After trudging through nearly two years of restricted travel during the pandemic, cruise ship operator Carnival Corporation (CCL 1.15%) (CUK 1.37%) just capped off its fiscal 2023 by setting some company records. As of Nov. 30, the company had customer deposits of $6.4 billion, a fourth-quarter record and 25% higher than its previous record.
Indeed, record Q4 deposits point to a strong cruising season ahead in 2024, which is obviously good for Carnival. The company generated 58% and 65% of its revenue from selling cruise tickets in its fiscal 2022 and 2023, respectively.
The fuller Carnival can pack its ships with people, the better -- this business has very high fixed costs. The cost to power the ships and the cost of the ships themselves are largely the same whether they sail at 10% capacity or 100% capacity. Filling them up, therefore, allows the company to leverage these high fixed costs and turn a higher profit.
There's another less obvious benefit to filling up a cruise ship. Most people think Carnival only makes money from selling tickets, but it also makes a huge amount of money from somewhere not everyone would expect, as I'll explain.
Carnival's less obvious revenue source
Once on board the ship, Carnival has a ton of things it can sell to generate more revenue. This includes sales of alcoholic beverages, spa experiences, specialty restaurants not covered by the cruise ticket, onshore trips, and more. This onboard revenue accounted for 42% and 35% of its revenue in fiscal 2022 and 2023, respectively.
One could argue that onboard revenue is far more profitable for Carnival. Take fiscal 2023, for example. The company generated onboard revenue of $7.5 billion. But management only attributed $2.4 billion in operating expenses to onboard revenue, giving it an operating margin of about 68% -- that's sensational.
Granted, cruisers wouldn't be spending this money unless they were on Carnival's ships in the first place. So, it's a bit of mental gymnastics to attribute certain operating expenses only to the cruise revenue and leave just direct operating costs for the onboard revenue.
It's probably better to think about Carnival's two revenue sources more holistically. That said, with onboard revenue, Carnival is able to bring in more revenue than just selling tickets. And given the high cost of doing business in the cruise industry, that's a big key to turning a good profit.
How it all fits into the bigger picture
Before the pandemic, Carnival was known for modest growth and good profitability. With its strong profitability, the cruise line rewarded shareholders with share repurchases and a high-yield dividend. This simple recipe produced steady, positive, long-term returns with the stock.
Carnival would like to get back to this approach, but for now, it's stuck repaying the substantial long-term debt it incurred during the pandemic when it couldn't sail. It made good progress in fiscal 2023 by bringing its debt down by $4.6 billion from its peak. But it still has a long way to go.
Encouragingly, Carnival introduced 3.5 million people to cruising in 2023. By bringing new cruisers into the industry, the company is setting itself up nicely for full ships in 2024 and beyond, which can help profitability. The higher its profits, the faster Carnival can pay down debt. And the faster it can pay down debt, the sooner it can get back to rewarding its shareholders like it did in the past.
Carnival isn't a stock I'm personally looking to buy today -- I'd like to see its debt come down more first. However, the company is poised for strong profitability in 2024 as it fills its cruise ships, hopefully allowing it to generate more high-margin onboard revenue. Therefore, there's plenty of reason to be encouraged if you're a Carnival shareholder.