Profiting from Cruise Line Competition

Deep Cruise Package Discounts Signal Trouble Ahead for Stocks

By Rudy Martin | Dec. 3, 2008

The smooth sailing days for the leisure cruise industry may be over. Stock dividend cuts and deep fare discounts are now the norm. Smart shoppers should take advantage of this situation. Here are some new ideas you should consider for fun and short sale profits.

The special deals on many cruise lines extend well into 2009 and 2010. They range from short, budget-oriented weekend trips to long and exotic luxury voyages. Some of the industry's hottest new ships, like the Celebrity Solstice and the Carnival Splendor, are available at bargains.

What’s behind this?

On October 31st, Carnival Corp (NYSE:CCL) announced that it was suspending its dividend for at least a year. The stock promptly slid from $22 to $15 in a matter of days. Investors reaction was also swift and negative for the other major cruise company Royal Caribbean (NYSE:RCL) which saw its stock price halved in a mere 14 days. It too announced it was suspending dividends on its stock.

Despite the brief price rebound in these two stocks, recent travel industry and economic data indicate a potentially worsening environment ahead.

• The US remains in a recession. This month, according to the National Bureau of Economic Research, the recession reached the twelve month mark, with continuing broad-based weakness in job growth and income.

• People are traveling less. Global traffic statistics published by the International Air Transport Association indicate a further substantial decline in air travel. Passenger traffic fell 3% in September and slid another point in October over the prior year. International passenger traffic now has dropped for five consecutive months and all indications are for lower travel activity near-term.

• Reservation cancellations are rising. Cruise lines are normally resilient to the economy. But recent drops in Carnival’s operating income bear out a bleaker scenario. There is a pronounced slowdown in the number of bookings compared to the same time last year, as disclosed by Carnival management on its recent conference call to explain the dividend cut. Trip cancellations are also up, as individuals stay home and spend less.

• Capital requirements (and debt load) have increased. The large cruise lines require billions to invest in newer, high-tech ships that will attract travelers. For example, Carnival borrowed $443 million in June to pay for part of the Splendor and another $353 million for the Ruby Princess. Fortunately CCL has nearly $4 billion in cash and various financing facilities to meet its near-term capital expenditure and interest expense needs.

Unfortunately, the long term investment implications of deep discounting across the board are inevitably not positive for the publicly-traded cruise stocks.

Cheaper cruise stock prices are likely.

Over the last five years, bed days statistics from the Cruise Lines International Association show travel to the most popular Caribbean and Bahamas destinations, 37% of total cruise travel, has not been growing.

Cruise managements are aware of this and have been building new destination routes to compensate for the saturated markets. Transatlantic and South America bed days have more than doubled in the last two years, while Mediterranean have risen 60% during the same period.

But the primary markets are saturated with competition.

To make things worse, over the next two years the North American cruise industry will add 20 new ships, which will create another 18% more beds to fill. This new capacity could not have come at a worse time.

The “wave season” runs from January through mid-March and is typically the busiest booking period of the year. By the end of this first quarter it will be clear whether cheaper rates are here to stay and whether the cruise industry stocks have peaked.