In 2023 Carnival (CCL -0.13%) had 3.5 million first-time cruisers aboard its fleet of ships. To put that in a better context, it attracted 51% more new-to-cruising guests in the fourth quarter of 2023 than it did in the fourth quarter of 2022. Is this a sustainable growth driver?
Carnival believes it offers great value
Carnival has been benefiting from a resurgence in demand for cruises following the effective industry shutdown during the early days of the coronavirus pandemic. But that demand isn't just coming from existing cruisers -- there's a whole new contingent of people who are experiencing cruising for the very first time. As noted above, 3.5 million new-to-cruise guests came aboard a Carnival ship in 2023.
Image source: Getty Images.
That has helped the company increase occupancy levels, ending 2023 at 98% of the pre-COVID average. At the same time, Carnival has been adjusting its business to push customers toward more on-board spending. More customers and more onboard spending is a double win. According to the company, 2023 unit-adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) exceeded 2019 levels.
The caveat with the unit-adjusted EBITDA metric, which is a company-provided figure, is that it holds fuel prices constant to 2019 levels. That isn't what has happened in real-time -- fuel price inflation has been a big headwind for Carnival and other cruise lines. Still, the key takeaway is that the company is executing well of late, and new-to-cruising customers are a key driving force. Management summed up what's going on during Carnival's fourth-quarter 2023 earnings conference call:
In 2023, we captured over 3.5 million new-to-cruise guests and remain well-positioned to continue to take share from land-based alternatives. In other words, we are gaining momentum in our ability to close the unwarranted value gap to land-based alternatives. And to aid in that effort, we can further champion the fact that while many land-based alternatives have pulled back on service levels, we still deliver incredible service to our guests, thanks to our amazing crew. This pairs exceedingly well with the expansive amount of guest-pleasing amenities offered on board our newer fleet.
Simply put, with the price of a trip to someplace like Walt Disney's hugely popular Disney World on the rise, choosing a cruise is an increasingly compelling option. To put a number on that, a one-day ticket to Disney World runs around $150 per person. So a family of four would cost $600 just to walk into the park. Hotel rooms and meals would be extra.
To be fair, Disney offers discounts for buying multi-day passes, but with rates like that, you can see why consumers are increasingly looking to cruises. An entire cruise could cost $600 (or less) per person, and includes the cruise, food, and a room. Cruise ships are also including more and more amenities, like amusement-style rides, water parks, and sports facilities, to better compete for traveler's dollars.
Carnival's good news can only go so far
This is a very good story for Carnival, and for the cruise industry more broadly. And it is important to note that cruises are usually booked well in advance. Carnival, for example, locked in a record $6.4 billion in customer deposits in the final quarter of 2023, up 31% since the fourth quarter of 2019. It is likely that many of the customers who have made deposits will be new-to-cruise customers. And while customers can cancel, most of the deposits the cruise line has collected will likely turn into full payment. Carnival appears well-positioned as it enters 2024.
But here's the problem: Rapid growth in new-to-cruise customer demand can only go on for so long. First off, cruising, regardless of the value it offers, is not a necessity. If the economy should weaken, demand will fall, including among new-to-cruise guests. This is a cyclical industry, and investors have to go in understanding that an industry pullback will happen at some point. When that happens, industry growth won't be the focus anymore.
Second, numbers just don't go up forever. There are only so many potential customers, and only so many rooms on Carnival's cruise ships to accommodate them. At some point, 50% new-to-cruise customers growth just isn't sustainable. In fact, if the new-to-cruise guest count leveled off at fourth-quarter 2023's high rate for all of 2024, 2024 fourth-quarter growth in new-to-cruise guests would be zero on a percentage basis. Meanwhile, if there were a decline in the number, the growth rate in new-to-cruise customers would be negative, even though it would still be at a high rate. You simply can't grow something at 50% a year for very long.
Great information, but don't get too excited
It is wonderful that Carnival is attracting customers who have never been on a cruise before. It improves the outlook for future performance since those customers can become repeat cruisers. But investors need to take this company's talking point with a grain of salt. The numbers are impressive today, but they probably won't remain this impressive for very long. It is just too hard a growth rate to sustain given the economic sensitivity of the industry, the inherent constraints of ships and, well, the way basic math works.
You should probably be prepared for this good news to turn sour. That doesn't mean Carnival will suddenly be a bad company, just that this good news story will have run its course.
