Cruise Execs Offer Straight Talk On Issues – Part 2

CruiseWeek

Cruise industry leaders have been unusually blunt in commenting on issues during recent earnings calls. In Part 1, Cruise Week looked at issues including the impact of terror and the overall cruising situation in Europe. In this final report, Caribbean capacity, China and the ‘new ship pricing premium’ are the topics.

New Ship Pricing Premium

Question from Robin Farley, UBS: “Just a clarification on 2016. You mentioned the capacity increase in the Caribbean as being kind of the reason that maybe things weren’t as strong as you had thought. What does that tell us about new ship premiums in 2016? With the Escape in there, you would’ve thought that would have been a driver of premium yield, not a contributor to too much supply making pricing tougher.”
    
Frank Del Rio, NCLH: “
We want to reiterate that the actual performance of our vessels in the Caribbean, even with having more capacity there than we probably should, at least in the low season, is up year-over-year. We just thought it was going to be higher.

 Prior to the situation that evolved in Europe, we decided that it was best to move Getaway out and put her in the Baltic because the Baltic has a nice, short season, roughly four months, and, in every possible environment that we’ve ever seen, it easily outperforms the Caribbean during the same time period.

But you’ve got to remember that in 2016 the capacity days for NCLH in the Caribbean was up some 15%, whereas it was down low-single digits for our competitors. In 2017 things reverse -- NCLH’s capacity in the Caribbean drops by 4.5%, while our two main competitors grow mid-single digits.

Caribbean Capacity

Question from Steven Wieczynski, Stifel, Nicolaus & Co.: “I know that the Caribbean continues to hold up very well at this point, but I know the fear out there from a lot of investors is if Europe continues to be impacted for the next year or so, you’ll start to continue to see more capacity brought back into the Caribbean. How do you view that, and how do you think that market will hold up if capacity starts to pick back up there?

Richard Fain, Royal Caribbean Cruises, Ltd.: “In terms of industry expectations for next year, we expect there to be low single digit, around 4% growth in capacity. This year, we saw about 3% growth in capacity, and we’re seeing yields in the high single digits in that market.

A lot of that is driven by North Americans’ focus on staying closer to home. And we see those trends continue as we look at our bookings on a day-to-day basis.”

Question from Harry Curtis, Nomura Securities International: “One of the fears is that the industry will be moving capacity out of China and back into the more traditional markets.”
    
Richard Fain: “
No way. Excuse me for interrupting you, but if we’re looking 2017, itineraries are largely fixed. It’s very unlikely you will see substantial change in the capacity in the different regions.”

Question from Robin Farley: “If we think about China having a capacity increase again next year, if your yields in China were to have a similar rate of decline next year, would the ships in China still be accretive to earnings for you?”

Richard Fain: “You know, Robin, I know this question has come up, and I’ll build on it as well as in the way I responded to Harry earlier. I’m aware that there are some concerns that if China doesn’t develop, all that capacity will turn left and head towards the Caribbean and saturate the Caribbean.

It would require an enormous change in the fundamentals of China to even begin to contemplate that. I will just tell you, within our company, the subject has literally never arisen in any deployment discussion that I am aware of. And we are so far from it that we just think that would require a level of change that none of us think is likely or even remotely likely.”

 Analysis: That’s absolutely the right thing to say because they have so much at stake in China right now. It’s not just the ships that are there looking for customers; it’s the infrastructure that they’re building.
    
They can’t rush any kind of China withdrawal. They’ve got to spend several years building it and then see what happens. They’re committed to China, and that’s a good thing for Caribbean rates as there is only going to be modest capacity growth in the Caribbean.
    
General Conclusion

Cruise lines have thrived on the ability to move ships around since the first Iraqi War of 1990. Everybody that was going to be doing a Mediterranean season in 1991 pulled out. Some even pulled out of the Baltic.
    
Subsequently, over the last couple of decades, we have seen that when one destination gets soft, the cruise lines move ships to other destinations. That’s one of the good things about the business as opposed to the hotel business, which can’t do the same thing.
    
You can only put so many ships in the Caribbean or rates dip. Where else do you go if China is soft and Europe is soft? There is no simple answer.
    
Cruise stocks have struggled all year. Now cruise execs lost a little street cred when they missed their projections. But analysts are asking cruise lines to predict their business with far too many unknown variables.
    
If they project lower to build in unknown events, then they are going to get hammered up front. And if they don’t build it in, when something happens, they will get hammered afterwards.
    
Del Rio put an annual earnings per share growth target for next year in a range of 15–25%. That’s an unusually large range, but understandably so.





(will not be published)