Cruise lines have enjoyed strong demand for the reason that end of the Covid pandemic, leaving some investors wondering if the great times will proceed. UBS believes they’ll. For one thing, the gap between cruise prices and onshore hotel prices continues to be “significantly wider” than it was in 2019, UBS analyst Robin Farley wrote in a note on Monday. “While cruise lines will always have a gap to hotel prices because there is no business travel in the cruise sector to support prices, there is no fundamental reason why this gap should be significantly wider in 2024 than it was in 2019, particularly because U.S. hotel price growth has been driven by leisure demand,” she said. In the primary quarter of this yr, U.S. hotel prices rose over 20% in comparison with 2019, Farley noted. While cruise lines have seen strong year-over-year demand, per diem rates — how cruises measure berth rates per day, including onboard revenue — are lagging behind hotel rates. Royal Caribbean saw per diem rates rise 16% in 2023 from 2019, Norwegian Cruise Line rose 6%, Carnival rose 6% and Viking's per diem rates rose 17%, she said. Viking just went public on May 1. In addition, cruises are benefiting from retiring baby boomers who need to spend more time traveling and millennials who’re slowly reaching cruising age, Farley said. The trend began before the pandemic, accelerated ticket prices and continues to be ongoing, she added. “Demand for cruises is also tied to consumers' broader desire to accumulate experiences rather than objects,” Farley wrote. “We believe the same dynamic will continue to benefit cruise demand, as hotels have already seen an increase in leisure travel beyond pre-pandemic levels.” In fact, the industry is attracting not only repeat customers but additionally recent passengers, she said. For example, Carnival's number of latest cruise passengers rose greater than 20% in the primary quarter, he identified. “We see 2024 benefiting not just from pent-up demand, because this is entirely new demand,” Farley said. Melius Research can be optimistic concerning the way forward for the industry and believes cruise lines are set for further margin expansion over the following few years. “Cruise demand has rebounded sharply since the start of 2023 and prices have followed suit. There have been concerns about the sustainability of price increases, but each quarter demand/price growth accelerates,” analyst Conor Cunningham wrote in a May 28 note. “Cruise lines are now just catching up to hotels in price growth from 2019 and have further upside as they try to close the gap with land-based vacations (historically 15% off versus 30% today).” Meanwhile, Morgan Stanley's channel checks show bookings proceed to normalize partially because of low remaining inventory and consumers “tightening their belts.” But cruise prices are holding up, analyst Jamie Rollo said in a note Friday. The firm recently met with management at Carnival, Royal Caribbean and Norwegian and the feedback has been “uniformly positive,” he said. Who will profit: Royal Caribbean is the highest pick of UBS manager Farley, who rates the stock a “buy.” Her $168 price goal on the stock suggests about 9% upside from Friday's closing price. “RCL's wave season was the strongest in the company's history from a volume and pricing perspective,” she wrote. “RCL is in record booking position, with 2024 rates further ahead of 2023 than they were at the start of the year.” In April, the cruise operator reported first-quarter earnings beat and raised its full-year earnings per share forecast. “Consumers are doing exceptionally well. Demand is very strong and increasing,” CEO Jason Liberty told CNBC in April after the earnings call. The company's management told Morgan Stanley during its recent meeting that the strong demand was driven by structural growth in travel, in addition to spending by higher-income passengers and the cruise-to-land value gap, which is about 25% to 30%, in comparison with the 15% gap pre-Covid. “Demographics are encouraging: half of the company's guests are now millennials, the share of new customers on cruises is above pre-Covid levels, and rebooking rates are double what they were in the past,” Rollo wrote. “The growth in capacity of the private island destinations and technological improvements should provide additional benefits over several years that the company views as structural advantages.” Rollo has an equal weight rating on the stock, although that’s his relative preference within the industry. Meanwhile, Farley also has a buy rating on Carnival. Her $21 price goal implies about 26% upside from Friday's closing price. She believes the stock will profit from Celebration Cay, a non-public island set to open in summer 2025. The cruise line's management told Morgan Stanley it sees continued demand because of the 20 to 45 percent value gap over land-based vacations. The private islands currently receive as many guests as all of its competitors combined, and one other 4 million are expected when Celebration Cay becomes fully operational, said Rollo, who’s underweight on Carnival. “CCL's brands are seeing customers travel less frequently but spend more (for example, when they take one cruise and travel in a suite versus two trips in balcony cabins),” he wrote. Another name on Farley's buy list is Viking. She believes the corporate should profit from travel demand from upscale consumers. Her $35 price goal suggests 11 percent upside from Friday's closing price. Finally, Farley is neutral on Norwegian. She expects the cruise line should profit from a powerful demand environment, but said there are still balance sheet and execution challenges. Earlier this month, the cruise operator raised its full-year earnings forecast, citing strong demand and improved outlook for the yr. At the meeting with Morgan Stanley, executives expressed confidence that Norwegian can save $300 million.
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