I belong to a Nautical chat board and one of the members asked the question about how well the cruise ships were doing with the credit crunch that many countries are facing. It was answered by a very knowledgeable person and I thought the cruise mates would like to read the answer,a bit long but a very good read.
That is a very wide ranging series of questions Peter and if anyone knew all the answers they would probably make a fortune. Any reply will probably look stupid by this time next month, but it is worth starting from a factual base: -
1. Market. The world total number of cruise passengers in 2007 was about 17.8 million, an increase of 5.5% on 2006. About 61% of all passengers were American, 29% European and 10% from the rest of the world. The American percentage has been fairly constant, with Europe growing and the rest declining.
2. Market Players. On the basis of the total number of lower berths, Carnival Group provides 44%, Royal Caribbean, 21%, Star/NCL 9% and all other operators 26% of the world fleet.
3. Available Financial Information. Only the big three are public corporations publishing financial data and since 50% of NCL was sold to a US venture capital corporation last year the information on Star/NCL has become scarce. Almost every shipping company borrows money to partially finance its capital expenditure and operations; the really important thing now is the scale of its borrowing. I have provided comparative statistics in: http://www.shipsnostalgia.com/guides...story_-_Part_3
The crucial figures are that in 2006 the interest cost per passenger/day for Carnival was $5.57, while Royal Caribbean it was $9.43 and Star $21.05. So before the credit crunch, Carnival was financially very strong, Royal Caribbean moderately strong and Star was weak.
4. Fuel Costs. The soaring bunker cost has been the major adverse factor over the past year. Carnival’s fuel costs increased from $288 million for the three months to the end of August 2007, to $529 million for the same period in 2008. The recent rapid reversal in oil prices is clearly beneficial for the cruise industry.
5. Exchange Rates. As the majority of cruise passengers are American, the major cruise lines operate their accounts in US Dollars. The recent fall in other currencies against the dollar reduces the cost to the companies of many of their non-fuel costs. All new cruise ships are built in Europe and the recovery of the Dollar against the Euro has made new ships more affordable.
6. Existing Profitability. In the three months to 31 August 2008, Carnival recorded a net profit of $1.485 billion; virtually unchanged on the same period in 2007. Royal Caribbean has a September accounting date and the figures have yet to be published, but the forecast is $350 million; down from $395 million last year. Star/NCL is loss making.
7. Operating Profit Margins. Excluding interest costs, Carnival’s 2007 operating profit was 20.9% of the value of its sales; Royal Caribbean was 14.7% and Star/NCL only 3.1%.
8. Filling the Ships. At the end of 2007 the world cruise fleet contained 362,000 lower berths, after receiving additions of 22,000 berths and seeing net de-activation of 2,000 berths during the year. The planned new deliveries in 2008 will add 25,000 new berths. De-activation is likely to increase as the new SOLAS regulations approach.
Moving from facts to study the cloudy crystal ball, I suggest following answers to Peter’s questions: -
• Only the major cruise companies have new ships on order, with deliveries stretching out to 2012. All have annual occupancy levels that average over 100% of lower berth capacity. The average capacity increase from deliveries up to 2010 is only 6.6% of the world fleet. SOLAS was in any event going to cull the old-timers. After 9/11 it was found that passenger volumes were very responsive to price. I would expect prices to decline, but passenger numbers to remain sufficiently steady to generally fill the new ships.
• It seems probable that the financial crisis will make it even more unlikely that older ships will be rebuilt to comply with SOLAS. It is possible that some will be laid-up until scrap prices stabilise.
• It is extremely unlikely that cruise ships will ever adopt the budget airlines model. A couple of hours of Ryanair extreme discomfort, at low cost at each end of a holiday, are a good trade off against a couple of hours moderate discomfort on a higher price scheduled flight. Not many people would want to spend a week in a Ryanair aircraft.
• Which cruise lines will be first to go out of business? The bottom-feeders who will not have any SOLAS compliant ships were going anyway, but if NCL fails, there could be some ships available for them.
• There must be a question mark against the NCL ships on order from Akar Yards France. The much more likely collapse of the container ship market may impose some stress on the MSC cruise ship orders. Otherwise I do not see any new building orders being cancelled, but I feel that it may be some time before any more cruise ships are ordered.
At the time of writing Carnival shares are up 14% at £14.67. The market could of course go pear-shaped tomorrow.