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Sunday, March 28, 2010

How Bad Could Things Be? People Taking AND Paying More for Cruises

Over time, we've loosely tracked the performance of Carnival Cruise Lines (CCL) and Royal Caribbean (RCL) . However, we've never owned shares of the capital intensive businesses. Somewhat akin to the container shipping industry, the cruise ship sector has a fairly sizable order book of new ships (supply) ordered pre-recession and to be delivered over the next several years. Still, unlike the former group, the cruise lines have been able to maintain reasonable occupancies and near-term demand may match/absorb new supply. Of course, pricing is a key variable and lever used to manage occupancies. For more industry details, the Cruise Lines International Association (CLIA) Web site has a wealth of intriguing information, including these slides from the "2010 Media Update"-

Supply (*occupancy definition below):
*Occupancy definition from Carnival 10-K:

In accordance with cruise industry practice, occupancy is calculated using a denominator of two passengers per cabin even though some cabins can accommodate three or more passengers. Percentages in excess of 100% indicate that on average more than two passengers occupied some cabins.

Passengers increased in 2009 (lower pricing worked magic!):

"International guests" more important:

A WSJ article caught our attention last week, highlighting the results/outlook of Carnival Cruise Lines (CCL). Here are some points directly from the WSJ article:
  • Carnival Corp. said it's starting to recover some of its pricing power in the U.S. as more leisure travelers open their wallets after the recession sent cruise fares plunging last year.
  • The world's largest operator of cruise ships estimated Tuesday that its net revenue yield—or how much it earns from each passenger—will rise 2% to 3% in 2010 after industry yields fell 10% or more last year as companies slashed prices to keep ships full.
  • Carnival raised its annual profit forecast on improving demand.
  • "We're surprised at the strength of the pricing that has come up this year," Howard Frank, Carnival's chief operating officer, said in a conference call.

  • North American consumers are driving the rebound, according to Miami-based Carnival, which operates 11 cruise lines including Holland America, Cunard and namesake Carnival Cruise Lines.

  • Analysts say the industry is benefiting from pent-up demand by consumers, many of whom skipped vacations last year to save money. That is helping keep ships full even as capacity increases—including last December's launch of Oasis of the Seas, the largest cruise ship ever, by Royal Caribbean Cruises Ltd.

  • Rich Tucker, head of business development at CruiseDeals.com, an online travel agency, estimated that fares for trips between June and August are up about 27% from a year ago. That's still down 7% to 8% from the summer of 2008, when cruise trip prices peaked, he added.

Thus, despite lingering worries about the economy, we think Carnival's results and commentary are yet another signal that the consumer-driven U.S. (and, increasingly, global) economy is on the mend. This is in line with our prior "Which Way from Here" discussion that we're in the acceptance phase where people grin and bear it, move on with lives.... How bad can things be if more folks are cruising, which likely draws a wide socioeconomic sampling of the public?

Of course, the challenge for investors is that many valuations now reflect more sanguine expectations. As a result, buying opportunities are markedly less plentiful than one year ago and require diligent analysis and selection. Per our prior posts, we still see certain out of favor areas begging for more attention. As an example, we recently added to our Seaspan (SSW) position.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW.

© 2010 Jeffrey Walkenhorst
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