• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

This note was originally published at 8am on June 28, 2013 for Hedgeye subscribers.

“Be good or I’ll send you on a nightmare cruise.”

-A warning to children that is spreading fast among parents

It’s Friday and time to start planning your summer vacations, if you haven’t already.  What will it be? A gambling spree to Vegas or white-hot Macau? A trip to Six Flags, Disney World, a vacation resort, or an exotic country?  Or spending less than the price per night at an economy motel for an all-inclusive (minus the cost of getting your butt there) cruise trip to the Caribbean? Here are 5 reasons why our Gaming, Lodging, and Leisure team, led by Todd Jordan, thinks the last choice should be avoided:

1)      A slim but fat enough chance that you may be stranded out in open water with no food and malfunctioning bathroom facilities. 

a.      12-year old Allie Taylor, who was abroad the infamous Carnival Triumph (aka poop cruise) where an engine fire stranded the ship for four days, described the moment perfectly, "I just wanted to vomit, like every second probably."

 

b.      Number of people at Hedgeye who want to take a chance aboard a ‘hot port-o-potty’: zero. 

2)     ‘I’m on Fire’—not because the ships love playing classic Bruce Springsteen but because they love to catch on fire e.g. Carnival Triumph, Grandeur of the Seas (operated by Royal Caribbean), Pullmantur Zenith (operated by Royal Caribbean)

3)     Norovirus (stomach flu) spreads like wildfire.

4)     If you’re new to cruising, think about which cruise brand and ship you trust.  Given all the embarrassing ship incidents in 2011-2013, it’s not easy to find one. Stick with the other potential 1st time cruisers, who have been turning towards other forms of entertainment, such as amusement parks and vacation resorts.

5)     Are you willing to save some bucks for mind-blowing unpleasantness?

We became bearish on the cruise industry from a TREND perspective starting with Carnival Cruise Lines (CCL) shortly after the Triumph incident (02/10/13). While Wall Street 1.0 and travel agents initially brushed aside Triumph as just another event, not really comparable to Costa Concordia—the Carnival-operated ship that capsized off the western coast of Italy on 01/13/12—we viewed the incident as a serious Carnival brand killer.  We believed Carnival needed aggressive marketing spending and discounted prices to fill capacity; Carnival later confirmed this on its F2Q earnings report, as promotional spending guidance will pick up in the 2H of 2013.  (see our notes, CHART DU JOUR: CCL: IT COULD GET SMELLIER (02/14/13) and CCL: SINK OR SWIM (03/19/13) for more details.)  After two guidance cuts, mainly stemming from the Triumph incident, Carnival’s EPS and yield expectations for FY2013 are finally reachable, but the company admits it will be a slow recovery for the tarnished Carnival brand (2-3 years). 

With Carnival licking its many wounds, we think the next opportunity on the short side is with Royal Caribbean (RCL). While RCL picked up market share in the face of Carnival’s woes early in the year, its own recent troubles may pressure performance for the rest of the year.  Based on our mid-June proprietary pricing survey for ~13,000 itineraries, we’re seeing pricing weakness in the RC brand.  The RC brand accounts for 64% of RCL’s total capacity for 2013.  Part of the discounting was attributed to negative publicity surrounding the Grandeur of the Seas fire (05/27/13)—a RC brand—but the pricing trend has signaled further deterioration since early June.  We analyze YoY trends as well as relative trends, which are determined by pricing compared to the last earnings/guidance date for a cruise operator e.g. RCL: 4/25.  Europe is particularly concerning for the RC brand in F3Q, as YoY pricing has turned negative, a sharp reversal from modest growth in May.  RC brand pricing is also struggling in the Caribbean, declining in the mid-single digits in mid-June, substantially lower than that seen in May.  So far, F4Q pricing is relatively unchanged relative to late April. 

Alaska is another region to keep an eye on.  While Alaska is bolstered by record bookings, it is still discouraging to see the Celebrity and RC brands significantly slash prices to fill cabins.

Thus, the tide may have shifted for Royal in June and the high end of its net yield guidance of +2-4% looks too aggressive if the pricing weakness continues into the summer months.  While Carnival mentioned on its F2Q conference call an improvement in the performance of its European fleet, it is mostly based on its Costa brand’s outperformance.  RCL doesn’t have Costa nor as easy comps in Europe as CCL, and we believe the challenging and competitive environment there will continue to prevail for some time.  As for North America, the Grandeur fire has muddied the visibility somewhat.  It remains to be seen whether RC brand pricing will recover in the coming weeks.  Royal Caribbean also has been hit with some recent isolated ship incidents, i.e. two Celebrity Xpedition itinerary cancellations to the Galapagos due to violations of local law and the Pullmantour Zenith fire. 

These cruise operators just can’t catch a break.  We shouldn’t take a break with them.

For additional information on the cruise pricing database, company models, or written research, please contact sales@hedgeye.com.

Our immediate-term TRADE Risk Ranges are now (TREND bullish or bearish in brackets):

UST 10yr 2.43-2.74% (bullish)

SPX 1559-1622 (neutral)

Nikkei 12815-13698 (neutral)

USD 82.33-83.89 (bullish)

Yen 96.67-99.67 (bearish)

Gold 1178-1295 (bearish)

Enjoy the summer weather,

Felix Wang

Senior Analyst, Gaming, Lodging & Leisure

Vacation Unchecked - ww.chartday

Vacation Unchecked - ww. porto