Cruise Stocks Gain On Upbeat Demand

Share prices of cruise line stocks have performed the well year-to-date on strong demand in the United States, despite high inflation, in an industry that was particularly hit hard by the Covid-19 lockdowns after operations were halted for 15 months

Although share prices of Carnival Corporation, Royal Caribbean Cruises and Norwegian Cruise Line Holdings, remain below their pre-pandemic level, they surged during the first eight months of the year. So far this year, cruise stocks have outperformed the S&P 500 Index, after cruise companies delivered stronger-than-expected updates in recent quarters.

Bookings across the cruise industry have now reached historical levels without any notable upsurge in cancellations, analysts at JPMorgan and Bank of America Global Research wrote in investor notes in June after meetings with executives from Carnival, Royal Caribbean and Norwegian Cruise. The growth in bookings is largely driven by pent-up demand from loyal customers returning to taking summer vacations and other leisure travel, the analysts said.

"In North America, the booking curve is as far out as we have ever seen it," Carnival CEO Josh Weinstein told analysts in June. "Onboard revenues were, once again, off the chart this quarter," he added.

Steep losses

The cruise industry was hit particularly hard during the Covid-19 lockdowns as ships became a hotspot for the virus. Companies cut staff at a rate of 2,500 per day during the early stages of the outbreak after the World Health Organization declaration of Covid-19 as a pandemic led to the suspension of operations in March 2020.

South Florida’s cruise ports — some of the busiest in the world — went quiet, as did most around the world. The number of people who went on a cruise dropped from almost 30 million people in 2019 to under 6 million passengers in 2020.

The pandemic pushed cruise operator share prices off a cliff. From February 20, 2020, to April 9 that year, for example, Carnival fell from about $42/share to $8.8 per share.

This year, cruise stocks are recovering. Carnival climbed 96%, Royal Caribbean 104% and Norwegian Cruise 41% as of August 21. The S&P 500 Hotels Resorts & Cruise Lines Sub-Industry Index was up 45% year to date, led by gains in cruise stocks.

Carnival Ratings

With stock prices still off their pre-pandemic levels, BofA analyst Andrew Didora and JPMorgan’s Matthew Boss both upgraded Carnival shares to "overweight," while Bank of America raised its rating on the stock to "buy." BofA’s Didora has neutral ratings on both Norwegian Cruise and Royal Caribbean. Boss at JPMorgan rates Norwegian Cruise neutral and Royal Caribbean overweight.

“The cruise industry’s long booking window and strong current demand could allow it to be less susceptible to a slowdown in the leisure consumer relative to other areas of travel,” BofA’s Didora wrote in a note to clients after meetings with the three management teams. JPMorgan echoed Didora’s optimism following meetings with management.

The three operators were positive on current trends and indicated “zero signs of momentum slowing,” with increasing interest from new cruise passengers suggesting sustainable demand, Boss said.

A younger customer base is helping fuel this demand with 88% of millennial and 86% of GenX travelers that have past cruising experience intending to sail again, according to a report from Cruise Lines International Association (CLIA). There is “more interest than ever before” among Millennials and Gen-X travelers to take their first cruise, it said.

Price Hike

Amid the spike in demand, US cruise companies have signaled that their itineraries will get costlier in the coming month after discounting aggressively following years of COVID-era testing requirements and restrictions. Labor costs, marketing, and port and freight expenses are on the rise, offsetting gains from robust demand and higher ticket prices, according to cruise operators.

Cruise vacations before the onset of the pandemic were on average 15% to 20% cheaper than a land-based vacation, Truist hotel and cruise analyst Patrick Scholes said. That gap has widened to 50%, he added.

Royal Caribbean's CEO Jason Liberty said on a post-earnings call late in July that the value gap to land-based vacation would help the company raise ticket prices further. Carnival is implementing a range of initiatives to close “the outrageous” and unwarranted 25% to 50% value gap to land-based offerings over time, Weinstein said.

“We are already executing on our strategy with a demonstrated ability to grow revenue by taking up ticket prices even while maintaining record onboard spending levels, building occupancy and growing capacity,” Weinstein said.