Cruise Supply and demand

[never_cruised]

I asked this question in another section but didn't get a reply so posted here in the RCCL section purely because Royal Caribbean are one of the lines investing in larger ships and expanding capacity on older ships.

It seems with nearly every day that goes by we hear of new expansion projects for existing ships or new ships announced.

 

Whilst I'm aware the amount of people cruising is expanding are we likely to see cruise lines struggling to fill rooms in the future ?

[ONECRUISER]

Maybe someday, but now Royal consistently fills their ships at average of 104%

Only time in 20 years saw them struggle was for about 6 months after 9/11. I could get on their newest ships for cheapest ever. Paid $799 total for myself on a 7 nite balcony on Explorer. Had no single supplement. Also did a 5 nite for 2 was $59 each, tax was $50ea of the $59ea, so total was $118 for 2 of us in an ocean view... But cruises now are cheaper then 30 yrs ago, $1 for $1, not even taking inflation into it...

Edited May 31, 2018 by ONECRUISER

[chengkp75]

Due to the capital intense nature of ship ownership, the time delay between ordering a ship and delivery, the limited amount of shipyards that do newbuilds, and particularly cruise ships, the industry tends to be cyclical. There will be periods of large demand, when lines will order ships, and then when those ships are delivered, because everyone ordered a few ships, the capacity will overbalance the demand. In fact, all of the maritime industry tends to have these cyclical swings of supply and demand.

 

As for struggling to fill the ships? Don't think so. The cabin fares, even the discounted ones, generally cover the ship's operating expenses, so the profit is made through the onboard revenue (drinks, specialty restaurants, casino, excursions, etc) after taking out corporate overhead. So, in times of high demand and low supply, the rates go up and the cruise lines make additional profit. Then when supply goes up (new ships), the fares go down due to more competition for the same passenger, so the profits decline, but the ship still makes money.

[Sobro]

Looking at my recent SEC Form 10-K, in 2017 RCI (all cruise lines) carried 5,768,496 passengers on 40,033,527 cruise days, and states that Available Passenger Cruise Days numbered 36,930,939 for an occupancy rate of 108.4%.

 

 

Also, net income in 2017 was $1,625,133,000.00.

[Sobro]

And as far as the demand curve goes, RCI reported occupancies of 106.4% in 2016, 105.1% in 2015, 105.6% in 2014 and 104.7% in 2013.

[chengkp75]

Looking at my recent SEC Form 10-K, in 2017 RCI (all cruise lines) carried 5,768,496 passengers on 40,033,527 cruise days, and states that Available Passenger Cruise Days numbered 36,930,939 for an occupancy rate of 108.4%.

 

 

Also, net income in 2017 was $1,625,133,000.00.

 

When you take that $1.6 billion and compare it to the $22 billion in assets, that is a return on investment of 7%, which is respectable, but must also be tempered by the knowledge that the line has obligations to acquire (new build) 13 ships with a book value of $11 billion, so that ROI could be diluted some as the new ships come on line.

[Baron Barracuda]

Occupancy rates don't really tell the story. Ships virually always sail full. What matters is how heavily they have to discount those final cabins.

 

The following interview with Fain appeared in Barrons today. They specifically ask about capacity growth. Apologies for the formatting. Article was in subscribers section so couldn't post link.

 

 

 

What’s On Deck for the Cruise Industry?

 

Richard D. Fain has been running Royal Caribbean Cruises since 1988, the tail end of the Reagan presidency. Now 70, with no plans to retire soon, Fain is upbeat on the industry and his company’s place in it. He’s convinced that Royal Caribbean has just scratched the surface in finding customers outside the U.S.

Barron’s named Fain one of the world’s 30 best CEOs in our latest issue, partly due to the value he has created for Royal Caribbean (ticker: RCL) shareholders. Since the company went public in 1993, the shares have returned 12% annually, compared with 10.5% for the S&P 500. In a recent phone interview with Barron’s, Fain discussed the industry’s attractive outlook, how big ships have helped Royal Caribbean’s growth, and his transition from Royal Caribbean board member to company captain.

 

Barron’s: How has the business changed in the years you’ve been running this company?

Richard Fain: The cruise industry has totally revolutionized itself. It has gone from being a niche player meeting the needs of a very small part of a very select geographic area to being a worldwide phenomenon that offers a relevant vacation experience all over the world.

 

Will big ships be the key driver of growth in the future?

One of the beauties of the cruise industry is that it hasn’t succumbed to the temptations to homogenize itself. Each company, each brand, is really quite different. For a lot of companies, the large ships are part of the success story, but others do very well with small ships. Over a 12-month period, we took delivery of the Symphony of the Seas, which has about 5,500 berths, and we will add the Celebrity Flora, which has about 100 berths. It is expected to start sailing next year.

 

What is the role that big ships have played in the company’s growth?

One of our objectives is to be aware of—and focus on—our customers’ wish for more and better things to do. That has led us to a strategy of building somewhat larger vessels, which give us an economy of scale. We reinvest some of that economy of scale into upgrading the quality and sophistication of the product. Traditionally, it was thought that the smaller the ship, the higher the per diem. So you either got high price but low economy of scale or you got low price and high economy of scale. However, we believed that people’s wish for experiences would lead them to pay more to go on a ship that was larger and had more and better activities, amenities, and experiences. So we spent more money on art. We spent more money on activities. We spent more money on things that would help people communicate, including Wi-Fi. In your office at Barron’s, you are probably within 100 feet of a land connection to the internet. But on a cruise ship, that’s not really possible. So traditionally you’ve had Wi-Fi, or internet access, come from satellites in far-Earth orbits. The result has been that the amount of bandwidth available to the ship is relatively low and the latency—the time that it takes for the signal to go up and back—is pretty long. Several years ago, we signed an exclusive agreement with a company called O3B, which wasn’t putting up satellites that saturate an area. Instead, their satellites have beams that go directly to one user, in this case a ship. We went from what all of us in the industry had, which was not very good connections, to much better connections.

 

 

Why is Wi-Fi so important to your business?

Beside the fact that the guests like it, good Wi-Fi is a great marketing tool, because our guests are sending photographs from the ships. In today’s world, it is not only important to have an experience, it is important to share the experience.

Some investors are concerned about oversupply in the cruise industry. Does capacity growth look rational to you?

It is definitely rational. The issue isn’t oversupply. The issue is our ability to continue to generate the growth in demand, and we are seeing that has continued to snowball. Once somebody takes a cruise, they come back and tell their co-workers about it, they tell their brother-in-law about it, and our future is secured. We have begun to be a more common vacation experience in the U.S. But in the rest of the world, we’ve really only begun to scratch the surface.

Is China going to be a key market for you?

Yes. Before long, China will probably be our second-largest market [after Europe in terms of destinations].

I had operating experience from the other company, but being a board member is a little bit like being a grandfather, which I can tell you from personal experience is one of the best things in the world. You have all the authority and none of the responsibility. The transition from board member to CEO is definitely a major transition. It helped having been on the board. I knew the company, I had some strategic views, and I worked with the company’s founder, Ed Stephan, who was a terrific visionary for our industry. But when you actually step from the boardroom into the wheelhouse of a cruise line, it is a daunting move and scarier than I expected. But it’s also more thrilling, because you could actually effect more change.

Before becoming the CEO in 1988, you had worked at a shipping company and been a board member at Royal Caribbean for nearly a decade. Did that give you a head start in figuring out the job?

I had operating experience from the other company, but being a board member is a little bit like being a grandfather, which I can tell you from personal experience is one of the best things in the world. You have all the authority and none of the responsibility. The transition from board member to CEO is definitely a major transition. It helped having been on the board. I knew the company, I had some strategic views, and I worked with the company’s founder, Ed Stephan, who was a terrific visionary for our industry. But when you actually step from the boardroom into the wheelhouse of a cruise line, it is a daunting move and scarier than I expected. But it’s also more thrilling, because you could actually effect more change.

What will the cruise industry look like in 10 years?

The most important part of what we do is still the people. It is still the men and women who provide that vacation. The ship is a tool for that. The other thing is the destinations to which we take them and how we relate to those destinations and how we support tourism in a sustainable way—all of that will be an increasingly important factor.

Thanks, Richard.

[karena1]

I don't know about that, but I am totally thrilled with some of the prices I am getting. I have Allure for next April for a total of $1400 for a balcony! All I have to pay is tips and I have OBC for that. So super excited. Same with our 3 night cruises. We are getting balconies on Mariner for less than OV on Enchantment. So Win Win for us

[broberts]

Looking at my recent SEC Form 10-K, in 2017 RCI (all cruise lines) carried 5,768,496 passengers on 40,033,527 cruise days, and states that Available Passenger Cruise Days numbered 36,930,939 for an occupancy rate of 108.4%.....

 

I'm having trouble understanding how occupancy can exceed 100%. Does the 8.4% represent no shows and those denied boarding?

[AmazedByCruising]

I'm having trouble understanding how occupancy can exceed 100%. Does the 8.4% represent no shows and those denied boarding?

 

I believe that's a third/fourth person in a cabin.

[AmazedByCruising]

When you take that $1.6 billion and compare it to the $22 billion in assets, that is a return on investment of 7%, which is respectable, but must also be tempered by the knowledge that the line has obligations to acquire (new build) 13 ships with a book value of $11 billion, so that ROI could be diluted some as the new ships come on line.

 

The company adds the ships to the balance, so its total value increases more than what they paid for the ships as the new ships are making money at 7% as well.

IMHO, dilution would take place if the companies decided to invest their money in less-performing investments, or even worse, leave it in the bank at 0.3% interest.

[ONECRUISER]

I'm having trouble understanding how occupancy can exceed 100%. Does the 8.4% represent no shows and those denied boarding?

Opposite. 100% is all cabins with 2 passengers per. Over would be more as some cabins hold more... Example is Voyager's two passenger capacity is: 3114 Total beds is: 3840

[chengkp75]

The company adds the ships to the balance, so its total value increases more than what they paid for the ships as the new ships are making money at 7% as well.

IMHO, dilution would take place if the companies decided to invest their money in less-performing investments, or even worse, leave it in the bank at 0.3% interest.

 

That assumes that the new capacity is matched by new demand, so that cabin fares remain as they are now, to keep the ships making 7%. There is no guarantee that the 7% ROI would continue in the future. Historically, after a large newbuilding program, supply exceeds demand for a few years, so fares drop and while the overall profit continues to increase (in total), the ROI may not remain stable or increase.

[Joebucks]

Over-saturation can definitely happen. There's a few ways this can go:

 

Expanding internationally is probably the best option. There are tons of countries that have a big lack of cruise options.

 

Prices going lower. As ships get larger, economies of scale get better. They are already getting into different fuel options. It is unlikely that they grow the cruise business with higher prices. More upsell opportunities and more choices catering to more people will be the ideal growth method.

 

Continuing to improve the experience. Cruises are already a different experience than they were in the past. As much as people complain about change, the changes are necessary to capture more people. As ships have more options including shopping, activities, and private island resorts, more people will be interested in cruises

[Ourusualbeach]

I'm having trouble understanding how occupancy can exceed 100%. Does the 8.4% represent no shows and those denied boarding?

Occupancy is reported at double occupancy so 100% occupancy is 2 guests in every cabin. Many cabins hold more than 2 thus the 108%.

 

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[AmazedByCruising]

That assumes that the new capacity is matched by new demand, so that cabin fares remain as they are now, to keep the ships making 7%. There is no guarantee that the 7% ROI would continue in the future. Historically, after a large newbuilding program, supply exceeds demand for a few years, so fares drop and while the overall profit continues to increase (in total), the ROI may not remain stable or increase.

 

True, but when I invest in a cruise line I simply expect them to buy more ships when they can. The investment is a bet that ships bring in more than land based resorts, or Google or whatever, so more of those ships, please :)

 

I don't see 13 RC ships as a large newbuilding program compared to a world wide fleet over more than 300 ships. There's Europe where in my country cruising was hardly advertised just 4 years ago. Now it's hard to not see an ad on TV. And there's China. I wonder if the ship builders will be able to keep up. Maybe I should invest in those :D

Edited June 1, 2018 by AmazedByCruising

[chengkp75]

True, but when I invest in a cruise line I simply expect them to buy more ships when they can. The investment is a bet that ships bring in more than land based resorts, or Google or whatever, so more of those ships, please :)

 

I don't see 13 RC ships as a large newbuilding program compared to a fleet over more than 300 ships. There's Europe where in my country cruising was hardly advertised just 4 years ago. Now it's hard to not see an ad on TV. And there's China. I wonder if the ship builders will be able to keep up. Maybe I should invest in those :D

 

The 13 ships is just for RCI, then there is Carnival and others. Total orders are 15 for 2018, 23 for 2019, 18 for 2020, 17 for 2021, 16 for 2022, and so on. You have to look at total industry capacity and demand, not just one line's share.

[AmazedByCruising]

The 13 ships is just for RCI, then there is Carnival and others. Total orders are 15 for 2018, 23 for 2019, 18 for 2020, 17 for 2021, 16 for 2022, and so on. You have to look at total industry capacity and demand, not just one line's share.

 

Where do you get all these numbers?

 

89 ships, about 30% more capacity in 5 years. That's not even 5% growth per year and even less when older ships are scrapped. Just adding the Europeans discovering cruising in 5 years should be enough to fill those cabins. When the well of Chinese and Indians start cruising like Americans do, 300 ships/year may not be enough to fullfil the demand.

[AmazedByCruising]

The 13 ships is just for RCI, then there is Carnival and others. Total orders are 15 for 2018, 23 for 2019, 18 for 2020, 17 for 2021, 16 for 2022, and so on. You have to look at total industry capacity and demand, not just one line's share.

 

Where do you get all these numbers?

 

89 ships, about 30% more capacity in 5 years. That's not even 5% growth per year and even less when older ships are scrapped. Just adding the Europeans discovering cruising in 5 years should be enough to fill those cabins. When the well of Chinese and Indians start cruising like Americans do, 100 ships/year may not be enough to fullfil the demand.

[chengkp75]

Where do you get all these numbers?

 

89 ships, about 30% more capacity in 5 years. That's not even 5% growth per year and even less when older ships are scrapped. Just adding the Europeans discovering cruising in 5 years should be enough to fill those cabins. When the well of Chinese and Indians start cruising like Americans do, 300 ships/year may not be enough to fullfil the demand.

 

From shipyard order books. What that number of ships doesn't reflect is the fact that the most newbuilds reflect more berths per ship than the average of the existing fleet. The Chinese market is somewhat disappointing at present, not meeting expectations, but should expand in the future. There is also no guarantee that traditional markets like the US will continue the present expansion.

[yuvraj]

I believe the growth is anticipated due to increased international demand. Especially from areas where cruises are not saturated.

 

As far as RC is concerned, I believe they will continue to sell of older ships as they build new ones. If the older ships satisfy other markets (premium or budget) then they will not necessarily be competing or adding to capacity.

 

I see cruise lines in the same way as hotel chains. We need variety to suit different types of customers and spend expectations.

[Biker19]

We spent more money on things that would help people communicate, including Wi-Fi.

Except on older ships, where we really don't care about it as much.

[AmazedByCruising]

From shipyard order books. What that number of ships doesn't reflect is the fact that the most newbuilds reflect more berths per ship than the average of the existing fleet. The Chinese market is somewhat disappointing at present, not meeting expectations, but should expand in the future. There is also no guarantee that traditional markets like the US will continue the present expansion.

 

Are those order books freely available?

Many more berths/ship, that certainly true. Anyway, RC and Carnival shares would be nice in any portfolio, even at 0% the free OBC is better than what the bank offers.

[Baron Barracuda]

Are those order books freely available?

Many more berths/ship, that certainly true. Anyway, RC and Carnival shares would be nice in any portfolio, even at 0% the free OBC is better than what the bank offers.

 

Cruise ship order books are easily viewable online. Just ask google.

 

While RCL and CCL stocks have performed well in the past both are trading down from a year ago, so maybe not so nice. And since the shareholder credit isn't combinable with most other promos it's no longer much of a perc.