Seas the day: how cruise ships are making a comeback

Tony Sutton

Sintra Capital

In 2019, which seems like 100 years ago, the cruise industry was booming with bookings and pricing both at record levels. 2020 was set up to be a phenomenal year. What could go wrong?

With the onset of COVID-19, the world changed drastically, and the travel sector in particular continues to experience significant difficulties. The cruise lines found themselves right in the eye of the storm with the Ruby Princess in Sydney and the Diamond Princess in Japan making headlines for all the wrong reasons. For approximately 15 months now and counting, ships have been sitting idle and the operators burning through cash. In order to stay afloat literally and figuratively they have been forced to raise significant amounts of capital – both equity and debt.

Moving forward to today, global travel is slowly resuming and more specifically we are seeing an enormous amount of pent up demand for leisure travel. Consumers want to go on holidays and they love to cruise. 

Using Norwegian Cruise Lines as an example, their booked position for 1H 2022 is meaningfully ahead of 2019 which was a record year and at higher prices

Recently launched new ship Norwegian Prima, with voyages scheduled to begin in August 2022, set a company record for the single best booking day and best initial booking week. It warrants emphasising that this is all being achieved with almost no spending on marketing, further demonstrating the strong demand for cruise travel.

Dinner and a show: the business model 

The revenue economics for the major cruise lines are quite straightforward. Prior to COVID-19, all ships sail at close to 110% occupancy. The only variable is the price as the opportunity cost of an empty cabin is significant. 

The business model is to get the passengers on board then upsell them with things like shore excursions, dining upgrades, internet, casino, drink packages, etc. Revenue is split roughly two thirds of ticket price, one third of onboard spending. For this reason, Norwegian is strongly advocating for cruises to be fully vaccinated so that they can firstly fill the ship and secondly the onboard experience will be as close to ‘normal’ as possible.

In the very short term, the US Centre for Disease Control (CDC), which has been making life hard for the cruise industry by imposing excessively onerous conditions to the extent where Norwegian CEO Frank Del Rio accused them of being and I quote “un-American”. His source of frustration is the different rules for every other transportation, entertainment and hospitality venue which are all open to varying degrees. However, in the last few weeks, the CDC has started to ease, providing cruise operators with greater confidence that they will be able to meet their return to sailing timelines.

As an army general will tell you, it is easy to start a war but difficult to end it. This is very similar to the cruise ships and COVID-19 where we have been through a lockdown and now the path out remains a little foggy. While we don’t expect smooth sailing from day one, for investors that are prepared to take a more medium-term view, we know that cruising will resume in full force and we know that demand is there in abundance.

Keep Calm and Cruise On. 

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Tony Sutton
Portfolio Manager
Sintra Capital

Tony has extensive experience in international equities having worked in both London and Australia. Tony was formerly senior portfolio manager and head of international equities at K2 Asset Management (2016-2022). Prior broader market roles...

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