2004 Industry Outlook

2004 is going to be a great year for the cruise industry, according to analysts surveyed by Cruise
Industry News.  

“There is pent up demand and people have money to spend,” said Felicia Kantor, senior vice president of equity research at Lehman Brothers. “I also think the industry was smart to build up new ports after 9/11,” she added. “Now more people see cruising as a vacation alternative.

“I also hear that the Wave Season is going strong and that pricing is up,” she continued.

At A.G. Edwards & CO, Vice President and Leisure Analyst Tim Conder agreed. “2004 should be a good year,” he said, “and comparisons year-over-year through August should be very easy,” he noted, attributing the pick-up to an improving economy and lack of acts of terrorism His only concern for the year is the lunacy of terrorists. Conder is confident the cruise lines will fill the record capacity they will introduce in 2004 and that fuel price increases will have relatively little impact as well.

“2004 will be an interesting year,” said Glen Reid, Associate Director at BEAR STEARNS. “Finally, the economy and the geopolitical situation are in the industry’s favor. Also, last year we saw a significant  capacity increase, but in 04 capacity will be decelerating. In addition, demographics favor the cruise industry too.”

Reid went on to say that so far bookings and pricing are ahead for 2004 (compared to 2003) on a capacity adjusted basis.

“It is very difficult not to be an optimist,” said Cleopatra Murphy, analyst at Ryan Beck & CO.  “The industry will be emerging from two difficult years,” she continued. “People are waiting for a recovery even if we are not back to where we were in 2000 or before.”

At UBS Warburg, Leisure and Gaming Analyst Robin Farley reported that the Wave Season was kicking off with positive booking trends.

At the Stanford Financial Group, Vice President of Research Assia Georgieva believes that 2004 will be a good year and that the results will easily be better than 2003. The Wave Season should be strong, driven by pent-up demand and the publicity generated by the OM2, according to Georgieva.

If Kantor has any concerns, it is that the industry may be trying to raise prices too soon. While consumers may understand why prices need to go up, demand is not price elastic, according to Kantor, who said the cruise lines must find the right balance between raising prices and attracting more customers.

She is less concerned about the hassle factor of air travel, noting that people are getting used to it and that it is not turning people off. 

Kantor believes Europe will be particularly strong in 2004, partially because of the draw of the Olympic Games.

Reid’s concern is that the close-in booking pattern limits forward visibility. He is also somewhat concerned about all the capacity that has to be absorbed. He expects Europe and Alaska to do well, with the Caribbean most at risk.

Murphy believes that all the capacity coming into service in 2004 will still be a challenge.

Conder believes Europe may be the strongest geographic market in 2004, also noting that the European cruise lines are bringing their ships to more homeports, following the North American example of making cruises more accessible and more affordable.

Georgieva has not seen much change in pricing since last November, but expects bookings to gain momentum once people get past the holidays and back to work. Her concerns are the fuel prices, the dollar­ euro relationship, and the overall economic-political situation.


Lehman Brothers has “Buy” recommendations on both Carnival Corporation (CC) and Royal Caribbean Cruises (RCC) with 12month price targets of $45 and $38 respectively.

A.G. Edwards also has “Buy” ratings on both companies, believing both will outperform the S&P 500 this year.

Due to its higher operating leverage, A.G. Edward’s Conder believes that RCC can do a little better in a good environment. His price targets are $45 for CC and $40 for RCC, and he believes that there will  be a gradual adjustment upwards of the price targets (as the companies continue to do well).

“Right now the cruise stocks may be a little ahead of themselves,” said Bear Stearns’ Reid, who suggested that value investors may want to wait for a better entry point. But he does think that the cruise stocks will move higher.

The Stanford Financial Group has a “Hold” on CC and a “Buy” recommendation on RCC. Georgieva’s concern is all the new capacity CC is bringing into service in 2004, and the associated marketing spending, while RCC will only introduce one new ship.

Georgieva admitted that RCC is more leveraged and is expected to do better than CC in good times, but also worse in bad times. Her earnings forecast is $2.00 for RCC and $1.80 for CC.

She noted that CC was selling inside cabins for $70, outside for $85 and balcony cabins for $120 for February sailings, compared to RCC selling the same category of cabins at $100, $115 and $150, respectively.

At Ryan Beck, the earnings estimate for CC is higher at $1.92, but below the consensus of $1.98. Murphy noted that CC was increasingly affected by foreign exchange rates, which last year helped bring yield up and costs down. But more important than yield is the operating income per passenger day, according to Murphy.

Murphy was impressed that CC had expressed confidence in the 04 earnings consensus. “All of a sudden, they are comfortable for all of next year,” she said, “while recently they have only forecast quarter by quarter.”

She noted that in press interviews given by CC Chairman Micky Arison in conjunction with the launching of the QM2, he said he was pleased and confident with how business was progressing for 04.

While she does not necessarily see higher prices in 04, she does not think pricing will go further down either, and believes pricing is improving.

UBS Warburg revised its price targets upwards this week from $44 to $48 for CC and from $39 to $40 for RCC.

Looking Forward

Looking forward, Conder said that the penetration level in North America and Europe is relatively low, compared to land-based vacation alternatives. The North American-based industry has already gone through consolidation, while he expects more consolidation and withdrawals of older tonnage in Europe (due to SOLAS compliance) that will further strengthen CC and RCC.

Next, Conder expects both CC and RCC to pay down debt at an accelerating level, resulting in better debt ratings. Long term, Carnival’s goal is said to be an A rating while RCC’s goal is a triple B rating, according to Conder.

Differentiating the two cruise companies is Carnival’s stronger balance sheet, according to Kantor, who noted that while RCC will be paying down debt, CC’s debt will always be lower, and with a lower cost structure, CC is more profitable, she said.

Kantor is hopeful that RCC “can keep their heads down and focus on the business” with only one new ship in 2004 and none in 2005.

RCC also needs to focus on its Celebrity Cruises brand and increase pricing for this premium brand.

According to Kantor, RCC puts out a very good product and can give CC a run for the money.

Long term, the cruise industry will be able to hold its own, if not peak, over land-based vacation alternatives, according to Reid.

He also said that Carnival’s merger with P&O Princess Cruises was gong well, and that cost savings and revenue enhancement opportunities were being realized. “Long term, Carnival will have very strong cash flow,” he noted. 

Reid added that RCC was more leveraged, generating a lower return on capital. “They have paid more for their ships and are not getting higher prices,” he said. “Celebrity has been a disappointment for the past couple of years. We are now seeing some improvement. It is an issue of getting prices up,” he said. But RCC should have a big spike of free cash flow in 2005 with no new ship arrivals, according to Reid.

With only one new ship entering service in 04, RCC has less to worry about than CC, according to Murphy, who said it gives RCC time and energy to focus on improving operations and to close the gap to CC.

Murphy said that CC clearly has a superior operating performance, and the acquisition of P&O Princess Cruises opened up huge strategic opportunities. “On the books it looks like CC paid a premium price for the acquisition, but the acquisition is justifiable if it raises operating efficiencies, and Carnival has a trackrecord of doing that,” she added.

“In the long run, the key is to position yourself with the strongest market share and draw the largest market at the best prices and the lowest cost,” she said. Murphy expects it may take two to three years before CC will receive the full benefit of the acquisition.

Meanwhile she also believes the gap in capacity and earnings will widen even more between the two companies in the future.

“RCC will have to work harder to improve brand awareness, pricing, and operating efficiencies, but at the same time, it will be even harder for RCC to get closer to CC,” Murphy said. “In terms of operating income per passenger day, RCC has consistently lagged 30 percent behind CC,” she added.

“RCC also needs to drive pricing up for Celebrity,” Murphy continued, adding that Celebrity is now priced lower than the Voyager-class.

Kantor said that as things get better for the two cruise companies, there could be another building bubble towards the end of the decade. “Growth depends on newbuildings. But new ships may cannibalize older ships in the marketplace,” she added.

”How will the Voyager-class stand up to the Ultra-Voyager class?” Kantor wondered.

While cruise lines are generating more onboard revenue, consumers may be used to being “nickled and dimed,” but they may no longer think that a cruise is a bargain, and the cruise lines have to be careful not to affect the product quality negatively, according to Kantor, who expects future customers will have to pay for more of what used to be free.

“This year, it will be more like going back to normal,” added Murphy. “I expect a positive development due to the absence of the shocks of last year. “But she does not think the industry can rebalance the supply/demand situation in one year. “The excesses were built over time and must absorbed over time,” she said.

Murphy sees CC as the prime explorer out there, but they need to find new ways to expand the market, she added. “They must find ways to grow the market, while increasing prices meaningfully,” she said, adding that over the past 10 years, cruise rates have not increased, but actually decreased. But she does not see ticket prices increasing much in the near term. “This is an unusual oligopoly,” she said, ”but still, it does not appear to have much pricing power.” Her concern is that by generating more revenue onboard, lines will cause “allergic” reactions among passengers and undermine the product.

Travel Agent Panel

In a travel agent panel conducted earlier this week by Lehman Brothers, heads of three travel agency groups with agencies in Florida, California, North Carolina and the Northeast, said that they were finding business getting stronger. The agents said that while 03 was a tough year for leisure travel, with a non-existent wave period, they had seen business starting to pick up in Q3 and Q4 of 2003.

The agents expressed optimism about the Wave Season and said that prices so far were up five to 10 percent over last year, but also voiced concern over sticker shock among some consumers, and about the close-in booking trends. Cruise lines are already offering agents incentives to book Q4 04, because passengers are not booking that far out.

Alaska, Hawaii and the Mediterranean are getting good responses so far. While the Caribbean has the lion’s share of the business, cruises out of San Juan are suffering because of limited airlift and high fares. Seven-day cruises out of San Juan are offered as low as $229 per person.

The hype around the QM2 was said to bring cruising back into people’s awareness. 

The luxury market is expected to pick up again after dropping to per diems as low as $250 and $350 last year.

The low-ball offers in the market are mostly deceiving, designed to draw in business, while very little capacity is actually available at the lowest prices, the agents said. Case in point was Norwegian Cruise Line which was said to offer ”two-for-one rates or better” during its annual Sale Of All Sails, with the actual rate being ”better” rather than two-for-one.

Prices for summer cruises are expected to stay relatively high until late April or early May, when they may come down for Europe or Alaska, pending the amount of business on the books at that time.

Most of the cruises booked are cruise-only with passengers staying away from what the panel agreed were exorbitant airfares charged by the cruise lines.

The trend towards more families cruising was said to benefit the lines, with families spending more onboard for shopping as well as shore excursions (in addition to bars, casino, spa, photography, art auctions, etc.).

Thus, the cruise lines are generating a lot of revenue today that the agents never see ( or earn commission on). In fact, the belief is that Carnival Cruise Lines can be profitable from onboard revenue alone if it were to give its cruises away for free.

While passengers do not complain about being nickeled and <limed, they were said to complain about port charges. With discounted rates, there have been cases were the port charges were more than the cost of the actual cruise.

Carnival Cruise Lines got highest grades for working closest with the travel agency groups present, with weekly calls by sales representatives.

These agency groups focus on selling the big, well-established brands. One company said the only brand outside what it called “the big IO” it would even consider selling was Oceania Cruises; it would “not even touch” Royal Olympia Cruises.


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