Wave Season


By Jack O'Connell 2016-04-25 20:49:08

(Article originally published in Jan/Feb 2016 edition.)

The cruise industry is coming off a banner year in 2015, and 2016 looks even better.

By Jack O’Connell

Haven’t been on a cruise yet? You will. It’s the greatest bargain around, which is why it’s the fastest growing segment of the travel and leisure business. Think about it. Where else can you work out in the morning, sun yourself by the pool in the afternoon, enjoy a Broadway show at night, and all the while eat and drink to your heart’s content for as little as $100 a day?

Or, if you’re the sedentary type, you can sit in front of a slot machine and while away the time, or pamper yourself with a massage or mani-pedi in the onboard spa, or simply sit on your balcony and read a book and watch the world go by. I have friends who are regular cruisers who spend most of their time playing blackjack and reading books. If you get lucky, you can pay for the cruise that way. Chacun à son goût!  

Meanwhile, you’ll be visiting some of the most desirable destinations on the planet, and for those who love to travel – and who doesn’t? – there is simply no better way than cruising to see the world. No driving, no packing and unpacking, no concerns about getting from one place to another, no hassles and no worries. Everything is done for you. All you do is choose the ship and the itinerary.

And did I mention the ships? They’re engineering marvels and a wonder to behold – destinations in themselves. You can spend an entire cruise just exploring the ship. You can tour the ship’s galley and engine room and bridge deck, attend cocktail receptions with the captain and ship’s officers, and go behind the scenes to see first-hand just how  incredibly efficient these floating palaces really are. And in between tours you can listen to lectures by well-known experts on all kinds of interesting topics (like where to take your next cruise).

“It’s the Destination, Stupid!”

Travel industry pros know that the number one factor in choosing a cruise is the destination. And the destination most people choose is the Caribbean. You know why. It’s warm and there’s lots of beaches and the living is easy and there are even some interesting sites to visit – like Mayan ruins in the Yucatan or the “will-it-ever-be-completed?” new Panama Canal.

But the real reason the Caribbean is #1 is because most cruisers are Americans, and most cruises depart from Miami or Port Everglades or Port Canaveral, and most of the U.S. is cold from November to April. 

The Mediterranean is #2. If Americans comprise roughly 60 percent of all cruisers, another 30 percent are Europeans, including the Brits and Scandinavians, and it’s hard to beat the Med when it comes to historic sites and fascinating places to visit. The Baltic comes in as the third most popular destination, and those of you who read my column on “Cruising the Baltic” last year know what an interesting and entertaining trip that is. Everything from Denmark and Sweden and Finland to Germany, Poland, the Baltic states and Russia, with the highlight being St. Petersburg, where you can attend the ballet and visit the Hermitage and tour Catherine the Great’s Summer Palace.

Never been to Alaska? That’s another popular destination, and you can combine it with fascinating shore excursions like panning for gold, salmon fishing, and camping in Denali National Park. It’s the fourth most popular itinerary, tied with Australia.

But cruising is growing fastest in Asia and China. Last year China had close to a million cruisers, about four percent of the global total of 24 million and more than the rest of Asia combined. That number could easily reach four million by 2020 given the growing popularity of cruising in China and the country’s expanding middle class. Which is why the cruise lines have taken notice. Carnival is increasing its presence there as is Royal Caribbean – the two biggest cruise lines on the planet. Carnival President & CEO Arnold Donald is already on record as saying he expects China to eventually pass North America as the world’s leading cruise market.

He’ll have plenty of competition, especially from homegrown brands. The Chinese market – and the Asian market as well for that matter – is dominated by Genting Hong Kong, a travel and hospitality giant that knows the terrain better, has been there longer, and “speaks the language.” Its flagship brand, Star Cruises, is the largest in Asia and caters mainly to the Chinese market. The soon-to-be-launched Dream Cruises is aimed at the wider Asian market and will feature bigger ships and higher prices. Genting, as you savvy readers know, also owns Crystal Cruises, this issue’s cover company and the world’s #1 luxury brand, as well as a minority stake in Norwegian Cruise Lines.

Cash Cows

It’s a great business and – unlike the rest of the maritime world – it actually makes money. Carnival earned $2.1 billion in 2015, up from $1.5 billion the year before. Its stock price rose 19 percent last year. Even better, it pays a dividend, which – at CCL’s recent price – yields more than two percent. Compare that to the major stock market averages, which at best broke even in 2015, and you can see why the cruise business looks like a winner.

“We nearly doubled our fourth quarter results and ended the year with 40 percent higher earnings,” Carnival CEO Donald gushed. “Our strong performance led to record operating cash flow of well over $4 billion versus $3.4 billion last year.”

And the outlook is for more of the same. The company reported that advance bookings for the first three quarters of 2016 are running well ahead of the prior year and at slightly higher prices, and it expects first quarter results to be up as much as 50 percent, on a per share basis, over 2015.

Like its competitors, Carnival is benefiting not only from increased demand but also lower fuel prices, which can make a huge difference in the profit picture. The company reported that its average fuel price declined 46 percent in the fourth quarter of 2015 to $316 per metric ton from $584 the year before. And it’s fallen even farther since then. The decline in bunker costs “fueled” an 11 percent drop in overall operating costs – a huge amount in any business and a surefire way to boost earnings.

Financial weekly Barron’s has taken notice and forecasts another 20 percent gain for cruise stocks in 2016. In a recent article titled “Cruising Toward 20% Gains in 2016,” it predicts that the three major brands – Carnival, Royal Caribbean and Norwegian – will build on their strong performance in 2015 with another stellar year in 2016. “For a high seas trifecta,” correspondent Jack Hough writes in the magazine’s typically breezy and irreverent style, “we like Carnival to win, Norwegian to place, and Royal Caribbean to show.”

By way of comparison, in 2015 that same trifecta had Norwegian first, Royal second and Carnival third (see accompanying chart).

Although neither Royal Caribbean nor Norwegian had reported fourth quarter results by the time this edition went to press, we do know they both had a banner year in 2015 with Royal upping its stock buyback program and outlook for 2016 and Norwegian checking in with the highest margins among the Big Three (which is why its stock had the biggest yearly gain).

Wave Season

All of which brings us to “wave season,” the term given by the industry to the first three months of the year when, historically, the most bookings are made and the bargains are greatest. It’s happening right now, and that’s why you’re seeing all those cruise line ads on TV – from Norwegian’s “Feel Free” campaign to Royal Caribbean’s “Come Seek” mantra and Princess Cruises’ “Come Back New” theme.

And if you tune in to the Super Bowl on February 7, the world’s most-viewed TV event, you’ll see another memorable 60-second spot from industry leader Carnival, which made its first Super Bowl appearance last year with its “Come Back to the Sea” ad.

Why is Carnival willing to spend upwards of $10 million on one Super Bowl ad? Because it knows that only a tiny fraction of the viewing audience has ever taken a cruise, and the industry’s biggest challenge right now is to attract that first-time cruiser. It’s common knowledge among industry executives that someone who has already taken a cruise is at least five times more likely to take another one than someone who has never cruised, which is why most passengers are repeat cruisers. So the Carnival ad will be more about cruising in general than about Carnival. It will be a generic ad aimed at the person who has never taken a cruise, and there will be an audience of more than 100 million potential customers watching.

Carnival is willing to “front” for the industry in this way because it is by far the biggest player and has the most to gain. Its ten cruise brands (Carnival, Holland America, Princess, Costa, Cunard, AIDA et al.) comprise roughly half the market or about 12 million passengers. Nobody else is even close. Which means one of every two new cruisers is likely to sail on Carnival. To paraphrase a well-known saying, “What’s good for the industry is good for Carnival.”

So there you have it. Not only are these companies doing well, but you might make a few bucks investing in their stocks. In the meantime, see you at Seatrade Cruise Global – in Fort Lauderdale this year! – MarEx




12/31/14                               12/31/15                               Increase                  (Yield)


Norwegian (NCLH)                           $46.70                   $58.60                   25%                       N/A

Royal Caribbean (RCL)                     82.95                    101.21                   22                           $1.50 (1.5%)

Carnival (CCL)                                    45.61                      54.48                    19                           $1.20 (2.2%)


Source: Dow Jones

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.