Growth in cruise lines sails on with ‘explosive’ demand

IT is usually people who have never indulged in an ocean cruise who take the cynical view that it is a ‘dry run for the nursing home’. But there are far too many fancy lounge bars on these floating hotels, and such an abundance of jolly, suntanned punters for the cruise fans to be considered in any way dry.

With millions more each year choosing to be royally entertained on the high seas, cruising has become a big business as this week’s company, Carnival, shows. Latest statistics suggest there could be as many as 79 million passengers challenging their digestions over the next few years on the cruise ships that daily search for the sun.

Carnival is a global cruise company headquartered in Miami. It offers holiday products to a broad customer base in terms of culture and language. Dual-listed in London and New York, it has 10 major cruise brands, including Cunard and P&O. It employs 120,000 people globally on its 100-plus vessels, and is valued by the market at £35bn (€39bn), with a dividend yield of 2.4pc and a price earnings multiple of 17.

While cruising may be a very big business, it is also an evolving one. The traditional market depended on retirement spending, however, experts now feel that the growth outlook will be shaped by the Asian middle classes and a younger cohort. Interestingly, more than one million Chinese went on a cruise last year, that’s five times the numbers who did so five years ago. In addition the Chinese government is busy expanding a number of ports to accommodate large liners.

Of course, to get a decent bang for their buck, the cruise operators have to look to broadening their appeal to younger people, always conscious of the risk of alienating the core base of loyal passengers.

The company was launched in 1972 with a single secondhand ship, the ‘Mardi Gras’.

After a few rocky years, the company prospered and by 1987 went public. Over the years, its acquisition policy allowed it to be represented in every single market segment in the cruise liner business, from premium operators like Holland America and the famous Cunard brand to the luxury liners of Seabourne.

Carnival also became Europe’s leading brand with Costa Cruises. It became the world’s first global cruise operator following the contentious takeover of P&O Princess Cruises.

Important to the future of the industry and the continued growth of cruising (as well as the explosion of demand in China) is a record expansion of ship orders. Carnival expects 20 new ships to enter service by 2022. These will not be cheap.

Recently Carnival’s rival, Royal Caribbean, launched the world’s largest ship at the significant cost of $1.5bn (€1.2bn).

The ship is capable of carrying 9,000 passengers. Of particular investor concern is the possibility the supply of cruise ships will outstrip demand.

Sceptics, who point out that industry capacity by 2022 will be double that of the previous five years, also note that while bookings are at a record level, there was also explosive growth in the past (in 1999 and later in 2006) which ended in tears.

Carnival revenues for 2017 were £13.7bn (€15.5bn) with higher ticket prices offsetting the hurricane-related disruption. Lower oil prices and stronger bookings from the US and Europe also helped.

The comparison over a fiveyear period shows revenues up over £3bn (€3.4bn) and net income rising from £690m to £2bn. In this period, the Carnival share price was almost doubled at £47.

This reflects an impressive management performance as the group had to cope with the extraordinary sinking of the Costa Concordia off the Italian coast. It has had other (happily less-fatal) PR disasters to contend with, one of which was pleading guilty to a $40m (€33m) fine for dumping waste.

With the Asian middle class getting more enthusiastic about the waistline-challenging holidays and the Chinese happy to add to the explosive demand, Carnival looks to be in a good space, provided the number of new liners entering the cruising fleet does not cause problems.

A share worth considering – but watch oil prices.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.