Carnival: plain sailing for cruise operators

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Having been nearly sunk by the pandemic, the cruise industry is buoyant again. Carnival and Royal Caribbean, the two sector leaders, are among the top 10 performers on the S&P 500 this year. Their shares are up 141 per cent and 161 per cent, respectively, while smaller rival Norwegian Cruise Line has gained 77 per cent.

Between 2020 and 2022, the three companies collectively lost $50bn as bookings plunged and trips were cancelled. But the industry currently has several things going in its favour.

Experience-based spending — particularly travel — is holding up. Florida-based Carnival this week reported an average 101 per cent occupancy rate during the fourth quarter, compared to 85 per cent last year and 104 per cent in 2019. Net yield, or the revenue per passenger per cruise day, excluding costs, for the period was 6 per cent higher than 2019.

Demand has remained robust, with two-thirds of 2024 occupancy already booked and at considerably higher prices, Carnival said.

Meanwhile fuel prices have been coming down. Carnival’s fuel cost per metric tonne in 2023 was about 16 per cent lower than 2022. Demographics are also on its side as baby boomers splurge on cruises.

Yet despite the impressive run, only Royal Caribbean is near its pre-pandemic high. Both Carnival and Norwegian remain about two-thirds lower than their peaks.

High debt levels might be giving investors pause. Cruise operators had to borrow heavily during the pandemic. Carnival has about $28.5bn of long-term debt. The $2bn it spent on interest expenses in the fiscal year contributed to the $74mn net loss. Its enterprise value-to-ebitda multiple of 12 times remains substantially higher than its pre-pandemic multiple of around 8 times.

Despite a heavy liabilities load, the cruise industry sails surprisingly smoothly. Improving cash flow enables the industry to pay down its debt. Given this, Carnival will leave remaining pessimists in its wake.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore