Cruising to Recovery
A Bullish Voyage on Carnival Cruise Lines
Date of publishing: 07.08.2022
- The COVID-19 pandemic resulted in significant health challenges within society and caused financial disruptions in various industries over the past few years
- The tourism industry experienced the most severe difficulties
- Although the cruise industry reached pre-pandemic levels in occupancy and exceeded expectations, share prices are still below pre-pandemic levels
Despite the initial downturn caused by the pandemic, cruising lines have made a remarkable comeback. In 2023, the industry has successfully regained full capacity as travelers stayed true to cruising. This achievement is a testament to the cruise industry’s commitment to implementing rigorous health and safety protocols, but also the success of companies’ ticket price strategy. Some of the largest cruising lines such as Royal Caribbean, Carnival and even Norwegian Cruising lines have already reported passenger occupancy close to 100% in Q1 2023. These numbers are expected to grow even further thanks to a smart value proposition strategy as well as further expansion of onboard activities.As the tourism industry gradually recovers, cruise companies continue to thrive, benefiting from passengers’ increasing expenditures and their eagerness to explore the world once again. The industry’s decision to order new ships and expand its offerings underscores its optimism for the future and its commitment to providing unforgettable travel experiences. During the pandemic, cruise companies took the opportunity to renew their ship fleets. In 2022, the BRS annual review reports for the delivery of 21 new ships, while 16 older ones were demolished. This signifies cruising lines’ efforts towards fleet modernization and improvement. Currently, the average age of a cruise ship is around 14 years, indicating a continuous turnover of vessels in the market. Another positive sign that reaffirms cruising industry’s confidence is the full capacity recovery since 2022. Aligned with the confirmed order book, the total global cruise capacity projections until 2028 exhibit a CAGR of almost 3.7 %.
General economic landscape
One of the major hurdles impeding the full recovery of tourism is inflated prices. However, both the US and Eurozone are observing a steady decline in inflation levels. In Europe, inflation and interest rates remain above optimal levels, hampering the overall economic situation. Nevertheless, the outlook for tourism in Europe appears positive, as travel trends exceed expectations. Taking a deeper look at the revival of tourism, there exists a positive correlation between tourist expenditures and consumer confidence. This relationship remains relatively consistent, albeit not yet reaching pre-pandemic levels. Despite this, there has been a remarkable surge in US consumer expenditures for hotels and foreign travel, increasing by nearly 35% compared to the pre-Covid period. The first quarter of 2023 witnessed a similar trend, with international travel volumes rebounding and doubling compared to the previous year. Globally, travel volumes have reached 80% of pre-pandemic levels, indicating a significant recovery in the industry.This trend has been particularly noticeable within the cruise industry, where passengers are not only booking cruises but also increasing their onboard expenditures. The boost in passengers’ spending on various onboard amenities, including dining, entertainment, and spa treatments, has significantly contributed to the revenue growth of cruising companies. This increase in onboard expenditures further demonstrates the industry’s ability to capitalize on the recovery phase and maximize its revenue streams.
After carefully screening all publicly traded companies under the “cruise lines” classification and applying a filter for a market capitalization above $1 billion, our analysis led us to identify six potential candidates. Subsequently, we conducted a thorough examination to eliminate general travel companies from the list, resulting in the identification of three pure cruise companies: Royal Caribbean Cruises Ltd., Carnival Corporation & plc, and Norwegian Cruise Line Holdings Ltd.Unfortunately, like many industries, the cruise sector has been severely impacted by the ongoing pandemic, as evidenced by negative Net Income figures for the Fiscal Year 2022 across these three companies. The effects of the pandemic have proven to be long-lasting and continue to challenge their financial performance.
The share prices of these three cruise companies have inevitably reflected the protracted impact of the pandemic on their operations. Among them, Royal Caribbean emerges as the company with the most significant recovery, though Norwegian and Carnival have seen their share prices stagnate at approximately 20% of their 2018 levels.The decline in performance can be attributed to two primary factors. Firstly, the companies have incurred substantial debt to sustain operations amidst the challenging circumstances. Secondly, despite steady revenue growth, the companies remain unprofitable, which further contributes to their unfavorable financial situation.
Carnival Cruise Lines
The majority of the company’s revenues, accounting for nearly three-quarters, are derived from its North America and Australia cruise operations. Another significant portion, comprising one-fourth of the revenues, comes from Europe and Asia operations, while the remaining revenue is attributed to Cruise Support and Tour & Other segments.In terms of revenue by region, North America stands out as the largest contributor, accounting for approximately 60% of the total revenue. Europe follows as the second most significant region, contributing around 30% of the revenue. The remaining revenue is generated from Australia, Asia, and other regions.
In order to benefit monetarily from the investment thesis outlined thus far, we would use an options strategy, to be more precise a bull call spread – a bullish options strategy based on the simultaneous buying and selling of call options with the same maturity but different strike prices, where both the possible profit and the possible loss are limited.We choose options expiring on January 19, 2024, which gives us an investment horizon of about 7 months. At our chosen strike prices of $17.50 and $20.00, we would make a profit from the moment the stock rises above $18.22. If the stock trades above $20 on the expiration date, we would make the maximum profit of $2,670, if the stock trades below $17.50, we would have to book the maximum loss of -$1,080, giving us a reward-to-risk ratio of 3.
Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with WUTIS – Trading and Investment Society e.V.