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A little more than a year ago, Norwegian Cruise Line was celebrating its first China-based ship, Norwegian Joy, at a ceremony in Shanghai. Everything at the christening — ship included — had been customized for the market: the hull art, featuring a phoenix; the choreographed dance; the guest list; and the godfather, pop star Wang Leehom, who gave a performance.
“After years spent carefully designing this amazing vessel, my team and I are both proud and thrilled to finally christen the world’s first cruise ship custom-designed for the wonderful people of China,” said Frank Del Rio, president and CEO of parent company Norwegian Cruise Line Holdings, at the June 2017 event.
On Wednesday, Norwegian was singing another tune. The operator announced a series of deployment changes that will see the 3,883-passenger Norwegian Joy leave China in April for the more lucrative waters of Alaska. Eventually, the ship will be replaced in China by a much smaller vessel that will sail there seasonally, but Norwegian will have no vessels in the country for about a year.
“China’s a good market. But it’s not as good as Alaska,” Norwegian Cruise Line President and CEO Andy Stuart told Skift in an interview. “In this business, particularly when you’re not the biggest, we don’t have 100 ships where we have to have a significant deployment essentially in every region around the world. We can be a little more opportunistic in how we deploy the fleet.”
Norwegian Bliss, which launched this year, is sailing in Alaska already and setting records for the company. Norwegian Joy will join Bliss and another ship, Norwegian Jewel, next spring. The changes will also see a ship sail from Amsterdam for the first time, send another to Australia and New Zealand, and a third to Singapore and Hong Kong.
“That’s really the center of it, the opportunity to put a sister ship in Alaska alongside Bliss, which has just been a knock-it-out-of-the-park success, expand capacity in Europe, and build our presence across the Australasian region through the domino effect of all of that,” Stuart said.
$50 Million Upgrade
Before Norwegian Joy arrives, though, the vessel will get $50 million worth of renovations, including a Starbucks, an expanded spa and gym, downsized retail outlets and casinos, and more bars. In a note to investors, Wedbush Securities analyst James Hardiman noted that the upgrades were “somewhat of an unusual step for a ship just one year into its operation.”
Stuart said there were some features on the ship, which was built with China’s cruisers in mind, that wouldn’t translate for North American passengers, including larger retail and casinos, smaller gyms and spas, and tea rooms instead of bars. But he said the larger goal was to tailor Norwegian Joy to be as close as possible to Norwegian Bliss, which got a nationwide rollout this spring with stops in multiple cities.
“We’ll have two ships that are basically identical in Alaska, which was really the goal,” Stuart said. “You know how much we invested in showing Bliss to everyone we could possibly show the ship to.”
After sailing in Alaska, Norwegian Joy will move to Los Angeles to sail Mexican Riviera and Panama Canal itineraries in the winter of 2019 into early 2020, a market the company described as “historically underserved.”
Cruise industry expert Stewart Chiron, CEO of CruiseGuy.com, called the Mexico deployment a “terrific move for NCL,” especially considering Carnival Cruise Line recently announced it was sending a new ship to the region.
“Signals strong demand in the rebounding Mexican Riviera market,” he said in an email.
The China Backstory
Norwegian’s aspirations in China have evolved over the past year and a half as the market itself has fluctuated. In February 2017, Del Rio announced the company would send a second new ship to the country in 2019, saying it would be “the highest and best use” for the vessel.
He was sounding less certain a few months later, after tensions between China and South Korea forced cruise lines to stop calling on South Korean itineraries.
“Ships have propellers and rudders for a reason,” he said. “Our goal is to always deploy them in areas that we think can maximize profitability. Today, we think that place is China. The South Korea situation, we believe, is a temporary bump in the road and time will tell.”
By February of this year, Del Rio said the company would no longer deploy a second new ship to the market, and suggested it could be a couple of years before more capacity would head to China.
While he spoke highly of Norwegian Joy’s occupancy and ratings in March, Del Rio still described the market as “a work in progress” and a “long-term investment” that required patience.
In May, he did not give any indication that the company planned to withdraw from China for a while: Del Rio said he felt “better about China today than I certainly did six months ago” and said prices appeared to be rising as industry capacity dropped. Wednesday, he described the shifts as a correction.
“The realignment and optimization of ship assets also allows us to rightisize our capacity in China while maintaining our commitment to this promising cruise market,” Del Rio said in an announcement.
After years of rapid expansion, several cruise lines have lowered their China capacity this year amid forced itinerary changes and pricing struggles, sending ships to destinations with more favorable conditions.
While Norwegian has seven ships on order, due between 2019 and 2027, no new capacity has been announced for China. According to the plans released Wednesday, the 2,000-passenger Norwegian Spirit will move to China in summer of 2020 after an extensive refurbishment.
“Beyond that, we take a view and treat China like every other destination where we deploy capacity based on the demand as we see it,” Stuart said. “It’s a big market and one that we think has a positive future, but we don’t have a speicfic plan for capacity beyond Norwegian Spirit beyond this point.”
An Upbeat Update
Due to the changes, Norwegian said it expects to earn about 30 cents in incremental adjusted earnings per share in 2020. The company said it anticipated only a very slight benefit in 2019 due to an anticipated one-time write-off of about $25 million related to the Norwegian Joy upgrades, revenue that will be lost during the five weeks it will take to make the changes and reposition the ship, and cost of marketing the new itineraries.
For this year, the company said it expects to raise its forecast for adjusted earnings per share when it reports second-quarter results in early August.
“The booking environment for cruise demand shows no signs of slowing,” Del Rio said in the announcement. “Occupancy for the second half of 2018 continues to be ahead of last year with pricing well ahead of last year’s record levels. Similarly, the booked position for full year 2019 not only remains well ahead of the prior year’s record levels, the year-over-year gains in occupancy and pricing have also accelerated since our last earnings call.”
Shares closed at $50.14, up more than 5 percent from the previous day’s close.
Said Hardiman in his note to analysts: “This was probably the most significant positive stemming from today’s release, as investors are always keenly focused on whether trends have gotten better or worse versus the last update.”