2005 Industry Forecast

If 2005 turns out as predicted, investors will see their Carnival Corporation stocks appreciate as much as 30 percent, from approximately $55 today to as much as $72 by year’s end, and Royal Caribbean Cruises up 18 percent, from $55 today to $66 by year’s end, according to analysts who follow the industry. The biggest risk is some sort of travel disruption, especially if it were to impact the third quarter, which is when cruise lines make most of their money.


With Jess new tonnage entering service and with occupancy rates close to maximization, it is all about price and onboard spending going forward, according to Tim Conder, senior leisure analyst at A.G. Edwards & Sons.

Also, with an improving economy, positive demographic trends and more people discovering cruising as a vacation form, Conder expects the industry to continue the earnings momentum from 2004.

The outlook for 2005 remains very strong, said Glen Reid, associate director at Bear Stearns, who said trends were solid for all of Carnival’s and Royal Caribbean’s brands. “The drivers will be higher ticket prices and improving the (itinerary) mix, as 2005 summer European and Alaskan cruises appear strong.”

“So far, all signs indicate that 2005 will be a good year,” said Robin Farley, gaming and leisure analyst at UBS. She pointed out that the cruise industry is still in a recovery stage, however, not yet exceeding pre-9/11 price levels.

Conder agreed. “With pricing below peak-levels, there is room to materially raise prices for both companies.”

He said that modest capacity growth will become a significant positive dynamic in 2005 with a strong likelihood of higher pricing and improved profitability.

According to Assia Georgieva, principal of Infinity Research, year-over-year pricing is tracking positively, with some ships able to fetch much higher per diems than last year. “Demand is strong and we will have a good wave season,” she predicted.

2005 is also important because “for two to three years, everybody has looked to 2005,” Reid said, noting that the main drivers will be demand and price growth. Reid believes the weak dollar also helps drive cruise demand in Europe, while it attracts more Europeans to dollar-denominated vacations. Europe is tracking the strongest for 2005, according to Conder, who said that cruising is one of the best value propositions for people going to Europe. Georgieva said that much of the improvement expected for 2005 will come from European deployment.

Brands to Watch

The brands to watch are Holland America LINE (HAL) and Norwegian Cruises Line (NCL), according to Reid. He added that Carnival is counting on HAL to show some improvement this year. Georgieva said that according to her pricing surveys, HAL has not been tracking as well as the other brands. But with (Stein) Kruse (CEO) onboard, she said she sees a new drive at HAL.

For the past two years, Georgieva said she has seen HAL lose momentum and believes it will take time to turn the line around, especially in the winter season in the Caribbean. The typical HAL passengers ( experienced cruisers) do not find the Caribbean all that
appealing in the winter, she explained.

(In a related development, Celerity Cruises moved one more ship, the Century, on short notice out of the summer season in the Caribbean to benefit from the higher pricing in Europe.) Georgieva also noted that Celebrity has been a drag on Royal Caribbean’s profitability and is so far only tracking at the same prices as Royal Caribbean International. Celebrity still has to regain momentu-111 from nearly losing its brand identity within Royal Caribbean, she said.

Reid, however, said that Celebrity is gaining traction and pricing power. He is also wondering when Royal Caribbean will make its move into Europe. With Msc Cruises’ President Rick Sasso coming from Celebrity, will MSC be Royal Caribbean’s ticket to Europe?

Meanwhile, Reid is more concerned about NCL, citing travel agents’ reports that NCL is struggling with its Hawaii product.

Georgieva is upbeat on NCL, saying that the line has the Hawaii market cornered. Although she suspects that Carnival and Royal would like to be involved. She said the winter per diems in Hawaii were much better than in the Caribbean.

In addition, Georgieva noted that Mexico is becoming the Caribbean of the West Coast with a pickup in demand.

She also said that by moving ships around to different ports, cruise lines have been able to generate higher per diems.

Reid attributed Cunard Line’s move to Princess cruises to streamlining and efficiency, noting that Cunard as a brand is not big enough to stand on its own, and adding that he would not be surprised if Seabourn Cruises Line and Widstar Cruises were for sale.

Onboard Spending

Onboard spending has been going up. “People know it is there; it is like a menu,” said Conder. “People have the option to spend, but they do not have to,” he said. But the industry needs to monitor that it does not push too much. So far it has not been an issue, according to Conder.

“Onboard spending has been a great part of the yield increase,” Farley said. “Once onboard, passengers spend more than they used to. Onboard spending generates a great revenue stream with very high margins,” she added.

“What else are you (passengers) going to do if you’re not buying drinks and going to the casino,” said Reid. “It is part of the experience.”

Future growth

According to Conder, both Carnival and Royal Caribbean are committed to improving returns on invested capital and lowering debt. Neither of these objectives is accomplished by returning to high capacity growth, he said.

Reid pointed out that the capacity growth of recent years is in check and that the industry is consolidated and stable.

Price Targets

Against the positive outlook, analysts have revised their 52-week price targets upward:

Carnival averages $61 but is as high as $72 (Lehman  Brothers), compared to trading at $56.32 at press time and with a 52-week low-high of $40.05 – $58.75.

Royal Caribbean averages $55.69 but goes as high as $66 (Lehman Brothers), compared to trading for $53.05 at press time and with a 52-week low-high of $37.06 – $55.47.

Earnings forecasts are strong, with analysts predicting an average EPS for Carnival at $2.77 for 2005 and $3.23 for 2006, compared to $2.25 in 2004.

For Royal Caribbean, the average estimate for 2005 is $2.82, compared to estimated 2004 EPS of $2.35, and $3.20 for 2006.

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