As we pointed out in our 2/26/09 post, “CRUISING TOWARD STABILITY”, the cruise liners recently found their pulse. The good news is that the customer is elastic. Sure, prices are down a lot but at least the boats are full and the numbers are more predictable, at least for 2009. For the first time in a while we believe the Street estimates for 2009 are reasonable. That’s the bull case.
How long the bull case dominates the trading in the stocks is debatable. Indeed, RCL and CCL are up 68% and 45%, respectively, off of their March lows. It seems the 2009 stability thesis has played out. Now for the bad news.
I have no idea what the consumer will spend in 2010. However, if investors are looking for yield growth the economy needs to improve dramatically. Capacity growth is huge, as depicted in the following chart. If industry-wide capacity grows 10% in 2010, how can analysts project flat yield growth? Maybe my calculator isn’t as smart as their slide rules but negative yield growth in 2010 is pretty close to a mathematical certainty.
For investors hoping for capacity exiting the market, we’ve got bad news. Even the older boats are still cash flow positive. None of the operators, not even the small ones, have plans to reduce capacity, at least not through 2010. Unfortunately, the new supply is pretty locked as well due to very putative termination costs of breaking a shipyard contract.
As can be seen in the following chart, the number of Americans in the core cruising age group of 47-52 will grow only 0.8% in 2009. This represents the first year in decades that growth in this segment falls below 1%. More importantly, growth will slow every subsequent year until 2015. The segment population turns negative in 2012 and remains so until at least 2020. In 2020, the core cruising population will have dropped 9% from the peak of 2011.
The Wealth Effect
Given the business already booked and the price elasticity, 2009 revenue estimates are pretty reasonable and predictable. However, 2010 estimates look way too aggressive due in part to the capacity issue discussed above. Moreover, the significantly reduced wealth of the core cruising customer puts future demand at risk. This age segment could be the most impacted by The Wealth Effect reversal. A 50 year old is precisely the person that probably has much of his wealth in stocks and real estate, two of the hardest hit asset classes. Those looking to retire early have likely pushed back retirement expectations, and are not happy about it. Saving is more important now than almost any other time in their working lifetimes. You think a cruise vacation might be “backburnered”? I do.
The question now is when do investors turn their attention to 2010? They are certainly feeling better about the 2009 outlook as indicated in the big stock moves. However, when sentiment turns, as it inevitably will, 2010 will be the focus and it won’t be pretty.