Cruise-Line Pricing Is Lost at Sea

As Covid restrictions relax, cruise lines have been removing occupancy limits on ships and appear to be discounting to fill summer voyages. After an abysmal two years of losses and mounting debt,

Royal Caribbean,

Carnival

CCL -5.80%

and

Norwegian Cruise Line Holdings

NCLH -4.36%

are forecasting a return to profitability on the basis of adjusted earnings before interest, taxes, depreciation and amortization at some point this year. Those targets could certainly use the boost of more passengers in the face of rising costs.

Labor and fuel costs, which most cruise lines don’t hedge against, are soaring and comprise significant portions of cruise operators’ overall expenses. UBS analyst Robin Farley estimates Carnival’s labor and fuel typically account for around 29% and 20%, respectively, of ship operating costs, excluding sales and general and administrative expenses.

Wall Street is forecasting a significant rise in occupancy rates across all major cruise companies this year. Royal Caribbean is expected to boost occupancy from less than 60% as of March 31 to nearly 100% by the end of December. Truist analyst Patrick Scholes said in a note last month that it would likely take “significant additional discounting” and promotions for the industry to get close to meeting analysts’ year-end occupancy targets.

Cruise Critic notes pricing for next year’s cruises has held more steady, but discounted pricing could persist. Mr. Scholes has long warned that it has historically taken years for pricing to recover in the industry once it is broadly discounted.

Cruise operators aren’t even implementing fuel surcharges, despite the rise in fuel prices. Passengers, it seems, are a shrewd, deal-hungry bunch. With the price of some cruises dropping 20% to 30% since the time of initial booking, cruisers are often eating nonrefundable deposits to rebook at lower prices, Mr. Scholes wrote last month. That could mean reservations made at higher prices for future cruises might end up being rebooked at lower rates.

On the positive side, lower ticket prices often provide cruisers the means to spend more money aboard. Wall Street is very hopeful: While occupancy is expected to climb by 38 percentage points from March to December across Royal Caribbean’s fleet, for example, analysts are projecting onboard spending will more than double over that period.

One risk here is the percentage of cruise lines’ business that comes from repeat cruisers. UBS’ Ms. Farley estimates 30% to 60% of Carnival’s guests, for example, repeat cruises on the same brand within three years. While that certainly speaks to strong brand loyalty, it isn’t clear whether passengers who splurge while aboard their first cruise back after Covid will want to spend as much on subsequent voyages.

Cruise stocks are down an average of more than 50% over the last year and are now trading at levels seen in 2020, when the industry was shut down. Pricing for luxury cruises, at least, seems to be holding up—a positive for Norwegian, which has nonetheless seen its stock fall nearly as much as Carnival’s over the last year. Less than 5% of Carnival’s business is luxury, according to Truist’s Mr. Scholes, compared with approximately a third of Norwegian’s.

Across a battered group, that might make Norwegian’s stock the best deal right now, even if its voyages aren’t cheap.

Write to Laura Forman at [email protected]