By Kari Reinikainen
The recent past has been financially challenging for the cruise industry. Listed conglomerates had to issue large numbers of shares and take on billions of dollars in new debt to survive the crisis caused by the Covid-19 pandemic. Despite the challenging times, new companies have entered the scene and more may follow. Initial public offerings (IPOs) of stock would be one way for new companies to raise equity they need, but investor sentiment must warm up towards the cruise industry before this becomes a realistic option.
Paradoxically, investors have pumped billions into shares of the listed cruise majors. As a result, the share counts of these companies increased markedly during the pandemic. All the three listed cruise majors now have a double-digit percentage more shares outstanding than what they had before the onslaught of the pandemic.
Numbers of shares outstanding (in millions)
| Company | Early 2020 | Early 2023 | Percentage increase |
| CCL | 700 | 1,250 | 78% |
| RCG | 210 | 255 | 21% |
| NCLH | 220 | 420 | 91% |
Source: Macrotrends.com, YCharts.com
These capital issues did not take the form of an offer for the public to participate in them, but rather of private placements. Investment bankers found a number of investors who were willing to participate in the capital raised by the three cruise majors. Share prices of the trio – Carnival Corporation & plc (CCL), Royal Caribbean Group (RCG), and Norwegian Cruise Line Holdings Ltd (NCLH) – are off recent lows but remain well below their pre-pandemic levels because of the recent challenging conditions and the additional supply of shares resulting from the private placements.
However, Andrea Trevisan, managing director of the advisory firm Bancosta (Benelux) B.V., said that there are potential newcomers to the industry who are looking at both second-hand tonnage and newbuildings and they need funds to reach their objectives. “There is certainly demand from new players seeking to enter the market and target new niches,” Trevisan told CruiseTimes. “Some of these players have intriguing ideas and prestigious leisure-brand partnerships. They bring forth innovative concepts.”
Finding niches
A crucial aspect to consider here is the sustainability and efficiency of the second-hand tonnage. “New players must carefully evaluate and allocate a considerable budget to improve the ‘green element’ of a second-hand cruise ship,” Trevisan continued. “Furthermore, it is widely recognised that a new, well-designed cruise ship is inherently more efficient, sustainable, and generally more profitable than an older vessel. This operational advantage also translates to lower operational expenses for ship owners. While second-hand investments offer advantages such as faster time to market and lower capital expenditure compared to newbuilding programmes, it may be somewhat easier for a new cruise player to secure financing and attract investors for a newbuilding programme if they have an exceptional business plan, equity, and significant partners supporting their venture.”
Recent newbuilding orders have demonstrated that these elements are crucial. It is also worth noting that European banks and major export credit institutions used by prominent shipyards now prioritise projects with a significant “green” element that reduces emissions of various types.
Economies of scale also play a vital role. It would be challenging for new players to establish a successful business with just a single ship. Quickly scaling up to at least two to three ships is crucial for operational and sales efficiency.
“While I believe the second-hand market will remain attractive to secondary markets in specific regions of Europe, the Middle East, and Asia, it is important to emphasise that a strong business plan and a well-suited product for operating such vessels are essential,” Trevisan said. “New owners will need to identify untapped niche markets, which is no small feat. One potential niche that I see is an upper-premium-luxury segment catering to 500–1,000 cabins and suitable for families. This segment would focus on destination-oriented experiences while offering interesting features, all while avoiding direct competition with larger ships. It would provide a balance between luxury and family-friendly amenities.”
There is also potential for successful ventures that combine leisure brands, including hotel chains, with a premium cruise line. Establishing a new cruise brand and gaining market share are challenging in a highly competitive market. “To succeed, such ventures would need truly innovative business plans and overall products that stand out from the competition. I anticipate that some exciting projects in this realm will emerge soon,” Trevisan said, adding that residential ships at the high end of the market could be another opportunity, while the ultra-luxury segment that resembled yachting would also continue to grow.
Raising equity
Looking ahead, the cruise industry in 2030 would be characterised by innovation, sustainability, and a wide range of cruise options that appeal to diverse audiences. Against this background, Trevisan sees IPOs as a potential way for newcomers to raise equity: “Yes, I believe that new players who successfully enter the cruise market and establish themselves with a strong product will consider utilising IPOs to raise capital and expand their operations. As the industry continues to recover from the impacts of the Covid-19 pandemic, investor confidence in the cruise sector is likely to improve. This improved sentiment, coupled with successful market entry and growth, could create opportunities for cruise shipping companies to go public and offer shares through an IPO. However, the exact timing for such an IPO would depend on various factors, including market conditions, financial performance, and overall investor appetite.”
At the moment, the prospects for cruise shipping companies to raise equity on the stock markets are very limited beyond the three already listed majors, despite a rapid recovery of the mainstream cruise industry, according to Peter Shaerf, managing director of AMA Capital Partners, the Stamford, Connecticut-based merchant bank that specialises in the transport, cruise, and offshore sectors.
The industry had to raise billions of dollars during and immediately after the Covid-19 pandemic after being forced to shut down operations. It was able to do this because the three listed majors and the privately owned MSC Cruises group had deep pockets and strong balance sheets. The listed expedition cruise operator Lindblad Expeditions was also able to access the debt and equity markets.
Two elements
Broadly speaking, the capital markets look at the cruise industry as a structure with two rather different elements: the mainstream and the small-ship element. The mainstream element is highly consolidated, with about four-fifths of its total capacity commanded by the four largest groups. “The [mainstream] cruise industry is phenomenally resilient; we have seen it all the way since Achille Lauro, 9/11, and even the financial crisis,” Shaerf said. Achille Lauro was an Italian cruise ship that was hijacked by terrorists in the Mediterranean in 1985. An elderly American passenger was killed in the incident. It made huge headlines around the world in its time.
The picture is somewhat different at the small-ship element. This segment includes the expedition cruise sector, which has expanded rapidly in the recent past, and other small-ship operators that mainly operate at the very high end of the industry. Some, such as Windstar and Ponant, are in the hands of financially strong owners and enjoy all the benefits when it comes to accessing finance. However, the expedition sector, in particular, includes several small companies, some of which charter rather than own the ships they operate.
“Financing new tonnage is a challenge,” Shaerf said, referring to the smaller companies in this sector, adding that the expedition cruise sector could be overcrowded. While the mainstream cruise sector enjoys high percentages of repeat customers – so high in some cases that questions have been asked if the industry is failing to attract enough new customers – the situation may be quite different in the expedition sector.
“Many of the destinations of these operators are bucket-list destinations. How many times do you really want to visit the Antarctica?” Shaerf asked. “A practical consequence of this question is that it is difficult to estimate the true size of the expedition cruise market, a task made more complicated by the fact that its demographics differ markedly from the mainstream cruise sector.”
The fact that there are operators in the expedition sector that charter tonnage tells the capital markets that the threshold for access to this business is not really very high. “However, you still need both time and money to build your brand, set itineraries, et cetera, so it is not just about chartering a vessel,” Shaerf said.
In any case, given the ongoing rapid expansion of this sector, its fragmented nature, and the aftermath of the pandemic that has shown that some operators might struggle to fill their ships, investors have become more cautious about the small-ship market in general and the expedition market in particular.
When time is right
A further consideration relates to the mainstream cruise industry as well as the small-ship sector: a company with small market capitalisation tends to struggle to attract interest on the stock market.
“If your market capitalisation is less than $1 billion, it will be hard to attract analysts who would follow you. There may not be many investors who would buy shares in the company either,” Shaerf said. A consequence of poor liquidity in the shares of a small, listed company is that even relatively small transactions can lead to a significant fluctuation in their prices: huge volatility is not what investors appreciate.
Mark Ittel, partner and senior vice president of ports and maritime at the consultancy firm Bermello Ajamil & Partners, also feels that, for the time being, the prospects for a successful cruise line IPO are not good. “Under the current economic conditions, examining both the current cruise line debt, recovery period, stock pricing, et cetera, an IPO presently for a new cruise operator concept would have less chance for success,” he told CruiseTimes.
There is space for small exploration and luxury brands catering to key market demographics – brands such as Ritz-Carlton, Emerald, Explora, Exploris, and Four Seasons. “However, at present, there is little space for larger contemporary to premium brands unless they are targeted to niche markets such as Adora (China), Compagnie Française des Crosières (France), and Ambassador (UK),” Ittel concluded.
Continued recovery of the cruise industry is crucial for investor sentiment to warm towards it. A huge debt pile that the existing lines will have to deal with, the need to finance newbuildings that are on order, and the need to upgrade existing ships all mean that the recovery is vital. The big three listed groups are the industry benchmarks. A new niche company, with a product clearly differentiated from what is an offer today and with a size that justifies a market capitalisation big enough to attract investor and analyst interest, could join the ranks of listed cruise shipping companies – when the time is right.
