Though the U.S. is the focal point for the cruise industry, two-thirds of Americans have never enjoyed a cruise vacation. That figure is even lower in Europe and Asia.
In this segment from Industry Focus: Consumer Goods, the team continues its discussion of the cruising industry by looking at the large, untapped market across the globe and the seasonality that shapes important strategies for management teams.
A full transcript follows the video.
This video was recorded on Feb. 20, 2018.
Vincent Shen: The third thing I wanted to talk to you about in terms of high-level takeaways is the long-term potential for this industry. Even though the U.S. has a relatively high penetration, two-thirds of Americans have actually never been on a cruise, which actually also surprised me. Only 3.5% of U.S. consumers will travel on cruises annually, and that number drops to less than 2% for Europeans, and again, the opportunity for Asia, 0.1% for that region. As you can imagine, with the low number in Asia, that market, and China especially, is a big opportunity for these companies. And it gets mentioned in just about every single earnings call, industry outlook, and financial report that I could find.
The last thing I want to touch on is some of the more specific industry dynamics and things to know about how management teams plan out each year. A big part of that is seasonality, if you could touch on that, Dan?
Dan Kline: Basically, we're in the heart of the booking season. They call it the "WAVE" season. It's not an official period, but it's roughly three months, where the goal is to fill the ships at the best price possible. For a consumer, that tends to be maybe a little higher than you'd get at the last minute, but you get the most perks, usually, if you book early. Everything is about taking that boat and going, seven months from now, 12 months from now, whatever it is, it varies a little bit, up to about maybe about 18 months, we're at 60% capacity before anything has happened, or whatever the profitability number is, we've broke even.
And then they work their magic. Then you start to get, Dan has booked, and he's booked the cheapest possible cabin. For an extra $5 a day, do you want the next best cabin? Because that will free up a low-price cabin, which they can then market. Or maybe all the balconies have sold out, so they upmarket you a suite. It's a very intricate dance that starts in this season. And they push very hard, because they have to plan. You can't build a cruise ship in a day. As a matter of fact, you can't build one in six months. [laughs] I mean, I could, but they can't. So they have to figure out what their capacity is going to be. And if they have specific cruise lines, a seven-day trip that's not selling, they could cancel that trip, they could move the capacity elsewhere, they could reposition the ship. There's a lot of different ways. It's a very far-thinking industry.
Shen: I'll add to that that right now, the first three months of the year, that wave season that a lot of management teams will speak to, is the heavy booking season. The people who are booking trips, the busiest time of the year is obviously dictated by the summer months in the Northern Hemisphere. They account for by far the most demand, the best ticket prices that these companies can get, and also the largest share of their operating income coming from this period.
Kline: And they also use a very smart strategy. We talked about this a little bit before. If you're booking a Walt Disney World vacation, you generally have to pay for it. You have to buy your airline tickets. Maybe you don't pay for the hotel all at once, but you order your Disney tickets, you're paying for that within a couple of weeks, for all three pieces of it, or all at once. What the cruise lines do, specifically the more mass-market cruises, is this time of year, they let you book with a low deposit.
Shen: Get the reservation.
Kline: So it locks you in. Maybe it's $150, $200 a person. Maybe at a low-level cabin, you're getting $50 in onboard credit or free something for doing that. Then you can pay as you go. The brilliance of this is, by the time you get to the cruise, of course, you've paid it off, and you never wrote a big check. You most likely paid it off in little chunks. Which makes you feel freer when you get there about your ability to spend money. So then maybe you book some excursions, maybe you buy more drinks, maybe you up-sale a restaurant. It's a very smart strategy where at no point, if you want to do it this way, do you ever feel the pain of, "Oh, my god, I just spent $2,000 on a vacation."
Daniel B. Kline has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.