Can Carnival Adapt to the Changing Economy?

Carnival PLC (CUK) / Carnival Corporation (CCL) is the world's largest cruise ship operator and part of the S&P 500. Current analysts forecast earnings per share dropping 10% to $2.79 for this 2008 calendar year. But the game changed in September and October. Trillions of dollars disappeared from the economy and the world markets crashed. The fundamentals upon which analysts based their projections have changed.

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What is different now for Carnival?

• Fuel prices have fallen dramatically. Carnival does not appear to hedge their fuel requirements so this will be an immediate benefit to Carnival’s bottom line.
• Americans (USA and Canadians) account for 90% of Carnival’s passengers in 2007. Although the recession has caused a drop in USA passengers, because of the dollar's weakness Carnival could turn to Europe to fill their ships. European passengers pay with strong British Sterling and Euros. But the dollar has strengthened, adding up to 20% to the cost of these cruises for the Europeans. Further, there has been some backlash by American passengers when confronted by East European social skills. There is a question whether this is alienating repeat American passengers.
• No matter what happens, Carnival will fill its ships by reducing the price you pay for the cruise. Carnival has come up with loads of new ways to get you to spend the savings on the price you paid for the cruise once you get on the ship. An insider has stated: “We have become quite accomplished at emptying your pockets once onboard.” But passengers have also wised up to this game by drinking less on board and not relying on the ships' sponsored tours. It will be interesting how this plays out in this economic downturn.
• Cruises are pre-booked up to 18 months in advance. There is evidence that bookings are up in the latest reporting period. According to CLIA studies only 17% of the likely passengers are retired, and the median target passenger is 46 years old and makes $93,000 per year. This translates to 83% of all passengers still working for a living. This is the group that has watched their 401K evaporate and their home value nest egg deteriorate. This is the group saving for retirement, and most likely to cut back on vacations to try to rebuild their retirement funds. Carnival must find replacement customers outside their traditional base.
• Carnival is constrained by 22 new ships being put into service between 2008 and 2012. The only weapon is price cutting due to this additional capacity, as there is little doubt now that a worldwide recession is setting in. In the past, ships could be repositioned to stronger markets. This will not happen this time as the markets are saturated. The only bright spot may be Asian passengers depending on how the worldwide recession plays out. Again, how will they mix with American passengers who have different diets and different social skills – not to mention a different language. And how to get the Asians to want to vacation aboard a ship?
• Carnival is not in a position to benefit from customers selecting more value in cruise options. They have ships to appeal to the entire range – from ultra expensive to value for money. Any migration of passengers from the high end cruises to lower end cruises will affect their profitability negatively.

Short term, Carnival appears to be profiting by the economic changes. Long term, Carnival is faced with the partial destruction of its traditional customer base. The long term question is who will these new customers turn out to be, and how these new customers can be integrated into current customer mix?

We live in interesting times.

Disclosures: None

Comments

[Ryanwahlstrom:]

Glad to see the post and generally agree with your comments, but the statement "Americans (USA and Canadians) account for 90% of Carnival’s passengers in 2007" is inaccurate. According to its 2007 annual report "In 2007 nearly one-third of our passengers and 46% of our revenues were sourced from outside the United States." I also wrote about the subject titled Cruise Value will be enough.... at www.ryanwahlstrom.com/...

2008 Oct 23 07:48 AM

[Steven Hansen:]

"In 2007 nearly one-third of our passengers and 46% of our revenues were sourced from outside the United States."

i have rechecked my source of the number (which was from the CLIA) and now realize the numbers I used was from North American Operations. As shipping industry expenditures are usually in dollars, this actually makes the situation worse as europeans are paying with devalued euros or sterling.

it will be interesting how things will play out but for now things are very uncertain.

2008 Oct 23 09:22 PM