Can Cruise Lines Sustain Their High-Seas Success?


Cruises: A Buoyant Industry with Enduring Appeal

Strong Demand Fuels Optimism

The cruise industry has emerged from the pandemic with renewed vigour, buoyed by strong demand for the unparalleled experiences it offers. UBS analysts believe this positive momentum is set to continue, driven by various factors.

Pricing Dynamics: Cruises Trail Hotels, But Poised to Catch Up

Cruise prices currently trail those of land-based hotels by a wider margin than before the pandemic. However, analyst Robin Farley of UBS maintains that there’s no fundamental reason why this gap should persist.

U.S. hotel rates have surged by over 20% since 2019, largely due to leisure travel. In contrast, per diem cruise prices, which incorporate onboard revenue, have not kept pace with this growth. While Royal Caribbean and Norwegian Cruise Line have seen modest increases, Carnival and Viking Cruises have recorded higher per diem gains.

Farley anticipates that cruises will gradually close the price gap with hotels, leveraging their competitive value proposition and targeting higher-income consumers seeking exceptional travel experiences.

Changing Consumer Trends Drive Demand

The industry benefits from the growing number of retiring baby boomers, who prioritize spending on travel, and millennial travelers, who are reaching the age where cruising holds appeal. This pre-pandemic trend has accelerated, further boosting ticket sales.

Moreover, consumers increasingly value experiences over material possessions, which aligns well with the cruise industry’s offerings. Farley highlights that this dynamic is expected to continue benefiting cruise demand, as it has already driven leisure travel growth in the hotel sector.

New Passengers Join the Fold

In addition to repeat customers, cruise lines are attracting new passengers, evidenced by Carnival’s 20% increase in first-quarter new-to-cruise bookings. Farley emphasizes that this growth goes beyond pent-up demand, representing a genuine expansion in the industry’s reach.

Analysts Project Continued Growth

Melius Research remains optimistic about the industry’s future, predicting continued margin expansion for cruise lines. Conor Cunningham, Melius’s analyst, observes the accelerating demand and pricing trends.

Morgan Stanley’s channel checks indicate a normalization in bookings due to limited remaining inventory and consumer spending adjustments. However, the firm notes that cruise pricing remains firm, signaling continued consumer demand.

Investment Recommendations

Royal Caribbean (RCL): UBS’s top pick, with a buy rating and a price target of 8. The company’s Wave season has seen record volume and pricing, and bookings for 2024 surpass those of 2023. An earnings beat in the first quarter reinforces the strength of consumer demand.

Carnival (CCL): Farley also rates Carnival as a buy, with a price target of . The company’s upcoming Celebration Cay private island is expected to drive future growth. The value gap between cruises and land-based vacations remains significant, creating opportunities for Carnival.

Viking Cruises (VIK): Farley maintains a buy rating for Viking, targeting a price of . The cruise line caters to the high-end consumer, benefiting from the increasing demand for luxury travel experiences.

Norwegian Cruise Line (NCLH): Farley takes a neutral stance on Norwegian, citing balance sheet and execution challenges. Despite a strong demand environment, the company’s earnings forecast for the year remains positive, with executives projecting cost savings of 0 million.

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