Europe Cruises: What’s the Outlook in Sourcing, Itineraries and Yields?

Over the past few years, some Carnival Cruise Line passengers have headed to Europe in summer, as with the Carnival Sunshine, shown here at Messina, Sicily in 2013. // Photo by Susan J. Young

With a good Wave Season behind the cruise industry, what’s ahead for this summer in Europe and how does it bode for cruise industry investors – with “takeaways” for agents?

Robin Farley, cruise industry financial analyst, UBS Warburg, has analyzed the historical and forward-looking rates of supply and demand as well as the Big Three cruise companies -- Carnival Corporation (CCL), Royal Caribbean Cruises Ltd. (RCL) and Norwegian Cruise Line Holdings (NCLH). She’s also reviewed their passenger sourcing and percentage of capacity deployment, and here’s a look at some of the points gleaned.

European Capacity Growth

With average cruise industry capacity growth (CAGR) of seven percent the past few years, “European capacity will now grow at an estimated CAGR of more than four percent over the next five years,” says Farley, who notes that CCL has the highest itinerary exposure to Europe, although it’s still lower year-over-year.

CCL plans to deploy 28 percent of its fleet on European itineraries in 2015 versus 29 percent in 2014. Mediterranean deployment of 15 percent this year is also down slightly from 17 percent last year.

Royal Caribbean International attracts both North American and European cruisers. // Photo of Oasis of the Seas by Susan J. Young

In turn, RCL has placed 22 percent of its capacity in Europe this year, unchanged from 2014. However, its European mix is lower than 26 percent in 2013 and 30 percent in 2012.

NCLH’s European deployment is 23 percent of its total capacity this year, Farley said, versus 24 percent in 2014. That’s down from roughly 27 percent to 28 percent in 2013.

Projections for European Sourcing

Much has been said about North American cruise operators increasing sourcing in international markets – particularly China and Asia.

In 2014, roughly 57 percent of CCL’s total revenues were generated from passengers sourced outside of the U.S.; that includes European passengers that cruise on CCL’s North American brands.

That’s up from 56 percent in 2013. In turn, 47 percent of RCL’s ticket revenues were generated from countries outside of the U.S. versus 48 percent in 2013.

What’s the sourcing picture this year in Europe? Cruise lines are definitely looking to Europe to fill ships. Farley notes that North American passenger sourcing is the focus of less than half of RCL's European itineraries.

Farley says roughly 34 percent of CCL's sourcing and from 28 to 30 percent of RCL's sourcing is targeted at European passengers, while that percentage drops farther – at 15 percent to 20 percent – for Norwegian’s brands.

The picture looks rosy for European growth. “We expect Europe to have continued passenger growth given relatively low penetration and subdued supply growth,” Farley said.

Historically, Europe has been a higher growth sourcing market for the big lines. Will that hold up this year and next? Roughly 6.4 million Europeans cruised in 2014 versus 12 million North Americans; the latter represents less than a one percent penetration rate.

So while European passenger growth slowed in 2013 and 2014, coming in flat year-over-year (up to four percent growth year-over-year), Farley noted that historically European passenger growth has been higher than for North America at a 10-year CAGR growth of more than eight percent – or more than double that of the North American market.

Farley projects European capacity growth of more than four percent over the next five years.

Europeans Spend Less Onboard

RCL recently revised its full year net yield guidance to financial analysts based, in part, on the trend of lower onboard spending from non-U.S. cruisers. Simply put, Europeans haven't spent as much onboard as North Americans. So the line's "revenue take" per voyage is often less. 

That said, “the longer-term question remains the general macro-economic outlook in Europe and how much that impacts end demand and yield assumptions, given that Europe was a source of good growth in 2014," stressed Farley.

Some takeaways for agents? “We believe that RCL generally targets roughly half of its total corporate sourcing to come from outside the U.S.," as international guests comprised 2.2 million of 5.15 million guests for RCL in 2014. 

RCL also owns approximately half of the German-sourcing TUI Cruises, which currently has 8,800 berths in the market and could have as many as 10,000 additional berths coming online through 2019, Farley said, noting that TUI Cruises is not included in RCL’s consolidated statistics.

In terms of itineraries, Carnival plans to deploy 28 percent of its fleet on European itineraries in 2015 versus 29 percent in 2014. Within those European itineraries, the world’s largest cruise company decreased Mediterranean deployment to 15 percent of capacity this year versus 17 percent last year.

Overall, the outlook for European cruising looks positive for 2015 and beyond. // Photo by Susan J. Young

Farley said NCLH's European deployment is 23 percent of its total capacity this year, versus 24 percent in 2014, down from roughly 27 percent to 28 percent in 2013. But she believes that decline is a bit misleading.

NCLH has not taken capacity out of the European market, but instead is adding new capacity overall. A small fleet base is also resulting in European capacity making up a smaller percentage of total deployments in 2014 and 2015 than in 2013.

European Trends

Farley noted that CCL's European itineraries are "nicely" ahead on price and occupancy. Booking volumes during Wave Season were also in line with the company’s forecast at higher prices but lower volumes. Farley said CCL began filling staterooms early for these itineraries and simply didn’t need as much volume to fill in.

“CCL has also noted an improved/further out booking curve in Europe,” Farley said. Roughly 34 percent of CCL’s capacity is in brands that source primarily from Europe, including P&O Cruises, Cunard Line, Costa Cruises and AIDA.

“In addition to European-sourcing brands, CCL's North American brands like Holland America and Princess also do some sourcing from Europe, particularly for Mediterranean cruises, and demand for European itineraries from North American passengers has been doing well,” said Farley.

RCL is seeing an “overall solid booking period for Europe, with particularly strong North American demand for European itineraries which has resulted in slightly less remaining inventory to sell despite roughly a five-percent-plus capacity increase,” Farley stressed. She also said RCL’s western Mediterranean and Baltic itineraries, roughly 70 percent of its European capacity, are seeing strong demand at better prices year over year.

“RCL has noted some softness in the eastern Mediterranean, specifically itineraries touching Turkey,” Farley noted, but added that “RCL expects to see a record yield in Europe this summer, guiding to a mid-single digit increase year-over-year.”

Western Mediterranean cruises such as to Rome (shown above) are doing better than eastern Mediterranean sailings. // Photo by Susan J. Young

Overall, RCL is seeing similar trends to 2014, with strong North American demand for European itineraries. In addition to using its CDF and Pullmantur brands to source southern European passengers, Farley noted that RCL also uses its flagship Royal Caribbean International brand to source both European – mostly United Kingdom – and North American passengers, and does the same to a lesser degree with Celebrity Cruises.

Most positively, “RCL is at its best booked position in the company's history for all regions,” Farley said.

As with RCL, NCLH has also noted “some softness in onboard spending from European guests in the first quarter,” she said, but that’s primarily for the Norwegian Cruise Line brand. Overall, Farley said overall guest spending improved for both the Oceania Cruises and Regent Seven Seas Cruises brands), and “overall, Europe has been strong for NCLH.”

Size of European Market?

The combined population of Europe’s largest cruise markets – Germany, the United Kingdom, Italy, France and Spain – is roughly 323 million, of which about 5.3 million cruised in 2014. Farley says that equates to a roughly 1.6 percent penetration rate.

“By comparison, we estimate roughly approximately 12 million North Americans cruised in 2014, which represents roughly a 3.5 percent penetration rate,” she says.

Trends? Germany surpassed the United Kingdom as the largest European cruise market in 2014, with more than 1.7 million cruisers in 2014 and a market penetration of 2.2 percent.

Farley said the following about CCL’s German AIDA brand: “We believe that the AIDA brand is now the most profitable brand for CCL, given its capacity increase leading to economies of scale in the last five years, better than corporate average improvement in fuel consumption, and lower employee headcount per berth-day for each of its ships. This means that increased European deployment could drive profitability growth for CCL more than yield growth."

That could occur she said even if Europe gets more capacity and even if yields aren’t growing.

Fewer Italians cruised in the past few years, in part due to the aftermath of the Costa Concordia accident. // Photo by Susan J. Young

The United Kingdom maintained second position with 1.6 million people taking cruises in 2014, which represents a 2.4 percent penetration rate.

Approximately 842,000 Italians took a cruise in 2014, down 3 percent year-over year, and down about 1 percent from 2011, driven by challenging economics and the aftermath of the Costa Concordia accident. That represented a 1.4 percent penetration rate.

Approximately 454,000 people from Spain cruised in 2014, down 4 percent year over year in 2014. That followed a 2013 double-digit decline. So the sheer number of Spanish cruisers is down 35 percent from 2011 levels, representing a 1 percent penetration rate.

In fact, France surpassed Spain in 2013 in terms of number of cruisers for the first time since 2002. This year, France rounds out the largest European markets with approximately 593,000 cruisers, less than a 1 percent penetration rate.

While the North American market represents the most passengers cruising in Europe, the sourcing has dropped, as the growth in the European market has risen at an exponentially greater rate.

Overall, the outlook for European cruising -- both within North America, due to the strength of the dollar and for sourcing markets in Europe with low penetration -- looks relatively positive.

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