Overview: Royal Caribbean Cruises Ltd. is a cruise company. The Company owns and operates three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (Global Brands). The Company also owns joint venture interest in the German brand TUI Cruises and interest in the Chinese brand SkySea Cruises (collectively, Partner Brands). Together, its Global Brands and its Partner Brands operate a combined total of 49 ships in the cruise vacation industry with an aggregate capacity of approximately 123,270 berths as of December 31, 2016. Also as of December 31, 2016, the Company’s ships offer a selection of itineraries that call on approximately 535 destinations in 105 countries, covering all seven continents. Royal Caribbean International offers a range of itineraries to the destinations, including Alaska, Asia, Australia, Canada, the Caribbean, the Panama Canal and New Zealand with cruise lengths that range from 2 to 24 nights.
Industry – The cruise line industry is dominated by three main players: Carnival, Royal Caribbean, and Norwegian. North American passengers account for roughly half of global cruise traffic. Although the Caribbean region has the highest traffic, cruises do operate across the globe including the Pacific, Europe, and Asia. The average cruise passenger is ~49 years old and over 80% of cruise passengers are married. Cruise companies are notoriously correlated with macroeconomic trends. When the economy expands, cruises do well, and when it contracts, the cruise business suffers (in the past this has resulted in bankruptcies and consolidation).
Royal Caribbean – RCL manages cruise ships across the globe, with approximately 72% of their ships operating in the Caribbean. From an Economic Margin perspective, the firm has struggled with profitability over the past decade. However, EM’s became positive in 2015 and 2016 and are projected to continue increasing over the next two years.
In the United States, the equity bull market has run continuously since Q1 2009, with only a few bumps along the way. In the month of March, Consumer Confidence measures increased to the highest level since December 2000, based on figures from the Conference Board. As aggregate net worth and confidence increase, consumers gravitate to spend more on discretionary items. Importantly, consumers are tending to spend money on experiences, not material possessions. This should benefit the cruise industry as a whole.
Lack of Negative Headlines and Zika in Particular
In the summer of 2016, Zika virus headlines dominated media outlets and affected tourism in Florida, the Caribbean, and Central/South America. Although global cruise traffic remained strong in 2016, the outbreak of the virus forced Caribbean voyages to waive cancellation fees, offer new destinations, or allow passengers to postpone trips. In 2017, relatively little has been said about health and safety disruptions. With roughly three out of every four ships operating in the Caribbean, the upcoming summer season should be good for RCL.
Continued Efficiency Improvements
RCL has shown consistent cost-cutting improvements over the past few years. In particular, the firm has been able to lower certain variable operating costs, on a relative basis, such as booking agent commissions, general transportation costs, and onboard expenses. Additionally, the firm will continue to benefit from lower fuel costs that began in 2014. RCL currently has about 60% of their fuel hedged.
Newly Targeted Demographics
In 2018, RCL will expand its Adventure Series. Historically, cruise amenities were designed to offer a restful and relaxing vacation setting, which mainly attracted older demographics. In a push to appeal to a younger/middle-age audience, the company has rebranded many of its cruises as “Adventures” with a range of activities including zip lines, hiking/running events, scuba diving, scavenger hunts, laser tag and others. Drawing appeal to a larger audience should help RCL with market expansion.
Overall, we feel that the cruise industry represents an attractive investment opportunity in this spring and summer. The lack of negative headlines, high consumer confidence, and continued low fuel costs should benefit all companies. We believe that RCL in particular will gain from its push towards drawing a younger audience, its focus on the Caribbean region, and its improvement in variable expenses.
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