Royal Caribbean Cruises has a lot of new ships coming, which will let the cruise operator charge higher prices and attract fresh interest. But as the global cruise industry continues to add capacity, analysts wonder if demand can keep up with the building boom.
Less than a month after welcoming its newest megaship — and with more vessels to come in 2018 — Royal Caribbean Cruises said Thursday that the year has been better than expected so far.
The Miami-based cruise operator beat earnings expectations for the quarter that ended March 31, though it missed on revenue. The company also increased its forecast for the full year. The optimism comes as rivals across the industry add their own new tonnage, prompting some analysts to worry about oversupply.
“I do admit that last year was such an exceptional year that there may have been some slight trepidation about our being able to beat it,” said CEO and Chairman Richard Fain. “Fortunately, today, we’re really encouraged by the outlook and we’re looking forward to beating even last year by 16 percent or so.”
The company reported revenue of $2.03 billion, up from $2 billion last year, and profit of nearly $219 million, up from almost $215 million in the first quarter of 2017. Onboard revenue was a “key driver” of growth in the quarter.
But Royal Caribbean, which owns Royal Caribbean International, Celebrity Cruises, and Azamara Club Cruises, said an “unusually strong” market in the second quarter of 2017 would make for difficult comparables during the same time this year. Shares closed down 4.7 percent to nearly $113 Thursday afternoon.
“Last year was somewhat unusual as the demand for our key markets was pervasively strong,” Fain said. “There simply weren’t virtually any areas of weakness.”
This year, sailings from Puerto Rico have been “a little weaker,” Fain said, due to logistical issues in San Juan and perception problems due to the impact of Hurricane Maria.
But on a positive note, Chief Financial Officer Jason Liberty said the China market — which has been a trouble spot for the cruise industry — was performing well. Europe sailings were also strong, the company said, particularly among North American customers.
The company is booked for the future at record levels, with rates and booking volumes higher than a year ago. Royal Caribbean’s new ships are outperforming the rest of the fleet.
Liberty said the company is spending some extra money to improve demand, especially from big spenders, in 2019 and beyond.
“We think there is the opportunity to accelerate the attraction of high-value customers and that’s where we’re looking to invest the money,” he said.
Investors have been concerned about demand in 2019 and beyond, considering the number of ships — many of them giant — that Royal Caribbean and competitors are adding. According to the industry publication Cruise Industry News, cruise lines have 106 new ships on order through 2027, valued at more than $64 billion. The concern is that demand from the cruising public won’t quite keep up with all the new ships joining the global fleet.
Analysts questioned industry giant Carnival Corp. about the issue late last year, and Wedbush analyst James Hardiman brought it up with Royal Caribbean on Thursday.
“Obviously the bear case there is that global capacity accelerates,” he said. “Pretty difficult to disprove, in April of 18, that that’s going to be a big negative on yields. But I guess as we think about that supply-demand, we know that supply’s going to accelerate. Is there any reason to think that demand will accelerate next year to match it?”
Liberty said bookings are showing strength for 2019 already. And he said larger demographic shifts and consumer trends are working in favor of better demand for cruising in the future.
“We think levers like social media and so forth are really helping break through stereotypes on cruise, and we have seen a real change in our new-to-cruise volumes that’s also suggesting that a lot of these past detractors are becoming fans of cruise,” he said, adding that the company is also focused on reaching markets around the world.
“We think there’s a lot of reasons why investors and us are very excited about the future demand of cruise,” Liberty said.
Earlier in the call, Fain acknowledged the continued interest in the subject.
“I’m well aware there’s a lot of focus on the supply side of the equation, and that’s appropriate,” he said. “But the demand side is just as important and something which we are fortunate to be in a position to impact in a nice way.”
Despite the concern and the drop in share price, analysts were generally positive about the results.
“We continue to like Royal’s shares on healthy momentum in the business, and believe new hardware, ship upgrades, and technological innovation should bolster trends in 2019 and beyond,” wrote William Blair analyst Sharon Zackfia in a note to investors.
Morningstar analyst Jaime Katz wrote that the company is so well booked going into summer that the downside risk to expectations is significantly lower.
“However,” she wrote, “the implication of current guidance is that pricing will increase at a significantly slower rate over the remainder of the year but could come closer to a mid-single-digit rate if close-in bookings benefit the business ahead of expectations.”
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Photo credit: The Ultimate Abyss, a waterslide, and other activities are shown aboard Royal Caribbean International's new Symphony of the Seas. Royal Caribbean Cruises on Thursday reported financial results that beat expectations. SBW-Photo / Royal Caribbean International