The 2022 full-year business performance figures of the three major listed cruise groups told a story of unquestionable recovery. They also brought to light all manner of woes in a complicated environment.
By Alan Lam
While the improvements in revenue and volume performances were unmistakeable and convincing, the all-important profitability – the true indicator of the sector’s business performance – still languished deep in the red. Three years after the pandemic began, the three major listed cruise groups still suffered from serious losses, totalling more than $10.5 billion: Carnival Corporation & plc (CCL) reported a full-year operating loss of nearly $4.4 billion and a net loss of more than $6 billion; Royal Caribbean Group (RCG) reported a net loss of almost $2.2 billion; and Norwegian Cruise Line Holdings Ltd’s (NCLH) was nearly $2.3 billion.
With sky-high debt levels, unremitting cost controls will be the initial pathway for returning to sustained profitability. This stringent measure will soon impact on the quality of the product and limit growth prospects. But there are no other tools available at this juncture.
Revenue dichotomy
After sinking to the lowest point in 2021, the revenues of the listed trio recovered soundly in 2022. This was hardly surprising, because post-Covid-19 demand was firm and persistent, propelling the industry’s solid optimism to new heights, with some predicting 2023 to be a record year in many regards.
All three groups reported much-improved fourth-quarter performances. The year-on-year revenue improvement for 2022 was striking. This was due to several favourable factors, among them the 100% return to sailing, rising passenger cruise days, and firm ticket pricing. This trend is set to continue in 2023, probably at an accelerated pace, as forward booking has been robust and often with record-breaking numbers.
“Booking volumes strengthened following the relaxation in protocols, cancellation trends are improving globally, and we have seen a measurable lengthening in the booking curve, across all brands. The momentum has continued into December, which bodes well for 2023,” said Josh Weinstein, the incumbent president and chief executive officer of CCL.
Source: CCL, RCG, NCLH
As always, revenue improvement was driven by fundamental volume rises. The trio carried 9.8 million passengers in 2022, compared to 2.5 million a year earlier. Their passenger cruise days improved from 16 million to 102 million in the same period, but were still 35% below 2019 figures.
Average occupancy for the year was reported at 72%–85%, with the fourth quarter generally reaching beyond 90%. Occupancy above 100% for 2023 is now a real possibility. NCLH predicted an average of 103.5% for its three brands.
Amidst all these improvements, there is a sobering counterpoint: the collective 2022 full-year revenue of the trio was still 33.5% below that of 2019, with CCL’s figure an unpalatable 42%. Admittedly, CCL’s financial year ended a month earlier than its two peers. The revenues of RCG and NCLH were 23% and 25%, respectively, below those of 2019.
When looking at the total revenue per passenger, the strength of post-pandemic demand is most apparent. In 2022, the trio achieved $2,595 revenue per passenger, compared to $1,729 in pre-pandemic 2019. But this improvement becomes less pronounced when examining the figures in detail. In 2022, the trio recorded an average per-cruise-day revenue of $248, compared to $241 in 2019, only a $7 difference. To properly understand the so-called “firm price”, one must take inflation into account, which renders the improvement quite insignificant.
Profitability indicators
Considering how far the initial setback had been and how complicated the situation was, it was understandable that the trio found it impossible to make a full-year profit for 2022. Such an expectation would be unrealistic.
The net losses were still deep, although far less so than in the previous two years. RCG was the best performer, cutting net loss by 59% compared with 2021. CCL and NCLH managed 36% and 49%, respectively. The fact that CCL’s financial year ended earlier was a main reason for its poorer figure.
At this point, though, it is still difficult to see how the trio will be able to make a significant profit in 2023 other than hovering just above or below the break-even line. No one can yet predict the outcome. What is comforting, though, is that the days of loss-making are now numbered.
Source: CCL, RCG, NCLH
Source: CCL, RCG, NCLH
The most convincing argument so far for a possible quick return to sustained profitability is the decisiveness of demand recovery, exemplified by consistently rising booking numbers and firm pricing.
“We are experiencing a record-breaking wave season, resulting in a booked position approaching previous record highs and at higher prices,” said Jason Liberty, president and chief executive officer of RCG.
Some in the industry, supported by tenuous material evidence, seem to have taken the presumption of a quick return to profitability and constant sterling performance for an unarguable fact. “We believe we are accelerating our return to strong profitability through our fleet and brand portfolio management which is delivering prudent capacity growth weighted toward our highest returning brands and amplified by nearly a quarter of our fleet consisting of newly delivered vessels,” said Weinstein. “We believe this leaves us well positioned to drive revenue growth across our global brand portfolio as we continue to leverage our scale on our industry-leading cost base, to deliver free cash flow which over time will propel us on the path to deleveraging, investment-grade credit ratings and higher ROIC.”
The best indicator of 2023 returning to profitability is undoubtedly the performance in the fourth quarter of 2022.
During the last three months of the year, RCG’s business, for example, performed particularly well. Its load factor reached 95%, with Caribbean sailings scoring as high as 100% because the North American market had been the frontrunner of post-Covid recovery. The current focus on that particular source market and Caribbean capacity deployment is at least a sound short-term strategy.
For RCG, profitability is already within reach. Its 2022 full-year average load factor was 85%, the highest among the trio, improving from 49.3% in the previous year. As forecast, its adjusted EBITDA turned positive in 2022, from a steep $2.6 billion loss to a positive $711.6 million. The group’s full-year net loss was about $2.2 billion, or $8.45 per share, with its fourth-quarter net loss narrowed to $0.5 billion – an encouraging performance under the circumstances.
Cost factor
What could derail the profitability trajectory is the cost factor. As inflation and interest rate hikes wreak havoc in the wider world, inflicting pain on most consumers on the planet, the cruise industry feels the impact keenly. It is aware of the need to control spending first and foremost if profitability and recovery are to be assured.
Source: CCL, RCG, NCLH
With the full fleet activated, the trio, not surprisingly, saw their operating expenses rising sharply in 2022 to a level equivalent to that of 2019. RCG’s 2022 operating expenses were in fact 8.3% higher than its pre-pandemic peak.
It is inevitable that costs and expenses will rise. In the push towards profitability, it will be critical for the cruise lines to control spending in 2023 and beyond. This is a challenging undertaking, given the current state of the global economy. But it is a must. This will only result in higher ticket prices without the corresponding improved services.
Cost control has already been the order of the day. “2022 was a pivotal year as we successfully returned our business to full operations. . . . We also returned to positive adjusted EBITDA and operating cash flow by consistently growing revenue and controlling costs,” said Liberty.
While the trio position themselves to deliver profits, there is a much bigger obstacle in their path: the swelling debt. This is where the industry finds itself in uncharted waters and is most exposed to risks.
Debt accumulation is still unrelenting. Cost control is also a means to manage debt. Between 2021 and 2022, the trio’s long-term debt rose by another 10.6%, compared to 12.2% a year earlier. Despite all the efforts and improved performances, they were only able to marginally slow the pace of debt rise.
Addressing this is now a matter of urgency. The only efficacious tool is again the cost-control measure. But the cost of debt servicing will rise with the size of the debt.
Source: CCL, RCG, NCLH
Complicated environment
With the accelerated pace of recovery come the accompanying woes. In the first quarter of 2023, the trio, and the cruise industry in general, find themselves under the unyielding pressure of managing a recovering business in the midst of geopolitical crises, economic uncertainty, rising costs, and other factors.
The only comforting element in this mix is the continuing robust demand from the sector’s loyal customers, which is demonstrated by record bookings and firm pricing, a fact the trio never fail to highlight.
The rising cost is probably the biggest demon in this otherwise improving picture. One thing we can say in this context is that, aside from praying for lower fuel prices and an end to hyperinflation, the restart costs that have impinged on earnings in 2022 will not be present in the 2023 financial statements. Profitability becomes more likely when looked at from this perspective, perhaps. But there are many perspectives. It is a complicated environment.
