Cruise lines record best profits in a decade

"All of our brands are performing at a level we've simply never seen," said Royal Caribbean Cruises Ltd. CEO Richard Fain. Pictured, Royal Caribbean's Harmony of the Seas.
"All of our brands are performing at a level we've simply never seen," said Royal Caribbean Cruises Ltd. CEO Richard Fain. Pictured, Royal Caribbean's Harmony of the Seas. Photo Credit: Rebecca Tobin

The cruise industry is closing out a year of extraordinary earnings, with several of the biggest companies enjoying their best profit margins in a decade.

Two of the three publicly traded cruise companies, Royal Caribbean Cruises Ltd. (RCCL) and Norwegian Cruise Line Holdings (NCLH), will have to wait until the end of the year to close the books on 2017.

But Carnival Corp., whose fiscal year ends Nov. 30, is already tallying the results and expects to report year-end results on Dec. 19.

A consensus of financial analysts who follow cruise lines is that Carnival will earn about $2.69 billion in a year during which a good economy, a longer booking curve, the right mix of deployment and a near absence of geopolitical or self-inflicted disasters have cruise bookings hitting on all cylinders.

Through the first nine months of its fiscal year, Carnival earned $2.06 billion on revenue of $13.3 billion, a net profit margin of 15.5%. 

Adding back the $392 million it subtracted from profits this year to write-down the assets of its inefficient P&O Australia brand would make those margins higher, probably more than the 16.9% recorded in 2016.

To find similar levels of profitability for Carnival, investors would have to go back to 2007, before the housing-related financial meltdown, when net income hit $2.4 billion and profit margins were 18.4%

Carnival Corp. CEO Arnold Donald, in a conference call with analysts in September, said that despite that month's spate of hurricanes, Carnival was in a strong enough position that it didn't plan any big promotions.

"At this point in time, we are well ahead on bookings and well ahead on pricing," Donald said.

If anything, it is even better at other lines.

At RCCL, after the third quarter ended on Sept. 30, the company reported net income of $1.3 billion on revenue of $6.8 billion, yielding an eye-popping 19.7% margin. A decade earlier, in 2007, RCCL's profit margin was 9.8%, a level that it didn't surpass until 2016.

CEO Richard Fain said, "2017 has been a particularly strong year, with a good economy, good consumer confidence driving high demand." He warned it wouldn't be surprising if 2018 was less profitable.

After posting record second-quarter results, Fain told analysts that in a normal year there are lots of pluses and minuses that usually balance each other out. "But this year, we are experiencing many more positive forces than negative ones. Part of this appears to be industrywide," he said.

Fain added: "All of our brands are performing at a level we've simply never seen. Our guest satisfaction ratings are at the highest point in our history, and they keep rising. Our onboard revenue figures are doing well, both in terms of sales and satisfaction."

For NCLH, analysts are forecasting 2017 net income of $834.5 million, up from $633 million a year ago. Through the first nine months the company earned $661 million on revenue of $4.1 billion, for a 15.9% profit margin.

NCLH CEO Frank Del Rio said on a conference call after the earnings were announced, "Sustained and robust consumer demand from all our top source markets for major destinations has resulted in a booking curve that is at an all-time high and that has yielded very strong pricing for voyages throughout the third quarter and beyond."

He added that revenue, earnings and number of guests booked were higher than in any quarter in the company's history.

Ten years ago, Norwegian, then a stand-alone cruise line, lost $227 million on revenue of $2.2 billion. This month it was accepted for listing on the New York Stock Exchange.

The cruise industry's 2017 profit margins are surpassing its hospitality peers. Hotel/gaming companies are seeing an average profit margin of 8.6%, according to a database maintained by the Leonard N. Stern School of Business at New York University.

Cruise executives said the margins would have been higher, possibly topping 20% at RCCL in the third quarter, had it not been for the active and damaging hurricane season in the Caribbean.

RCCL calculated that 2017 net income would be $55 million higher but for the expense of canceled cruises, port-of-call relocations and weakened future bookings in September when potential customers were distracted by the storms.

The robust year has been good for those associated with the cruise industry, including investors, employees and travel agents. Carnival Corp. has raised its quarterly dividend twice in 2017: 14% in April, then another 12% in October. RCCL raised its dividend by 25%, to 60 cents a share, in September.

NCLH does not pay a dividend, but some analysts expect it to start in 2018.

Employees, too, have benefited. At NCLH's Norwegian Cruise Line, gratuities on specialty dining and drinks packages were raised from 18% to 20% earlier this month. And many travel agencies are having a banner year.

Mike Hanlon, in his third year as a Dream Vacations franchisee in Wilmington, N.C., said he started as a land specialist but now is selling more cruises than ever. "I've more than doubled my bookings from last year," he said.

Ross Spalding, president of Crown Cruise Vacations, said that although 2017 has been very good for bookings and produced higher yields than he had anticipated, many of the sailings, and thus agency profits, won't materialize until 2018.

Wall Street analysts said that by getting more of their ships filled further out from departure, cruise lines have entered into a virtuous cycle of relative scarcity, leading to increased demand and thus to higher fares.

"Cruise companies have effectively locked in some of this strength, as they have elongated their booking curves," SunTrust Robinson Humphrey analyst Patrick Scholes wrote in a Nov. 8 report. "Near-in bookings (always the wild card in cruise) are a smaller part of the mix today versus recent history, and companies are avoiding last-minute discounting."

Scholes recommended that investors hold shares of NCLH and buy shares of RCCL and Carnival. Of the 25 analyst ratings listed for Carnival Corp. stock on a page of the company's investor-relations website, 24 are "strong buy," "buy" or "hold" recommendations. Only one rating is "sell."


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