Too many ships? Cruise execs unfazed by capacity concerns

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The Norwegian Bliss will enter service in April.
The Norwegian Bliss will enter service in April.

With orders for new cruise ships stacking up nearly as far as the eye can see, concerns about whether there might be too many ships for the supply of potential passengers are once again making the rounds among investors.

To date, there are 90 cruise ships on order through 2025, backed by an estimated investment of $55 billion.

Next year alone will see the delivery of 16 oceangoing ships, including giants such as Royal Caribbean International's Symphony of the Seas (5,400 passengers), Aida Cruises' Aidanova (5,000 passengers), Norwegian Cruise Line's Norwegian Bliss (4,200 passengers) and MSC Cruises' MSC Seaview (4,138 passengers).

If the number of berths exceeds passenger demand, the argument goes, cruise lines could be forced to lower prices to maintain bookings, eroding the profits investors have come to expect.

On a recent conference call with Carnival Corp. executives to discuss fourth-quarter and year-end earnings, Stifel Nicolaus & Co. analyst Steve Wieczynski said worries about excess supply are the biggest negative overhanging Carnival shares.

"How do you guys counter that?" Wieczynski asked.

Carnival Corp. CEO Arnold Donald said that as the question pertains to Carnival, the answer is to keep capacity growth to a digestible number. Because Carnival Corp. has more than 100 ships in its fleet, he said even adding four more in 2018 -- one each for Carnival Cruise Line, Seabourn, Holland America Line and AIDA Cruises -- will only raise its berth numbers by 1.9%.

"We are very comfortable with our capacity growth in the coming years," Donald said. "We have been consistent with our execution around measured capacity growth, and we are going to stick with that."

He added that no one brand or geographic region is getting a disproportionate share of the new orders.

"We are very careful where we add capacity," he said.

Pressed by analyst Harry Curtis of Nomura Securities about "the somewhat higher growth in supply in 2019 and 2020," Donald turned to cruise's market share within the larger travel industry.

He said Venice alone attracts 24 million tourists annually, nearly the same number of people the entire cruise industry carried in 2017.

"So, I mean, we are just small," Donald said.

David Bernstein, Carnival Corp.'s CFO, pointed out that travel and tourism in general has been growing about 4% annually. That exceeds Carnival's capacity growth next year and is only a little lower than the company's projected 5% compound annual growth rate through 2022.

What's more, that doesn't account for eventual subtractions from the fleet. Lower fuel prices have kept some of Carnival's older Fantasy-class vessels -- such as the Carnival Ecstasy, Fantasy and Sensation -- viable in some smaller drive-market ports. But if oil returns to the range of  $90 to $100 per barrel, those ships could be retired.

Carnival Corp. sold two ships last year, P&O Cruises' Adonia and Costa Cruises' NeoClassica.

Carnival's publicly traded competitors, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings, have also touted their "measured capacity growth" in public comments.

On the other hand, MSC Cruises, one of the fastest-growing lines, is privately owned, so it doesn't have to respond to the concerns of Wall Street. In late November, MSC ordered two 4,560-passenger "Seaside Evo" ships for delivery in 2021 and 2023.

With the orders, the company is on track from 2017 to 2026 to add 12 ships worth $12.45 billion to the dozen ships it already owns.

Even so, MSC CEO Gianni Onorato said at the christening of the MSC Seaside that industrywide capacity growth is constrained to about 7% annually by the fact that only three shipyards worldwide have proven themselves capable of building large cruise ships.

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