Cruise Analyst Discusses 2015 Outlook; Norwegian's Stock Downgraded

Carnival Breeze in port // Photo by Susan J. Young
Carnival Breeze in port // Photo by Susan J. Young

Robin Farley, cruise industry analyst analyst for UBS Investment Research, told her firm's investors in an e-mail today that "the Caribbean in 2015 may not be what you think." Here's a look at some of the outlook tidbits she provided to those investors.

Good News & Bad News

As agents know, the Caribbean pricing arena has seen soft pricing due to heavy capacity in the region this year. But Farley said the good news is that Caribbean market capacity will be down in 2015.

"The bad news is that it will not be down as much as investors had been anticipating," she noted. It's down less than 1 percent after a 12 percent capacity increase in 2014.

But at least the 2015 increase is mostly coming in the first quarter of 2015, after which Farley said the remaining three quarters will reflect a 3 percent drop in Caribbean supply.

The North American industry's overall capacity increase in 2015 remains below average at 2.3 percent, below the roughly 3 percent net increase in 2014, and further below the 5 percent average increase of the 10 years prior. So overall capacity growth is not high.

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Norwegian Breakaway // Photo by Susan J. Young
Norwegian Breakaway // Photo by Susan J. Young

Key Points: Norwegian Cruise Line Holdings

Despite Norwegian Cruise Line Holdings' overall supply in 2013-2017, Farley notes that NCLH will actually not have a delivery for more than 18 months between this February's delivery of Norwegian Getaway and the October 2015 delivery of Norwegian Escape.

As a result, "NCLH has biggest exposure to the Caribbean/Bermuda market at 54 percent [of total capacity], versus Royal Caribbean Cruises Ltd.'s 45 percent and Carnival Corporation's 34 percent.

In addition, she noted that NCLH will further increase its Caribbean/Bermuda inventory by 1.2 percent next year.

Key Points: Royal Caribbean Cruises Ltd.

The lull in Norwegian's ship deliveries means that Royal Caribbean Cruises Ltd. (RCL) will have the highest overall capacity increase in 2015 at 7 percent and the highest Caribbean capacity increase at 1.7 percent. But Farley noted those increases come from Quantum of the Seas in the first half of 2015. She cites the ship's new "bells and whistles" as a draw.

Despite Royal Caribbean's increase in Caribbean/Bermuda capacity, it is still lower as a share of the company-wide mix at 45 percent in 2015, which is a drop from 48 percent this year.

In addition, "the biggest increase in RCL's deployment is in Asia," she said, noting that Quantum of the Seas is moving into that region with a 35 percent increase in capacity.

That means RCL will have a mix of 16 percent of its capacity in Asia next year. That's up from 12% now in Asia.

Key Points: Carnival Corporation

Carnival Corporation with multiple brands has the lowest exposure to the Caribbean in 2015 with 34 percent of capacity, down slight from this year's 35 percent.

"Of the three operators, Carnival is the only one to reduce its absolute amount of capacity in the Caribbean next year, not just as a percentage of the mix," said Farley.

Overall company growth is at 2.4 percent, but there is a 1 percent decline in Caribbean supply. The company has increased its mix in other regions including Asia, Australia/New Zealand, trans-Atlantic and Panama Canal.

Quantum of the Seas
Quantum of the Seas

Research Tidbits

Here are some additional points of interest, provided by UBS Investment Research:

Despite the yield strength in Europe in 2014, with both RCL and NCLH reporting double-digit yield increases in the third quarter in Europe, the industry is not increasing its mix shift much there in 2015, so Europe is not setting up to see a supply glut in 2015.

Asia is the trade seeing the biggest mix increase in 2015 from the three largest cruise operators. "As we have previously written, we believe in the long-term emergence of China as a major sourcing market that has the potential to draw tonnage that can be removed from more mature markets," Farley said. She also noted that it will potentially drive pricing in existing markets, a benefit unique to the cruise market, as hotel supply, for example, cannot be redeployed.

NCLH's Hawaii capacity remains relatively unchanged, said Farley, noting: "We believe that is the highest ticket price of the major itineraries [for Norwegian]."

RCL is also growing in Europe, but as a share of its mix, Europe is still below the 26 percent of capacity that it was in 2013. It's expected to be 22% for 2015.

Carnival Corporation has the lowest overall company growth rate next year at 2.4 percent. Despite that increase, it will see declines in its Caribbean supply, as well as in its Mediterranean inventory. The increase in mix is all in Carnival's "Other" itineraries, which include Asia, Australia/New Zealand, and trans-Atlantic and trans-Canal cruises, among others.

Caribbean price pressure in 2014 is the result of significant supply increases in the region, combined with negative industry publicity throughout the past year.

Not all Caribbean capacity is created equal. For example, the three- to four-day market this year has been under greater price pressure than the seven-day Caribbean market because the shorter cruise product tends to attract more first timers.

For Carnival Corporation, Caribbean itineraries of less than five days make up 10 percent of its total, the largest exposure of the three major lines. For Royal Caribbean's brands, three to five night cruises represent less than 5 percent of total inventory. For NCLH, only the Norwegian Sky does short Caribbean; its three- to four-day cruises to the Bahamas are less than 6 percent of total deployment.

While Carnival Corporation sources from 10 different ports to sail Caribbean itineraries, a good deal of that is still drawn from South Florida, including Miami, Tampa, and Fort Lauderdale. CCL believes that about 57% of the industry's Caribbean capacity is from South Florida ports this year.

RCL sources about half of their Caribbean cruises out of South Florida and half from other places (like Galveston, New York and other ports). But RCL notes that of the half that is South Florida-sourced Caribbean, about half of that is Oasis of the Seas and Allure of the Seas, which, despite being four or five years old, have maintained price premiums to rest of fleet.

Downgrading of Norwegian's Stock

Separately, USB Investment Research downgraded Norwegian Cruise Line Holdings (NCLH) stock from “buy” to “neutral,” saying it believes the company will continue to face a challenging Caribbean and that a lack of new tonnage until the fourth quarter 2015 will hamper the line in driving yield growth through a mix of premium ticket prices.

The financial firm said Norwegian has the largest exposure to the Caribbean market, and its capacity is not down much next year. It also noted that fuel cost savings are being re-invested back into the business for payroll and food, and thus expenses have gone up versus the initial USB outlook.

“So we see fewer levers for upside in the near term," Farley said to the firm's investors in an email analysis note. She also

She also mentioned that NCLH’s largest shareholder, Genting HK, went to a shareholder vote in May to determine if the company would sell its nearly 28 percent stake in NCLH. The shareholders did approve that potential sale. While Genting isn’t obligated to sell, because they went to the expense and effort to put forth a shareholder vote, “that could have read-through to NCLHs other large shareholders," said Farley.

Analyst Robin Farley told her firm’s investors: “While we see NCLH benefitting over the long term from its unit growth in a recovering industry, there may be more attractive entry points than current levels."

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