The first-quarter performance results of the current fiscal year published by the three major listed cruise groups decisively support the notion that the sector is in accelerated recovery. Full recovery is now in sight, and cruise business is back on the path to growth and expansion.
By Alan Lam
While the cruise industry suffered more than all other sectors of the travel and leisure businesses during the recent crisis, by the end of the first quarter of the current fiscal year, it was fair to say that it had also bounced back more quickly and compellingly than its peers.
Most if not all major cruise brands have reported strong bookings and firm prices in recent months, as the pandemic impact evaporates, thus ensuring the continuation of this sustained recovery. Record after record has been shattered. Best-ever booking numbers have been reported by one leading brand operator after another. It seems that, in many regards, the industry is already in rude health, even though full recovery is not yet complete.
The numbers and trends are mostly encouraging. Cash flows are improving, and balance sheets are being repaired and strengthened, so much so that more and more people in the industry dare to dream and talk about ordering new ships again, and soon, after the virtual pause in the last three years.
The familiar cruise industry optimism has returned, and with good reason. “In the first quarter, we outperformed our guidance on all measures,” said Josh Weinstein, CEO of Carnival Corporation & plc (CCL). “We achieved record first-quarter net per diems, exceeding the high end of our guidance, driven by improving ticket prices and sustained growth in onboard revenue, while delivering an additional seven points of occupancy on higher capacity compared to the prior quarter.”
The momentum seemed to be accelerating, reinforced by sterling performance figures. “We are enjoying a phenomenal wave season, achieving our highest-ever quarterly booking volumes and breaking records in both North America and Europe,” said Weinstein. “Our strong performance has extended into March, and we expect this favourable trend to continue based on the success of our efforts to drive demand.”
Indeed, it has continued. CCL reported even stronger results for the second quarter. “With bookings and customer deposits hitting all-time highs, we are clearly gaining momentum on an upward trajectory,” said Weinstein.
The group now expects its occupancy rate to exceed 100% for the full year 2023 – in other words, a full recovery. This is already the case for Norwegian Cruise Line Holdings Ltd (NCLH), which reported a sequential occupancy of approximately 101.5% in the first quarter, exceeding the previous guidance of 100%.
“As we continue to focus on rebuilding our financial track record, we are pleased to report that we met or exceeded guidance on all key metrics in the first quarter, buoyed by the strong consumer demand we are experiencing across our brands,” said Mark A. Kempa, executive vice president and chief financial officer of NCLH.
The story with Royal Caribbean Group (RCG) was much the same. “We knew that demand for our business was strong and strengthening, but we have been pleasantly surprised with how swiftly demand further accelerated well above historical trends and at higher rates,” said Jason T. Liberty, president and CEO of RCG.
Multifold improvements
Collectively, the three major listed cruise groups recorded a more than 185% increase in the first-quarter revenue in the current financial year, compared to 2022, with CCL reporting a 173.1% increase, RCG 172.4%, and NCLH an impressive 249% improvement.
Both RCG and NCLH exceeded the previous first-quarter revenue records, set in 2019, by healthy margins of 18.2% and 29.8%, respectively, signalling that, in this regard at least, this main segment of the industry is already in rapid expansion mode.
“First-quarter revenue significantly exceeded the company’s guidance primarily due to very strong close-in demand, higher load factors at higher prices, and continued strength in onboard revenue,” stated RCG. “The company experienced particularly strong close-in demand for Caribbean itineraries, which accounted for close to 80% of first-quarter capacity.”
Source: CCL, RCG, NCLH
The trio’s revenue performance improvements were broadly reflected by their passenger cruise day numbers. Collectively, they reported a 184.3% increase in first-quarter passenger cruise days, compared to a year earlier, with CCL recording an increase of 179.4%, RCG 159.7%, and NCLH 284.6%.
In terms of passenger numbers, CCL, RCG, and NCLH reported improvements of 167.1%, 145.8%, and 231.6%, respectively.
As both CCL and NCLH were on course to overtake their record first-quarter passenger volumes, set in 2019, RCG’s latest first-quarter passenger numbers already exceeded its previous record by 17.8%.
Perhaps more significantly, in cruise day terms, all three groups set new records during the first quarter. With strong forward booking trends continuing, even these records may soon be breached.
“We are well booked for the remainder of the year at higher prices, which, coupled with continued strength in onboard revenue, supports our improving outlook for the remainder of the year,” said Weinstein. “We expect the extension of booking lead times, combined with our investment in advertising, to position us even better in 2024 and beyond.”
The company said it was experiencing the highest booking volumes on all future sailings for any quarter in its history.
For the second quarter, CCL reported a record revenue of $4.9 billion. The group’s nine brands carried three million passengers, scoring 21.8 million cruise days and 98% occupancy.
CCL was far from alone on this exuberant march. “Booking volumes in the first quarter were significantly higher than the corresponding period in 2019 and were considerably better than expected,” stated RCG.
NCLH’s current recording-breaking momentum also continued. “On the heels of a very strong wave season, the company continues to experience strong consumer demand,” stated its first-quarter financial review. “Cumulative booked position for the remainder of 2023 is ahead of 2019 levels inclusive of the company’s approximately 18% increase in capacity, at continued higher pricing.”
Source: CCL, RCG, NCLH
Source: CCL, RCG, NCLH
Narrowed losses
Though there could be little doubt about the trio’s strong revenue and volume performances, in earnings and expenses there are still hills to climb and challenges to overcome.
Looking at how quickly and to what extent they were able to narrow their net losses, however, the challenges appear far less daunting at this juncture. It is likely that by the end of the third quarter in the current financial year, if not sooner, their net losses will become net gains. Already they have narrowed their collective net loss from over $4 billion in the first quarter of 2022 to under $1 billion in the first quarter of 2023. Barring another major crisis, the trio’s business will soon become profitable again in net-result terms. The moderating fuel prices and slowing inflation will help.
Compared to the triple-digit-percentage revenue and volume increases, the rises in operating expenses were at a much slower, double-digit pace. This was a comforting development. On average the trio recorded only a 61% increase in cruise operating expenses. This would have been much worse had fuel prices remained at the peak.
We believe the increase in operating cost will slow further when compared to the revenue and volume rises in the near to medium term, as fuel prices moderate further and the economies of scale take effect with bigger numbers of passengers.
Based on these factors, the trio should be on the threshold of net profitability. CCL was able to narrow its net loss for the second quarter to $407 million, significantly better than the March guidance of $425–$525 million. Its operating income for the period turned positive for the first time since the pandemic, to a meaningful $120 million. Even more significantly, the group reported an adjusted EBITDA of $681 million for the second quarter, which was at the higher end of its March guidance range of $600–$700 million.
“We reached a meaningful inflection point for revenue this quarter, with net yields surpassing 2019’s strong levels, and we achieved positive operating income, cash from operations and adjusted free cash flow,” said Weinstein, commenting on the group’s second-quarter business performance.
Source: CCL, RCG, NCLH
Source: CCL, RCG, NCLH
Fortifying edifice
There is a caveat. The trio’s debt level was still unusually high. But this, too, was moderating during the first quarter. In fact, the long-term debts of both RCG and NCLH fell meaningfully, by 2.8% and 5.4% respectively, between March 2022 and March 2023. Only CCL reported an increase during the period, of 9.3%. This might be because its first financial quarter ended a month earlier than its two peers – by the end of the second quarter, CCL was able to report a 2.2% fall in its long-term debt.
These were the first signs of debt reduction since the pandemic – a very positive development. It meant that the runaway debt situation was now being brought under control, thanks to the rapidly improving business performances. With even better financial performances expected ahead, their ability to service their debts should improve further.
Under the current strong demand, this will have positive implications beyond the immediate outlook. It could mean investment being reinstated and new ships being ordered again. In fact, during the increasingly urgent energy transition, it is inevitable that more newbuildings will need to be forthcoming for the industry to be viable and compliant in the future, not to mention the seemingly endless rises in demand for capacity.
Source: CCL, RCG, NCLH
The prospect is bright once again for the cruise industry. An important lesson from the pandemic is that in cruise business it is only a short step from prosperity to destitution and, with any luck, vice versa. It is to the industry’s credit that it bore the assaults stoically and patiently.
But this fortitude alone may not be enough next time. The industry must also prepare for future crises by strengthening its balance sheets and improving cash flow, among other steps. All structural weaknesses must be reinforced; the business cannot rely only on strong demand. Above all, the lessons learned from the recent crises will be invaluable for the future.
