The cruise industry is back. We were able to say we
entered 2024 the highest we've ever been booked. There are millions and
millions of customers coming in to the cruise industry
and then onto our ships that have never cruised before. About 36 million passengers
are expected to embark on a ship in 2024. That's about 20% more than
2019. Cruising offers an
unbelievable combination of two things, and that is
being easy to book, easy to execute and often the price
being quite low. But the industry is coming
off its toughest test yet. The coronavirus that's
sickened passengers on a cruise ship a week ago
remains in quarantine. Two years into the pandemic,
the cruise lines had accumulated about $74
billion in debt. Bleeding cash flows and
tanking share prices led to questions about whether the
industry could recover. We started hearing people
talking about cruising is dead, but of course
cruising is not dead. So how did cruise lines make
this astounding comeback, and what does it mean for
the future? Although historically
plagued by viral outbreaks, nothing could have prepared
the cruise industry for February of 2020. Thousands of quarantined
passengers. Anthem of the seas was
supposed to be at sea tonight. We have a couple of hundred
new cases. We were seeing something
completely different. We were seeing ships being
turned away from ports, people not being able to
disembark. Stocks of the big three
public cruise companies plummeted in the first
quarter of 2020, and the industry had to shut down
for 15 months. By September of 2022, the
three public cruise lines had accumulated $74 billion
of debt. That balance comes with a
big interest expense burger. Um, we were chugging along
at about $200 million of interest expense before the
pandemic, and now, you know, it's hovering around $1.8
billion. There is no textbook. There is no business school
class. There is no experience that teaches you
on what happens one day when you're not operating for a
very long period of time. So we really spent the time
to focus on that, get our cost structure in place,
while at the same time making sure that we
maintained our ships very well. By 2022, the cruise lines
were up and running as 20.4 million travelers decided
to get back on the water. When the shackles came off
the industry. When the CDC stepped away
from the industry, bookings went through the roof. And so did share prices. In 2019, Royal Caribbean's
gross revenue was nearly $11 billion and Carnival's was
nearly $21 billion. Those numbers are expected
to reach about $16 billion and $25 billion,
respectively, in 2024. We're coming off of a 2023
where I got to use record every single quarter record
revenue, record pricing levels that we were
achieving at an accelerated over the course of 2023. And that momentum continued
into 2024. It's a business that
generates a lot of revenue, a lot of margin, a lot of
cash flow. And we were confident that
once we got back into service that we would
accelerate into this and that the demand for icon,
as well as our broader fleet and brands was going to be
exceptionally strong. And that has clearly proven
out. The Icon of the Seas, the
biggest ship in the world, and the latest addition to
Royal Caribbean's fleet, sailed its maiden voyage
out of Miami in January of 2024. It started booking
back in October of 2022, where it set the company's
record for single day bookings out of the big
three public cruise companies. Royal Caribbean
maintained the highest overall 2023 ticket revenue
increase compared to pre-pandemic levels, and
its profitability increased to. The best profitability
measurement for this business. It's probably
EBITDA per capacity unit, right? So literally how
much profit they make on every cabin, right? On average. And if I look
at 2024 and what we're modeling for 2024, Royal
Caribbean has grown that that metric versus 19,
whereas the other two have not. Despite that, 2023 was
Norwegian's first profitable year in terms of net income
since 2019. One analyst called it the
biggest growth story in the cruise sector. In April of
2024. We're seeing record book
positions, record guest traveling, record prices,
and it gives us great optimism for the future. Once a ship sets
sail,operating expenses don't change much, whether
it's full or not. That means historically,
the cruise lines have done whatever they can to fill
their ships. So when the cruise industry
looks over at the airline industry and sees that the
airline industry has trained all guests, right, and you
and me to to not wait until the last minute and to
expect if you wait in the last minute, you're going
to pay the highest price. That's what the cruise
industry wants for itself. And now that's finally
happening, at least for Royal Caribbean and
Carnival. Simply put, these graphs show how, as the
ship's sail date approached in 2022, prices went up in
2023 at an even stronger rate. Norwegian, the third
largest cruise line, has not experienced the same shift. Low to high. That's the
ideal, right? Not high to low, where you
have 90 days to basically sell distressed inventory. That's a bad habit to get
into. Consumers know it, the
trade knows it, and they'll take advantage of that. But it's not only the
ability to increase prices as the sale date nears. That's important. According
to experts, traveling on a cruise ship has
traditionally been about 25 to 30% cheaper than land
based traveling. That difference widened
during the pandemic. Today, it sits at about 40
to 50%. We'll always be able to say
we're evaluated right. We can always be lined up
against land alternatives and be at a discount. We just shouldn't be at
this much of a discount. Royal Caribbean's cash
management during the pandemic is part of the
reason why its stock price has recovered faster than
its competitors. The number one reason why
Royal Caribbean has outperformed its peers and
recovered the fastest, is because they issued the
least amount of equity during the pandemic, all of
the companies had to issue equity. All the companies
had to issue debt, all the companies had to issue
convertible debt. And Royal Caribbean was
able to manage its cash position in a way that that
utilized the least amount of equity. For Carnival, it was a
different story. They had to issue about 400
million additional shares in 2020. This was our survival at
risk and we made the tough decisions, but right
decisions to be able to see ourselves through. Catering to different
segments and operating in different countries also
posed a bigger challenge for Carnival, who owns nine
brands internationally. Royal Caribbean, on the
other hand, only fully owns three, with most guests
being from North America. A majority of their capacity
is the flagship brand. I've heard industry
insiders liken it to basically a startup of
getting these ships up and running from from zero
revenue to being fully operational and full of
customers. And so I think it helps
that it was one big brand. United States ran out the
gates in the fall of 2022, and Europe didn't. Because the fact is, our
European brands that are based in Germany, Italy,
the UK, they were dealing with energy crises. Private destinations have
also been a contributing factor in the industry's
comeback. Carnival is investing $500 million to
build a private beachfront in the Bahamas. Royal Caribbean's Cococay
opened back in 2019 and accommodates 3 million
annual guests. Today, as we accelerate out,
you know, we were really well positioned because of
the strength of our brands, our ships, the private
destination at Perfect Day at CocoCay, that really
brought strong preference for our business, which
helped us accelerate and use that additional cash flow
to help right the balance sheet. Closing the discount that
cruising has on land based travel is key to the
industry's future. One way they are trying to
do so is by driving pre-cruise spending. All the companies have seen
an increase in that area relative to 2019 levels. What we're seeing is those
consumers are are basically spending about 20 or 30%
more than they did with us pre-COVID. They now know
all the restaurants they can book on the ship. They can now book their spa
appointments in advance. They can book all their
shore excursions in advance. They use machine learning,
and they use sophisticated data methodologies to to
maximize the amount people will spend. While they're constantly new
ships being built. It's happening at a slower
rate. We are not interested in an
explosion of growth for the sake of the fact that there
are open slots in ship yards , that's not the right
approach. The right approach is we
need to reward our brands, who simply cannot manage
the demand profile because they are out of space. For too long, new builds
have almost been a bit of a crutch for us Carnival
Corporation, because it does drive a lot of good things,
but it also covers up well, how are we doing on the
underlying business? But there are some concerns
ahead for the industry. The contribution to climate
change is one. It takes about a 10 to 15
second Google to see that cruise ships are not good
for the environment. Are there things that
cruise ships are trying to do to take the edge off of
that? Yes, of course, but
inherently, by the nature of it, it's not in the
environmentally friendly ways to travel. The big three all planned to
achieve net zero emissions by 2050, although it's
unclear how exactly that's going to happen. You don't know how to get to
net zero yet. If anybody tells you, let
me know because I'd love to mimic it. We don't know. We do know, if we use less,
no matter what the answer is we're going to be ahead of
the game. Despite environmental
impacts, the value of cruising over land travel
continues to be its strongest appeal. Drawing
in new demographics is important to keeping the
industry's momentum. Currently, 36% of cruise
travelers are Millennials and Gen Z. The economics of cruising is
appealing to younger people now. And, you know, a lot
of times younger people, they tend to be a bit more
cash strapped. So suddenly a style of
traveling that they may have thought was more for their
parents or their grandparents age is looking
pretty good to them. Capitalizing on the current
momentum will be key to moving forward. The
industry plans to do so by closing the pricing
discount to land travel. It remains to be seen how
customers will respond, especially given the
industry's volatility around future viral outbreaks. We feel really good about
2024, and we feel really good about the momentum
that continues to build.
