Do Bigger Ships Mean Larger Profits?

Cruise ships have been getting larger--in fact, the maximum capacity of the biggest cruise ships almost doubled from about 3,000 passengers to approximately 6,000 passengers within the past 10 years. While some like larger cruise ships for their wider offerings of activities and features, others are concerned with issues like safety and fuel efficiency.

I will be looking at listed cruise companies Carnival (NYSE: CCL  ) , Royal Caribbean  (NYSE: RCL  ) , and Norwegian Cruise  (NASDAQ: NCLH  )  to see how the increased sizes of cruise ships have affected these companies' operations and their attractiveness as investments.

Are bigger ships more dangerous?
The 2012 Costa Concordia accident, where 32 lives were lost in an accident on a cruise ship owned by Carnival, has raised doubts about the safety of larger cruise ships. Some are concerned that it takes more time to evacuate the passengers of a larger ship, potentially increasing the death rates for such unfortunate accidents. Others worry that it is also more difficult to do a thorough inspection of larger ships, increasing the probability of ship faults going undetected.

Although the French Association of Cruise Companies has claimed that the size of modern ships has no impact on their safety, cruise accidents have already had an impact on safety regulations and safety-related spending for cruise companies. Following the Costa Concordia accident, the Cruise Lines International Association introduced several new safety directives to tighten current regulations regarding cruise ship safety with respect to crew training and the recording of passenger information. Separately, Carnival also committed to $600-$700 million  on fire protection and backup systems in April 2013.

The extra costs of compliance with safety regulations and enhancing safety capabilities will affect both Carnival and its peers in the short term. However, Carnival has an advantage over its competitors by virtue of its market leadership. With close to half of the global market share, Carnival has the ability to spread safety-related spending and investments over a significantly larger revenue base. Historically, it has already delivered ROAs superior to that of its peers in every single year in the past decade thanks to economies of scale.

Can bigger ships deliver fuel savings?
While larger ships typically use more fuel than their smaller counterparts over the same distance, larger ships also give architects opportunities to incorporate more fuel saving features. For example, Royal Caribbean's new and larger ships, Oasis of the Seas and Allure of the Seas, use about 25% less fuel than the rest of its fleet. Larger ships like these are equipped with engines of different sizes, to cater to different energy usage needs under various conditions. This will enable operators to optimize fuel usage. 

In the long run, the increased sizes of cruise ships should spur cruise companies to work with their partners on more efficient fuel systems to minimize the impact of fuel volatility on operations. Unfortunately, this is not a sustainable competitive advantage for Royal Caribbean in the mid-to-long term. Nothing stops its peers from installing their own energy saving additions to drive greater cost efficiency.

Size gives you greater freedom
When I plan to travel overseas, I usually prefer to design my own itinerary instead of relying on organized tours by travel agencies. Freedom is all that matters in going for a vacation. A vacation is no longer a vacation if you have to eat at designated times and venues, or dress for the occasion. Norwegian Cruise's "freestyle cruising" concept is one such example. Passengers have a wider variety of dining options. You can sit down for a three-course meal at the main dining room if you are in the mood for a satisfying culinary experience. Alternatively, if you are rushing for time, you can grab some fast food like burgers at cafes.

Larger ships will allow Norwegian Cruise to push its "freestyle cruising" concept further. For example, its new ship Norwegian Breakaway will boast the first Aqua Park at sea, complete with water slides and rope courses. Although Norwegian Cruise's competitors don't use the term "freestyle cruising," they are certainly leveraging larger ships to offer more choices to passengers.

Come sail away
There is no conclusive evidence that larger cruise ships are any less safe than their smaller counterparts. In fact, cruise companies have capitalized on the sizes of their new ships to entice customers with more attractions and incorporate more fuel efficient features into the ships. However, larger ships, fuel efficient systems, and the range of attractions can be easily duplicated by competitors with time.

Hence, it is not the size of the ships that matter, but the size of the cruise companies' operations that confer them with significant cost advantages. Of the three listed cruise companies, Carnival is my top investment candidate. As the outright global market leader in the industry, I expect it to leverage its size advantage to cruise ahead of its competitors.

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  • Report this Comment On November 07, 2013, at 9:01 PM, Lenrapp wrote:

    I am a travel journalist and president of International Press Association and publisher of IMPress Magazine. We cover a number of travel resorts and cruises for our publication and have cruised with RCL who we feel is one of the best in terms of comfort, value and overall customer satisfaction.

    I think you missed the point of the super sized ships which is the ability to deliver a better customer experience then the smaller ships can. We did a review and half hour video last year on the Independence of the Seas which you can see at: http://ipaimpress.com/ultimate-cruisers-guide-royal-caribbea...

    In talking to the captain, ships hotel director, entertainment director and executive chef, as you will see in our article and video they can offer much more then the smaller ships.

    Their entertainment on the larger ships are similar to the shows you might see in Las Vegas or Broadway shows, their theaters on the Freedom Class Ships, can accommodate close to 1500 passengers. The choice of dining is well, excellent with more menu choices and specialty restaurants and the activities they can provide on the larger ships is second to none.

    From the captains point of view, the larger ships are safer then the older or smaller ships since they have the state of the art safety and navigational features. You mention the Concordia which was an old ship that was being navigated by a captain who made too many mistakes.

    You are not correct in your assumptions and if you ask any real traveler who has cruised they will tell you that if you want the biggest bang for the buck, the only way to go is the Allure of Oasis of the Seas.

    Now older clientele might light Carnivals Holland American Lines which we also covered two years ago. No fancy show, very few activities, but their food was quite nice. So depending on what you are looking for the Super Ships for the active or family cruiser is probably the best choice, for the older client it might be some of the smaller ships that offer superior dining choices.

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