Cruise Lines Set to Benefit from Surge in Demand, Says Redburn Atlantic
According to Redburn Atlantic, cruise lines experienced a significant decline in market capitalization during the two years of the Covid pandemic, losing approximately 80% of their pre-pandemic value. However, there is now a surge in demand that is driving a rapid recovery, leading Redburn Atlantic to identify a promising investment opportunity. Analyst Alex Brignall has upgraded Carnival and Norwegian Cruise Line to a buy rating, with increased price targets suggesting potential upside for investors. Brignall highlights the improved pricing outlook for the cruise industry, driven by strong travel demand, particularly in leisure travel.
Demographic Factors Driving Demand
Brignall notes that the cruise industry, with an average guest age of almost 50, is poised to benefit from a "turbocharged" version of the overall travel demand. This is due to the projected growth of the U.S. over-65 population, which is set to increase at a rate of more than 2% per year until 2030, four times the overall population growth rate. Retirees, who are benefiting from high interest rates on their savings, are expected to contribute significantly to the increased demand for cruises.
Cruise Pricing and Market Trends
While cruise pricing has lagged behind that of leisure hotels, Brignall attributes this to longer booking windows and travel restrictions. The analyst highlights that the discount for cruises has risen from 20% pre-pandemic to nearly 40% in 2023. However, it is worth noting that the historical discount of 20% has remained consistent from 2006 to 2019, indicating that the gap has not widened over time. Brignall expects the cruise lines to gradually close this gap over the next five years, leading to 3% annual yield growth from 2023 to 2027, supported by favorable market trends.
Challenges and Recovery for Norwegian and Carnival
Norwegian, as a high-end cruise line with an older customer base and a more complex product offering, has faced particular challenges during the pandemic. The company has been more heavily impacted by sailing restrictions. However, Brignall anticipates an improvement in this regard. On the other hand, Carnival has experienced a slower recovery due to a delayed reopening in Europe, where it has greater exposure compared to its peers. Under the leadership of CEO Josh Weinstein, who assumed the role in 2022, Carnival has restarted its multi-brand, multi-language, decentralized business.
In early trading on Thursday, shares of Carnival and Norwegian were up 4%. Both companies have seen significant growth this year, with Carnival climbing 93% and Norwegian increasing by 39%, driven by the ongoing recovery in leisure travel.
Note: This report includes contributions from CNBC's Michael Bloom.
Conclusion: The Rising Tide of Cruise Line Recovery and its Impact on New Businesses
The resurgence in demand for cruise lines, as highlighted by Redburn Atlantic, presents a unique opportunity for new businesses in the travel and leisure sector. The projected "turbocharged" demand, driven by demographic shifts and high interest rates benefiting retirees, indicates a robust market for cruise travel in the coming years.
Adapting to Market Trends
New businesses can leverage these insights to align their offerings with the evolving market trends. The anticipated closing of the price gap between cruises and leisure hotels over the next five years presents an opportunity for businesses to capitalize on the growing appeal of cruise travel.
However, the experiences of Norwegian and Carnival underscore the importance of resilience and adaptability in the face of challenges, such as sailing restrictions and delayed reopenings. New businesses must be prepared to navigate similar obstacles and seize opportunities for recovery and growth.
In conclusion, the recovery of the cruise line industry and the projected surge in demand offer promising prospects for new businesses in the travel and leisure sector. By understanding and adapting to market trends and overcoming challenges, these businesses can ride the wave of this "turbocharged" demand.