstances, on Wednesday, Hilton CHIEF EXECUTIVE OFFICER Christopher Nassetta stated throughout the business’s quarterly revenues phone call that united state recreation traveling need “is flat, maybe even a little bit down.”
“The Cruise industry’s continued strength in bookings/demand, whilst cracks form across much of the rest of the travel market, is primarily driven by the combination of the still significant discount to land-based vacations coupled with the relatively elevated service levels,” Barclays expert Brandt Montour stated in a note recently.
As of the 2nd quarter, on a weighted-average basis, the large 3 cruise ship drivers reported web earnings dailies 17% over 2019, he created. Net earnings daily is the web earnings per guest cruise ship day. Caribbean resort space rates have to do with 54% in advance of 2019 and united state hotel rates are up 24%, stated Montour, estimating numbers from information analytics solid STR.
Carnival CHIEF EXECUTIVE OFFICER Josh Weinstein concurred those supposed fractures in other places can aid increase his organization.
“If that’s true that the consumer is slowing down in other sectors, that really bodes well for us to be able to take them into our demand profile because we will be of value. We give a better experience at a better price than they can achieve elsewhere,” he stated in a meeting with’s “Money Movers” after reporting a third-quarter revenues and earnings beat on Sept 30.
Royal Caribbean is readied to launch its quarterly outcomes on Tuesday, complied with by Norwegian Cruise Line Holdings‘ record on Wednesday.
Gap bigger than it shows up
Yet that gap has become even wider than it appears over the last several years, her research shows. That means the cruise lines may have more room to grow, she said.
One reason is the increase in direct bookings for cruises since 2019, according to Farley. That means fewer commissions paid out to travel agents, which is included in gross per diems but netted out of the net per diem line.
“While not disclosed by companies, we believe there has been 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 could add close to 200bps to reported net per diems even though it would not mean any growth in gross per diems, or actual ticket price.”
Separately, all three major cruise lines have increased the bundled and presold onboard revenue since 2019, which also is included in their per diems, Farley said. That could suggest another 300 basis point gap between cruise and hotel price growth that doesn’t show up in the metrics, she argued. One basis point equals 0.01%.
Farley sees another potential 350 basis point gap for Royal Caribbean because of its CocoCay private island, which has a water park, zip line and other attractions for which passengers pay an additional cost.
Royal Caribbean year to date
On top of that, all three cruise lines have been rolling out high-speed internet access through Starlink onboard, which could also boost passenger revenue.
“The wider that gap, the better the opportunity for the cruise lines to have upside,” Farley said in an interview with .
Meanwhile, every bit of increased pricing helps the cruise operators. Truist’s Scholes’ proprietary research on real bookings for next year shows the price is up mid- to high-single digits. Wall Street is only expecting about 3% growth, but it could easily be 5% or more, he said.
That matters because the industry has extremely high fixed costs.
“One extra point of pricing is extremely material to profitability,” Scholes said. “Almost 90% flows through to the bottom line.”
Investing in cruise stocks
Wall Street analysts are largely bullish on cruise operators’ prospects.
“If we think back to 10 years ago before Covid, these companies were competing against themselves,” said Scholes. Now, they are competing against Orlando theme parks and Las Vegas vacations with more attractions available to passengers.
“They are casting a much wider net now,” he said.
Water slides at 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.
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Royal Caribbean was the first to up the private-island ante with CocoCay.
“This private island is a really unique offering. It’s not just a nice beach. It has all those amenities that they can charge for,” said UBS’ Farley, who has a buy rating on the stock.
The company’s Icon of the Seas, which officially debuted in January, received a lot of fanfare as the world’s largest cruise ship. Royal Caribbean’s latest ship, Utopia of the Seas, set sail this summer. The fact that the latter offers three- and four-night weekend getaways shows it is really going after first-time cruise passengers, Farley noted.
“They have had so many home runs,” she said.
Royal Caribbean has an average rating of overweight by the analysts covering the stock, but it has about 1% downside to the average price target, per FactSet. The stock has already rallied nearly 56% year to date.
Carnival also has an average rating of overweight by the analysts covering the stock and 12% upside to the average price target, FactSet shows.
Carnival year to date
During its third-quarter earnings report, the company posted record operating income and raised its estimate for 2024 adjusted earnings before interest, taxes, depreciation and amortization as a result 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 year.
Nearly half of next year is booked — and that doesn’t include the benefit of its new island, Celebration Key, Farley pointed out. The island will be more along the lines of Royal Caribbean’s CocoCay and is set to be launched in July, she said.
“It is a nice catalyst for Carnival,” she said. “It is creating a new destination [and] that tends to drive new interest.”
However, Scholes said his research shows that out of the three major cruise lines, the Carnival brand is facing the most pricing competition from private cruise operator, MSC.
Shares of Carnival have underperformed the market, gaining about 13% year to date. In comparison, he S&P 500 is up about 22%.
Lastly, Norwegian Cruise Line Holdings has an average analyst rating of overweight and about 4% upside to the average price target, according to FactSet.
One of the firms bullish on Norwegian is Citi, which upgraded the stock to buy from neutral on Oct. 9. The call sent shares 11% higher that day. The firm also raised its price target to $30 from $20, suggesting 29% upside from Thursday’s close.
Norwegian Cruise Lines stock year to date
“NCLH’s shift in strategy gives us confidence that the considerable pricing opportunity will not 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. However, that percentage could 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 will have a competitive product by 2026.
The stock has also underperformed the broader market, up nearly 16% so far this year.
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