Norwegian Pricing and Occupancy Hold Up Thanks to Solid Hardware and Itineraries

Changes to consumer behavior surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings NCLH, affecting its ability to generate excess economic rents. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which proved successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. However, with ships now fully deployed at normal occupancy levels, pricing has been restored, set to surpass prepandemic levels in 2023. Still, Norwegian could intermittently see pricing competition as global supply shifts to focus disproportionately on the North American consumer, containing yield upside. On the cost side, higher oil prices and unfavorable foreign exhange could keep costs elevated in 2023. However, we expect both pricing and costs to normalize over time, rising at a low-single-digit rate longer term.

Altogether, these factors lead to average returns on invested capital, including goodwill, that we think are set to fall below our 10% weighted average cost of capital estimate over a multiyear period, supporting our no-moat rating. While we believe Norwegian has carved out a compelling position in cruising thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. We don’t believe it will be challenging to capture the historical levels of spending over the near term, given the value proposition the cruise product offers.

While liquidity issues appear to be alleviating for cruise operators, Norwegian can still opportunistically access the credit markets to optimize its interest-rate risk. Flexible refinancing across capital market efforts signals Norwegian’s dedication to derisk the balance sheet over time as demand normalizes. Given that the firm should generate positive EBITDA throughout 2023, the $899 million in cash of Norwegian’s balance sheet (as of June 2023) should provide liquidity for the firm to operate with over the near term.