Over 300 vessels, with the capacity to carry 540,000 passengers, make up the fleet of ocean-worthy ships in the cruise industry. And this industry is growing, with new ships scheduled for delivery as companies spend billions of dollars in a race to build bigger and more extravagant experiences for guests.

On this initial segment of Industry Focus: Consumer Goods covering cruise stocks, Vincent Shen and Motley Fool contributor Daniel Kline begin their discussion of this small corner of the global travel and leisure sector and its $38 billion in revenue last year.

A full transcript follows the video.

This video was recorded on Feb. 20, 2018.

Vincent Shen: To get our conversation started, I think it's important that investors that are new to this industry, this business, that they understand some big picture things about the industry. Dan, feel free to chime in as I walk through some of these numbers here. It's really interesting, actually.

First, I'm going to give some scale. The global ocean cruise fleet I could find is 310 ships with a capacity for about 540,000 passengers. And that number is growing as new ships come online. There's actually an estimated 90 new ships that will be delivered between now and 2025, and that totals an investment of $55 billion.

Dan Kline: It's also important to remember that doesn't always raise the total. Ships do come out of circulation.

Shen: Absolutely. Some of our operators, for example, will retire about one or two ships a year as they bring in new ones.

Kline: And ships generally move down the line. The three major companies we're talking about today will buy a ship, use it for its lifespan, sell it to one of the smaller companies or regional operators, and then eventually it will come off the sea completely.

Shen: So the scale again, that capacity, with over 300 ships, 540,000 passengers, it sounds pretty impressive, but you have to keep in mind that cruising only represents a small portion of the global travel and leisure industry. Various sources value global annual bookings in this industry for total travel and leisure at $1.2 trillion, but the cruise industry revenue last year was only about $30 billion, that's only about 3% of the total. By comparison, commercial airlines accounts for closer to $800 billion travel spending. You could consider this a niche within the sector.

Kline: You also very rarely take a cruise to get to a business meeting.

Shen: Yes, that's very fair. Overall, the cruises are becoming more popular worldwide, they're seeing strong growth rates. Average annual passenger growth since 1980 has been about 7%, and if we go back only 10 years, it's been about 4.5%. A lot of that is coming from newer developing markets like Asia.

The second thing I want to focus on beyond scale is who the customer is in this industry. There's definitely a concentration of them here in the U.S. In this corner of travel and leisure, there are over 1,000 port cities, there are destinations across dozens of countries. I think cruises will stop in every single continent. But the U.S. consumer is by far the leader in terms of cruise travel. The cruise industry only started to resemble its current state once cruises became more popular in the North American market. A few decades later, U.S. cruise travelers number about 11.5 million in a year. The next three largest markets are Germany, the U.K., and China. They each account for only about two million. That's out of about 26 million passengers annually.

Kline: It's a mature market in the U.S. There's growth potential.

Shen: Absolutely, and we'll get to that.

Kline: [laughs] Then I won't say it now.

Shen: [laughs] So the point I wanted to make on that is, close to you, Dan, Port of Miami is the largest cruise port in the world. They handle about five million passengers each year. Because of the concentration of popularity in the U.S., the most popular port destination in the world is not too far away, it's the Caribbean and the Bahamas, which make up one-third of all cruise capacity each year, while the Mediterranean, which is the next biggest destination, makes up about 15%. I was pretty surprised by that.

Kline: The Caribbean is sort of a starter cruise. That's where I went. I went in a family cruise. You can have a short itinerary. You can do a three day, a four day, we did a six day. And it doesn't take much. You don't even need a passport when you get off in most countries. The first cruise you go on, and the industry sort of knows this, is almost like where you get your sea legs. You figure out how it works, you understand how the ship is, what the ports are like. And then they're more likely to sell you on a more exotic destination.

Shen: Absolutely. And management speaks to that, about how the Caribbean and the Bahamas, for example, they feel like a safer destination for the U.S. consumer. It's close by and it's much more accessible in that way.

Kline: And there's nothing particularly adventurous about it. Most of those itineraries include a day at a private beach where it's very simple. You get off the boat, there's a barbecue, there's a beach. You're not exploring ancient ruins. The excursions are not anything particularly daring, maybe a zip line or a hotel pool or something. But if you've never been to a big resort or a theme park before, to go to one for a couple of days, you're probably going to have a better experience the next time, and the industry is absolutely understanding that one cruise is the gateway to another.

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