Tom Stieghorst
Is this as good as it gets?
Apparently that is the question on the minds of some investors in the cruise sector as reflected in a question asked of chairman Richard Fain during Royal Caribbean Cruises Ltd.'s first quarter conference call.
Barclays analyst Felecia Hendrix said some investors are concerned that Royal's lights-out financial report and ebullient comments about current business trends may signal that it's time to sell.
Fain answered, in part, that things do go up and down and nothing lasts forever.
"But overall, I think I would just say more and more people are understanding the wonderful value of cruising and so as that message gets out, we're really seeing people learning and moving forward," he said.
That's a pretty good answer from the cruise line's perspective. From a travel agent's perspective, I can think of at least one way things could get better from here. Agents would benefit if the current signs that inflation is beginning to pick up were to get stronger into the future.
Travel agents have endured a long period of extraordinarily low inflation. Upward pressure on prices means higher fares in nominal terms, and agents haven't had that tailwind, even though cruise line ticket yields have been increasing due to other factors.
In February, annualized inflation rose above the Federal Reserve's 2% target for the first time in five years. (Monday's March report from the Commerce Department showed annual inflation as measured by the CPE index rising 1.8%.)
For cruise lines, higher inflation can be a mixed blessing. Although inflation boosts nominal revenue it also shows up in cost increases, which at Royal Caribbean have been surprisingly tame recently.
Cruise agencies, however, get paid commission off the top line. Unlike cruise lines, they are not labor intensive businesses or big purchasers of commodities like fuel, subject to crippling expense increases.
What is most important to their earning power is the number of tickets sold and the number of zeros in the price. Whether or not the cruise lines make money off those sales is really only relevant for agents in the long term.
Currently, business is good for agents because it is good for cruise lines. But it isn't as good as it gets. A modest increase in inflation, one that wouldn't overheat and damage the economy, would be one way that a good situation could get better from here on out.