Norwegian Cruise Lines Earnings: Exogenous Events Hit Near Term, but Forward Bookings Still Healthy

Given impacts from both wildfires in Hawaii and the Israel-Hamas war, certain pockets of sailings have hindered no-moat Norwegian’s NCLH near-term potential. While the wildfires in Maui are extinguished, allowing for the resumption of the Pride of Hawaii’s year-round interisland itineraries, the duration of Middle East geopolitical instability is unknown. This explicitly impacted fourth-quarter occupancy levels as cancellations have accelerated and a more hesitant cadence of bookings have ensued for the region. In our model, this trend will surface in our fourth-quarter forecast through lower occupancy (98% versus 102% prior) and lower as-reported net revenue yield growth due to weaker close in bookings (up 8% versus up 12% prior), which will result in around a $0.14 EPS loss, versus just above our breakeven forecast prior. Moreover, costs are likely to run higher than our initial 3% increase excluding fuel in 2024, with Norwegian undertaking 170 dry dock days, which will provide a 300-basis-point (or $4 on a unit cost basis) headwind.

We plan to reduce our $26 fair value estimate by around $2 in response to near-term pressures in the Eastern Mediterranean that could persist into 2024 but still view shares as attractive given the limited capacity operating in this region and the still-strong booking picture. Specifically, over the next year, Norwegian noted it is at an optimal booked position at higher prices—and 2023 is already slated to generate net revenue yield metrics that are 4% higher than 2019 levels. This should keep Norwegian on a trajectory to collect 3% average pricing growth over the long term. Third-quarter results also provided evidence that the underlying business remains healthy—net revenue yields were 3% above 2019 levels, revenue per passenger cruise day rose 16%, and occupancy was at 106%. Additionally, the willingness to commit to the cruise product remains high, with $3.1 billion in advance ticket sales held, nearly 60% above 2019.