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How Is Carnival Cruise Lines Doing?

By Motley Fool Staff - Jul 28, 2019 at 11:30PM

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The company has had clear sailing but there are some clouds on the horizon.

Carnival Cruise Lines ( CCL 8.08% ) has 19 new ships planned between now and 2025. The question is whether demand will rise around the world to fill up all of those ships. The company remains vulnerable to global unrest and it has faced some short-term headwinds because of fuel prices and the loss of the ability to make stops in Cuba. That hasn't stopped the company from being on a record pace for bookings and inching its revenue steadily higher.

In this episode, host Shannon Jones talks to Fool contributor Dan Kline. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 23, 2019.

Shannon Jones: All right, Dan, let's turn our attention to the biggest cruise operators, the biggest of which we'll start with first. That's none other than Carnival, ticker CCL. Dan, from a high-level perspective, how's Carnival doing?

Dan Kline: As we talked about a little bit before, they're doing very well, but they're using a cautious optimism. Booking numbers are up, revenue numbers are up, everything is going along swimmingly with the minor exception of having to revise down a little bit for fuel prices and the loss of Cuba. But when they talk, the company does not want to say everything is great because it's very fragile. If you look at the fact that they're committed to 19 new ships by 2025, that's a lot of added capacity. It's a lot of new markets. It doesn't take that much for that to fall apart. They did slightly bring down their full-year revenue, but it's still very robust, and bookings are tracking ahead of the previous year. So it's smooth sailing ahead, but you never know when a storm is going to come up.

Jones: Truly never know when a storm is going to come up. I know they've also had to deal with some headwinds on the European front. You've got Brexit, concerns in Italy. It sounds like all in all, basically, Carnival knows that there's going to be some short-term headwinds, but that's not stopping them from investing into their fleet and continuing to build out the massive amount of ships that they have under the banner.

Kline: In addition to building 19 new ships, they've also done some major renovations. The ship I'm actually going to be out in December, they've done much to it, a multi-hundred-million dollar renovation, that they're changing its name. Why is this important? Because Carnival makes about 75% of its revenue from you buying a ticket. The other 25% comes from onboard revenue. Royal Caribbean, it's closer to 50/50. So, if you're a Carnival, and you can redo your ship to add more for-fee restaurants, more experiences that cost money, more shopping opportunities, another place to play bingo that they charge you $20 and keep about half the revenue compared to the prizes -- the more they can add that's going to entice you to spend money... They're also adding free venues as well, and experiences that don't cost money. But the more they can get you to spend, they can keep the same amount of passengers and up their profit. I don't know what the profit is when you buy a $7 Starbucks drink on a Royal Caribbean ship, but I'm going to guess it's very, very high compared to drinking the free coffee that's included.

All of this investment is about, generally, having the bigger ships that wow people, that generally sell for the highest prices, because people want to try all the new stuff, and targeting certain markets. Some of the European ports cannot take a 6,000-person mega ship, so you need a 2,200-person capacity ship that still has a lot of the bells and whistles and ways to make revenue. That's how Carnival, and to a similar extent, Royal Caribbean, are engineering their fleets.

It's a huge investment. It's kind of that Amazon model where it pushes off some of their profits, because they continually have to invest. If Carnival adds this experience, then Royal has to add that one. You're seeing it with like the Broadway-style shows, instead of the old school musical production numbers, the stand-alone comedy venues. It's very much an arms race where people say, "What am I going to get for free?" You mentioned Disney earlier. Well, you pay double to triple the price, but you're getting Disney entertainment, and everything is included. There's a lot of financial pressure to be bigger and better.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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