Demand for cruises remains strong — and it doesn’t look like it’s going to slow down anytime soon.
The industry was the last to recover from the Covid pandemic, but once it did, it enjoyed strong price and booking momentum. While price growth is starting to normalize somewhat, it’s still well above inflation, said Patrick Scholes, travel and leisure analyst at Truist.
“Cruise lines are having a great time right now,” he said in an interview with factstimes.
Despite price increases, cruises are still cheaper than land-based accommodations. That’s helping the industry stand out as some weakness creeps into other areas of the travel sector. For instance, Hilton CEO Christopher Nassetta said Wednesday during the company’s quarterly earnings call that U.S. leisure travel demand “has been flat, maybe even down a bit.”
“The cruise industry’s continued strength in bookings/demand, while cracks are emerging in much of the rest of the travel market, is primarily driven by the combination of the still significant discounting of land-based vacations coupled with relatively high service levels,” Barclays analyst Brandt Montour said in a note last week.
As of the second quarter, the three major cruise operators reported net revenue per day on a weighted average basis that was 17% higher than in 2019, he wrote. Net revenue per day is net revenue per passenger per cruise day. Hotel room prices in the Caribbean are up about 54% from 2019, and U.S. resort prices are up 24%, Montour said, citing data from data analytics firm STR.
Carnival CEO Josh Weinstein agreed that those so-called cracks elsewhere could help boost his business.
“If it’s true that consumers are slowing in other sectors, that bodes well for us to include them in our demand profile because we’re going to be valuable. We’re going to provide a better experience at a better price than they can get elsewhere,” he said in an interview with CNBC’s “Money Movers” after reporting a third-quarter profit and revenue win on Sept. 30.
Royal Caribbean is scheduled to report its quarterly results on Tuesday, followed by Norwegian Cruise Line Holdings’ report on Wednesday.
Gap wider than it appears
A price gap between hotels and cruises isn’t new. That’s largely because a lot of demand for hotels comes from business travel, while demand for cruises comes purely from vacationers, who are much more price-sensitive, UBS leisure analyst Robin Farley explained.
But that gap has widened even more in recent years than it appears, her research shows. That means cruise lines may have more room to grow, she said.
One reason is the increase in direct bookings for cruises since 2019, Farley said. That means fewer commissions paid to travel agents, which are included in gross per diems but are offset against net per diems.
“While companies don’t disclose it, we believe there has been a meaningful increase in the number of passengers booking direct since 2019,” she wrote. “If the share of directly booked cruises were to grow by 5 to 10 [percentage points], we calculate that this could add nearly 200 bps to reported net per diems, even though it would not translate into growth in gross per diems or actual ticket price.”
Separately, all three major cruise lines have increased bundled and pre-sold onboard revenue since 2019, which is also included in their per diems, Farley said. That could indicate another 300-basis-point gap between cruise and hotel price growth that is not reflected in the statistics, she argued. One basis point is equal to 0.01%.
Farley sees another potential 350-basis-point gap for Royal Caribbean because of its private island CocoCay, which has a water park, zipline and other attractions that passengers pay extra for.
In addition, all three cruise lines have rolled out high-speed internet access via Starlink onboard, which could also boost passenger revenue.
“The bigger that gap, the more likely the cruise lines are to profit,” Farley said in an interview with CNBC.
Meanwhile, every price increase helps cruise operators. Truist’s Scholes’ own research of actual bookings for next year shows that prices have risen by a mid- to high-single digit percentage. Wall Street expects only 3% growth, but it could easily be 5% or more, he said.
That’s important because the industry has extremely high fixed costs.
“One extra point of price is extremely important to profitability,” Scholes said. “Almost 90% of that flows into the bottom line.”
Investing in cruise stocks
Wall Street analysts are largely optimistic about the prospects for cruise lines.
“If you think back 10 years ago, before Covid, these companies were competing with themselves,” Scholes said. Now they’re competing with theme parks in Orlando and vacations in Las Vegas