One of the draws of taking a cruise is the all-inclusive nature of the trip. But if you take a closer look at the income statement of Royal Caribbean (RCL +7.34%) or any cruise line, you'll see that there's a lot more going on.
Here's why buying a ticket to take a Royal Caribbean cruise is just the start of the company's revenue stream and why you need to care.
Cruising is back in a big way
The pivotal year for cruising was 2020, when the coronavirus pandemic effectively shut the industry down. Since that nadir, cruise lines have been trying to get their businesses back on track.
That task is largely complete for Royal Caribbean. In the third quarter, the company reported that its bookings were "significantly exceeding 2019 levels." And, looking forward, "Demand for 2024 has continued to accelerate, with bookings significantly and consistently outpacing 2019 levels."
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However, the most important sign that the Royal Caribbean's business has moved past the pandemic was this line: "Booked load factors and rates are higher than all prior years while the booking window has continued to extend." Putting that into plain English, Royal Caribbean is selling more tickets at higher prices than at any time in its history.
This is, obviously, great news. However, investors need to understand that the ticket is just the start of the story. This is made very clear when you look at the company's income statement. On the top line, which is revenue or sales, the company lists two items: passenger ticket revenue and onboard and other revenue.
The ticket is just the start of the story
One of the draws of a cruise is the all-inclusive nature of the trip. You get to ride on the ship, eat three meals a day, and enjoy a host of entertainment options.
But there are other ways for customers to spend their money, too. Most ships have casinos, and not all food items (notably alcohol) are included in the ticket price. There are excursions at the ports of call and shopping venues on the ship itself. All of these items require additional spending, and it adds up quickly.
NYSE: RCL
Key Data Points
In the third quarter, Royal Caribbean's revenue totaled $4.16 billion. Cruise tickets made up around 70% of the total. The other 30% or so was on-ship spending. This dual revenue source is a lot like what you see at an amusement park, which cruise ships have increasingly started to look like as they add rides and other attractions.
Here's the more interesting thing. Further down on the income statement, there's a line item called "total cruise operating expenses." In the third quarter, that figure was $2.1 billion, just $800 million or so lower than the ticket revenue of $2.94 billion.
Although there are clearly costs in the cruise operating expenses that are tied to onboard spending, back-of-the-envelope math suggests that the $1.2 billion in onboard spending is mostly profit. This is highlighted by the fact that the company's operating income (which doesn't include interest expenses, among other things) in the third quarter was $1.27 billion or so.
Two big takeaways from Royal Caribbean
The first thing investors need to understand about Royal Caribbean's business is that it has recovered from the pandemic. In fact, it looks like this cruise line has more than recovered. And that is good news.
The second thing is that tickets are just one part of the revenue equation and, perhaps, represent the starting block on which the company builds its business. That's great news today, but if a recession leads to a drop in ticket sales, the company will also experience a drop in onboard spending, effectively exacerbating the revenue hit. This is a nuance that investors don't want to ignore.
