Cruise Ships in the Moat
Expansion into underpenetrated markets could increase brand awareness and pricing.
Although the top three cruise operators-- Carnival (CCL), Royal Caribbean Cruises (RCL), and Norwegian Cruise Line (NCLH)--have more than 150 ships deployed, we still see opportunities for them to reach a wider set of consumers globally. In recent months, the major cruise lines have been increasingly vocal about widening their presence in the Asia Pacific region, particularly in China. If the expansion is carried out strategically, we believe this long-term opportunity has meaningful valuation implications, thanks to rising pricing power and earnings potential. However, we also view alternate emerging markets as an earnings catalyst to the cruise market over the longer term, especially countries in the Southern Hemisphere such as Australia and Brazil, which historically have been largely underrepresented source markets for the cruise industry.
The current timing couldn't be better for redeployment to lightly catered-to geographies (like China), or for sourcing more aggressively from previously underrepresented locations. First, the middle class continues to grow rapidly in countries such as Brazil and China, lending to more consumer discretionary spending. Second, advertising has historically been light in these areas, allowing the brands to cultivate a new, tailored message to reach potential cruisers. The strategic redeployment of capacity and realignment of source markets ultimately could lead to higher prices as brand awareness increases globally and the supply/demand paradigm shifts, helping improve profitability and valuation. We view this pricing power as indicative of strength in the cruise company brands, and the ability to harness increasing pricing power conveys strength in their economic moats.
Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.