Our proprietary cruise pricing survey continues to provide choppy data for the rest of 2012 and early 2013. Unfortunately, the incremental good news of European improvement and continued strength in Asia/Australia is more than offset by North America weakness. Overall, we think trends are slightly worse than when CCL and RCL management gave guidance on their respective earnings releases and calls.
Our pricing model tracks price changes relative to that provided on the last earnings call i.e. RCL - July 20 and CCL - June 22. Since CCL reported earnings a month earlier than RCL, we have confirmed that the conclusions described below also apply if the reference date is July 20.
First, the good news. FQ4 2012 is looking better for CCL relative to what we saw at the end of July. CCL European pricing, while lower YoY, continues to improve since the end of July. Costa pricing has somewhat stabilized. Europe accounts for 35% of CCL’s total capacity in F4Q. As for RCL Europe, improvement in Royal Caribbean and Azamara pricing offset discounting in the Celebrity itineraries in F4Q. Pricing in Asia/Australia also remains robust for both RCL and CCL in FQ4 2012.
Now, some bad news. RCL’s FQ4 Caribbean pricing seems to be losing steam, which may push yields closer to the flat line. More importantly, 2013 is not off to a good start for both cruise lines. Weaker Caribbean could pressure upcoming earnings if current trends hold. CCL mentioned in its 2Q conference call that F1Q 2013 will be the toughest fiscal quarter comp in ’13 due to an exceptionally strong performance from North America 1Q 2012. Our survey indicates CCL pricing is under further pressure in F1Q than just tough comparisons. Also, keep an eye on Mexico & South America as there is some pretty steep discounting and aggressive promotions occurring in those regions.
Summer 2013 pricing may pick up given easy European comps but expectations are not necessarily low. For FY2013, the Street is anticipating 3.1% and 2.6% net yield growth (current dollars) for CCL and RCL, respectively.
We mentioned in our June 4 note, CHART DU JOUR: CRUISE VALUATION SPREAD, that there was a pair trading opportunity by buying RCL and shorting CCL due to a valuation disparity and RCL's better positioning post-Costa Concordia. Since early June, CCL's valuation premium has shrunk from 6x PE to 3x PE (where it was on the day of the Concordia incident). While RCL has gained some market share in Europe, the company’s disappointing results show it is certainly not immune to the slowdown in European consumer demand.