We came back from a cruise on the Carnival Spirit a few weeks ago. It was the first time we have ever been on a cruise. I can see how people just love the experience. Unfortunately I wasn't one of them. I'm not faulting anybody for liking this type of vacation, it's just that my idea of a vacation is a lot more simple, and relaxed.
Since this is a financial page I thought I would share my thoughts about Carnival and cruising. Overall, I think carnival is a good company. I think they are in a bubble. They have a 20%+ profit margin, cash is cheap, and they have 77 ships. They are expanding, the entire cruise industry is expanding. The Spirit for example is a ship that cost half a billion dollars. It's less than five years old. If you went into debt for this ship at around 5% it still would cost around $70,000 a day to pay the interest on the ship. After tax write offs its around $40,000 a day. When times are good, this is easy to cover. The problem I see is that times may not always be good. Because of cheap money the cruise industry may be over saturating their market with boats. It's an American problem. When something works and there is money to be found the segment gets overbuilt fairly quickly.
The competition to Carnival isn't Princess, or the other cruise liners. The competition is Las Vegas, Sandals, Club Med, and other tourist spots. There are other ways to vacation than cruising. Here's what I see that the cruise industry doesn't have going for it.
1. The cost of oil. I figure we are about to embark into an energy driven recession. The cost of the oil to run the ships may be a very small part of the cost of running the ship, but this will fluctuate. What's more important is that the energy costs will drive up the price of food and other aspects of the cost of doing business.
2. The lack of a strong secondary market. Vegas was built for gamblers, but then it became a convention city. You can still walk into a casino, spend money and walk out. This isn't true of a cruise ship. In order to spend money on a ship, you need a ticket. So, the goal of the ship is to get butts on the boat. They need people who aren't afraid to spend money while on the boat. What happens if a recession comes along? Are people as willing to spend money on a cruise if they don't have the disposable income to spend? Vegas has conventions, what does the cruise industry have to fall back on? I don't think the government will be calling on them anymore to help out for disasters.
The cruise industry is in a bubble, they are overbuilding and could reach a problem if an acute recession grips the nation. Rising food and energy costs combined with a public not taking vacations due to lack of disposable income could spell a major problem for the industry. These ships cost just too much money to sit in port and ride out a recession. The bottom line may be price wars which would further aggrivate a bad situation. I am very skeptical that buying stock in a cruise industry company is a good investment.
Thank you for your post. You raise many interesting issues. It would take me a while to respond adequately to all your points, so I will just concentrate now on the overbuilding issue.
If you will check on the messages being posted here in the spring of 2000, you will see all the negative people harping about how "over capacity" is going to kill cruising. In their minds, even in the minds of many professional analysts, there was no way Carnival was going to fill all the ships it had ordered. Those people were proven wrong, and not just a little wrong. There is not a one of them that could claim they were anything other than 100% dead wrong. Carnival filled--and is filling all its ships--what is more, they are being filled at prices at or very near historical highs. I must admit that even my optimism was tinged with some skepticism at that time, probably a result of reading all the press warnings. I remained, however, heavily invested on the long side throughout the period.
Now, Carnival was undertaking this very heavy buiding program against a very unpromising backdrop. In 2001, the economy was weakening. We had Sept. 11. Corporate scandals were rocking the stock market. SARS was in all the international headlines. No one could be blamed for imagining ships sitting idle at the dock with thousands of empty cabins and staff with nothing to do. But it never happened. Occupancy still topped 100% in the worst year. Prices were weak for about a year and a half. Then they started rising and have not stopped as of this writing. That is what I mean by the naysayers being completely wrong.
Okay, that was then and this is now, you might say. What worked in the past might not work today. After all, the available capacity is much larger than it was at the turn of the century. You must note, however, that capacity isn't growing as quickly as it was then. Annual increases of 15% were the norm then, versus mid-single digits now. The program then was aggressive. Today's building is much more restrained. Add to that the fact that the economic backdrop is relatively benign.
You are correct to point out that overbuilding has been a problem in many industries, semi-conductors, hotels, airlines, are just some examples. However, in all the cases that I can think of, the industries were fragmented, composed of many players, with new entrants coming along willy-nilly all the time.
Now, look at cruising. The whole industry is essentially controlled by two players--with Carnival the very dominant player. In most industries with overcapacity, you fear to reign in your building because your competitors are not doing the same and will thus grab market share. Carnival has no such worry. Compeititors will always be constrained by lack of ships--that's right lack of ships--from grabbing market share. Ships take years to order and years more to build. By the time they arrive, the window of opportunity to grab share has almost certainly slammed shut.
In most industries with falling prices, the weaker players slash prices, hoping to hang on until better times and dragging the bigger boys with them. We saw that happen after Sept 11 as Norwegian and then RCL stooped to insanely low pricing for several months in 2002. Carnival's own pricing dipped for a time, but then recovered.
Thanks everybody for contributing to a great post.
Carnival as a company, I can't say enough good things about them. The one thing I noticed is that the entire staff seemed like they cared about what they were doing. I think the ships are very well run, the organization is also very well run.
Starting next year if you leave for Mexico and wish to come back, you will need a passport. I think this may be true of the Caribbean and other non-US destinations. This will have some effect on the ease of cruising. It's a Department of Homeland Security mandate. It also makes it harder to leave the US and bolsters the notion of keeping your vacation money here in the states. I'm sure this won't effect the retired segment as most of them probably have Passports, but the younger folks... I don't know.
My concern about the cost of oil is minimal for what it costs to run a ship as far as the pure oil consumption is concerned. I'm more concerned about food costs. The cost of energy is perhaps minimal to their food costs. Food and labor. Carnival has picked up a lot of labor from Asia, Europe and former Soviet block countries. The problem is, I don't think they can do much more than they have to cut labor without cutting staff and service. A rise in food cost would mean a very definite cut into the bottom line of operations, unless they did some radical changes to cut their food costs. How they can do this without affecting the cruise experience would be a neat trick. Food is very much an essential aspect of the experience.
There is no doubt that Carnival has the upper hand in the cruise industry. And as the baby boomers retire and want to spend their golden years on a ship floating around I can see how this would be profitable.
As the cost of energy goes up, the discretionary income of the average American goes down. If there isn't any money left over for vacations, it doesn't matter how much or little they charge, if you don't have the money, you aren't going. One thing that is kinda neat about the cruise industry that I haven't thought of is that the boats are moveable. If the Asain markets do better in a major world recession for example, it's easy to set up routes in Asia and cater to that market. Casinos in Vegas just can't quite do this.
The one other thing that is kinda neat about Carnival is that they build up portfolios on people. When I left the cruise I was presented with one master bill. I spent about $600 on the cruise, not much. If it was more like $6000 I'm sure that I would be getting all kinds of phone calls from booking agents from Carnival in the future offering me great future deals on cruise, discounts on airfare, etc. That's the beauty of an all inclusive place that you can't leave, they can profile the passengers spending habits. Carnival can cut deals, but most likely they will want to cut deals to the big spenders first. This is probably how they can avoid recessions and empty ships.
If times get rough in the cruising industry I really can see Carnival being able to sell off a few older ships to keep their cash flow going to ride out any storm. Carnival can ride out many storms. Baring a major terrorist attack, depression, or pandemic outbreak I can see it's a fairly good bet. Thanks for helping me come to these realizations.
Wow , sane comments regards cruising .... I am heading up a group of 81 passengers . We will be sailing soon on one of the spirits sister ships ... Interesting to note that most of the group has been on many cruises . Everyone is excited... Like las vegas ,people like new . Many cruisers book the new ships , many are loyal to certain lines , many go for the ports, and /or the food . Some don't even leave the ships... There are numerous reasons that people cruise , and , aprox 70 % of vacationers have never been on a cruise . We are already planing alaska in 2007 ...i, am a very happy cruiser and a happy carnival stock owner . 2008 will see europe ..a very affordable way to go...
I have to disagree.
The cruise is a very relaxing and inexpensive vacation. Add up the cost of travel, hotels, meals, shows etc and you'll quickly see why the cruise industry is growing.
Oil. The ships run on 'bunker oil'. The cheapest stuff you can buy.
Veags has been taken over by the 'bean counters' who have decreed that every facet of the operations MUST make money. The shows are VERY expensive. ($125.00 for Copperfield several years ago.). The cheap food has all but disappeared. We used to enjoy Vegas but I know when I'm being gouged. I'd rather cruise.
By the way Carnival owns most all the other cruise lines, including Princess. The last I heard Carnival controls over 80% of all cruise business WORLD WIDE!!
If you were to invest in the business, Carnival is probably the best of the lot at this time.
Better bets are OFG (Banking), SFN, HMC, or STP if you are looking for growth in 2006.
I used to believe that there would be no other vacation choice for me other than Las Vegas. As a previous poster mentioned, the MBA's got hold of operations and pretty much eliminated all that was unique about Las Vegas.
We made the change to cruising. I was hesitant at first, but now am a frequent cruiser. We talked about going back to Las Vegas instead of a cruise last time - after looking at our options, we went on another cruise.
Carnival will soon be transferring their older ships from the various fleets that sail older vessels (Princess and Carnival). Those ships will likely end up with European and Australian subsidiaries where they will continue to generate revenue.
I cruise often and go to Vegas often. The typical vegas trip (air fare and hotel) is 4X as much today as it was 20 years ago. In the same timeframe, crusing (including airfair) has about doubled.
Not making any judgments based on this, but Vegas is not cheap competition anymore.
If you look back 5 or 6 years ago on posts on this board, the very same things were said. However, CCL made money through the recession and even after 9-11. They discounted and filled the ships and made money. Maybe a little less than before, but they made a profit. They generate enough cash to pay for a few ships a year with cash. The cruse industry is not in a bubble, IMO, and as the "boomers" start to retire they will cruise.
Excellant post. It really got me thinking.I tend to agree with alot you said. My only rebuttals are I dont think we are about to drop into deep recession and with this being an election year and 08 being another election year do not see how the GOP can let gas stay up to win re-election. 07 could be a worrisome year but barring catastrophe 06 is shaping up for a good year with employment and consumer spending good especially the way corporate earnings are coming in. Again a very good post!!!