The cruise industry is back.
We were able to say we entered 2024 the highest
we've ever been booked.
There are millions and millions of customers coming
in to the cruise industry and then onto our ships that
have never cruised before.
About 36 million passengers are expected to embark on a
ship in 2024.
That's about 20% more than 2019.
Cruising offers an unbelievable combination of
two things, and that is being easy to book, easy to
execute and often the price being quite low.
But the industry is coming off its toughest test yet.
The coronavirus that's sickened passengers on a
cruise ship a week ago remains in quarantine.
Two years into the pandemic, the cruise lines had
accumulated about $74 billion in debt.
Bleeding cash flows and tanking share prices led to
questions about whether the industry could recover.
We started hearing people talking about cruising is
dead, but of course cruising is not dead.
So how did cruise lines make this astounding comeback,
and what does it mean for the future?
Although historically plagued by viral outbreaks,
nothing could have prepared the cruise industry for
February of 2020.
Thousands of quarantined passengers.
Anthem of the seas was supposed to be at sea
tonight.
We have a couple of hundred new cases.
We were seeing something completely different.
We were seeing ships being turned away from ports,
people not being able to disembark.
Stocks of the big three public cruise companies
plummeted in the first quarter of 2020, and the
industry had to shut down for 15 months.
By September of 2022, the three public cruise lines
had accumulated $74 billion of debt.
That balance comes with a big interest expense burger.
Um, we were chugging along at about $200 million of
interest expense before the pandemic, and now, you know,
it's hovering around $1.8 billion.
There is no textbook.
There is no business school class. There is no
experience that teaches you on what happens one day when
you're not operating for a very long period of time.
So we really spent the time to focus on that, get our
cost structure in place, while at the same time
making sure that we maintained our ships very
well.
By 2022, the cruise lines were up and running as 20.4
million travelers decided to get back on the water.
When the shackles came off the industry.
When the CDC stepped away from the industry, bookings
went through the roof.
And so did share prices.
In 2019, Royal Caribbean's gross revenue was nearly $11
billion and Carnival's was nearly $21 billion.
Those numbers are expected to reach about $16 billion
and $25 billion, respectively, in 2024.
We're coming off of a 2023 where I got to use record
every single quarter record revenue, record pricing
levels that we were achieving at an accelerated
over the course of 2023.
And that momentum continued into 2024.
It's a business that generates a lot of revenue,
a lot of margin, a lot of cash flow.
And we were confident that once we got back into
service that we would accelerate into this and
that the demand for icon, as well as our broader fleet
and brands was going to be exceptionally strong.
And that has clearly proven out.
The Icon of the Seas, the biggest ship in the world,
and the latest addition to Royal Caribbean's fleet,
sailed its maiden voyage out of Miami in January of
2024. It started booking back in October of 2022,
where it set the company's record for single day
bookings out of the big three public cruise
companies. Royal Caribbean maintained the highest
overall 2023 ticket revenue increase compared to
pre-pandemic levels, and its profitability increased
to.
The best profitability measurement for this
business. It's probably EBITDA per capacity unit,
right? So literally how much profit they make on
every cabin, right?
On average. And if I look at 2024 and what we're
modeling for 2024, Royal Caribbean has grown that
that metric versus 19, whereas the other two have
not.
Despite that, 2023 was Norwegian's first profitable
year in terms of net income since 2019.
One analyst called it the biggest growth story in the
cruise sector. In April of 2024.
We're seeing record book positions, record guest
traveling, record prices, and it gives us great
optimism for the future.
Once a ship sets sail,operating expenses
don't change much, whether it's full or not.
That means historically, the cruise lines have done
whatever they can to fill their ships.
So when the cruise industry looks over at the airline
industry and sees that the airline industry has trained
all guests, right, and you and me to to not wait until
the last minute and to expect if you wait in the
last minute, you're going to pay the highest price.
That's what the cruise industry wants for itself.
And now that's finally happening, at least for
Royal Caribbean and Carnival. Simply put, these
graphs show how, as the ship's sail date approached
in 2022, prices went up in 2023 at an even stronger
rate. Norwegian, the third largest cruise line, has not
experienced the same shift.
Low to high. That's the ideal, right?
Not high to low, where you have 90 days to basically
sell distressed inventory.
That's a bad habit to get into.
Consumers know it, the trade knows it, and they'll
take advantage of that.
But it's not only the ability to increase prices
as the sale date nears.
That's important. According to experts, traveling on a
cruise ship has traditionally been about 25
to 30% cheaper than land based traveling.
That difference widened during the pandemic.
Today, it sits at about 40 to 50%.
We'll always be able to say we're evaluated right.
We can always be lined up against land alternatives
and be at a discount.
We just shouldn't be at this much of a discount.
Royal Caribbean's cash management during the
pandemic is part of the reason why its stock price
has recovered faster than its competitors.
The number one reason why Royal Caribbean has
outperformed its peers and recovered the fastest, is
because they issued the least amount of equity
during the pandemic, all of the companies had to issue
equity. All the companies had to issue debt, all the
companies had to issue convertible debt.
And Royal Caribbean was able to manage its cash
position in a way that that utilized the least amount of
equity.
For Carnival, it was a different story.
They had to issue about 400 million additional shares in
2020.
This was our survival at risk and we made the tough
decisions, but right decisions to be able to see
ourselves through.
Catering to different segments and operating in
different countries also posed a bigger challenge for
Carnival, who owns nine brands internationally.
Royal Caribbean, on the other hand, only fully owns
three, with most guests being from North America.
A majority of their capacity is the flagship brand.
I've heard industry insiders liken it to
basically a startup of getting these ships up and
running from from zero revenue to being fully
operational and full of customers.
And so I think it helps that it was one big brand.
United States ran out the gates in the fall of 2022,
and Europe didn't.
Because the fact is, our European brands that are
based in Germany, Italy, the UK, they were dealing
with energy crises.
Private destinations have also been a contributing
factor in the industry's comeback. Carnival is
investing $500 million to build a private beachfront
in the Bahamas.
Royal Caribbean's Cococay opened back in 2019 and
accommodates 3 million annual guests.
Today, as we accelerate out, you know, we were really
well positioned because of the strength of our brands,
our ships, the private destination at Perfect Day
at CocoCay, that really brought strong preference
for our business, which helped us accelerate and use
that additional cash flow to help right the balance
sheet.
Closing the discount that cruising has on land based
travel is key to the industry's future.
One way they are trying to do so is by driving
pre-cruise spending.
All the companies have seen an increase in that area
relative to 2019 levels.
What we're seeing is those consumers are are basically
spending about 20 or 30% more than they did with us
pre-COVID. They now know all the restaurants they can
book on the ship.
They can now book their spa appointments in advance.
They can book all their shore excursions in advance.
They use machine learning, and they use sophisticated
data methodologies to to maximize the amount people
will spend.
While they're constantly new ships being built.
It's happening at a slower rate.
We are not interested in an explosion of growth for the
sake of the fact that there are open slots in ship yards
, that's not the right approach.
The right approach is we need to reward our brands,
who simply cannot manage the demand profile because
they are out of space.
For too long, new builds have almost been a bit of a
crutch for us Carnival Corporation, because it does
drive a lot of good things, but it also covers up well,
how are we doing on the underlying business?
But there are some concerns ahead for the industry.
The contribution to climate change is one.
It takes about a 10 to 15 second Google to see that
cruise ships are not good for the environment.
Are there things that cruise ships are trying to
do to take the edge off of that?
Yes, of course, but inherently, by the nature of
it, it's not in the environmentally friendly
ways to travel.
The big three all planned to achieve net zero emissions
by 2050, although it's unclear how exactly that's
going to happen.
You don't know how to get to net zero yet.
If anybody tells you, let me know because I'd love to
mimic it. We don't know.
We do know, if we use less, no matter what the answer is
we're going to be ahead of the game.
Despite environmental impacts, the value of
cruising over land travel continues to be its
strongest appeal. Drawing in new demographics is
important to keeping the industry's momentum.
Currently, 36% of cruise travelers are Millennials
and Gen Z.
The economics of cruising is appealing to younger people
now. And, you know, a lot of times younger people,
they tend to be a bit more cash strapped.
So suddenly a style of traveling that they may have
thought was more for their parents or their
grandparents age is looking pretty good to them.
Capitalizing on the current momentum will be key to
moving forward. The industry plans to do so by
closing the pricing discount to land travel.
It remains to be seen how customers will respond,
especially given the industry's volatility around
future viral outbreaks.
We feel really good about 2024, and we feel really
good about the momentum that continues to build.