Carnival (NYSE:CCL) is already the world's largest cruise enterprise, and it's now poised to grow its fleet by nearly 20% over the next seven years. The company's March 26 announcement of deals with European shipbuilders to deliver nine new boats between 2019 and 2022 adds to the nine ships already in the pipeline for delivery by 2018. The latest batch of new ships should position the company to expand its presence in the growing Chinese market and reduce its fuel costs, among other potential benefits.
The world's biggest cruise fleet gets bigger
Right now, Carnival sails 101 vessels under nine cruise brands. By 2022, Carnival could operate nearly three times as many cruise liners as its nearest competitor, Royal Caribbean Cruises (NYSE:RCL), which currently operates 40 ships under five brands.
The deals with Fincantieri of Italy and Meyer Werft of Germany are pending financing and other conditions, according to Carnival. Details have yet to be announced about which of Carnival's brands will get the new ships, what design improvements have been made, and how many lower berths the new boats will add to Carnival's current tally of 216,000. Destinations haven't been revealed, either, with the company saying only that the new boats will serve the North American, European, and Chinese markets.
Better able to serve the Chinese market
It's the movement of new ships into the Chinese market in the next few years that bears watching. China's domestic cruise market grew 79% from 2012 to 2014, according to the Cruise Line Industry Association, and industry watchers expect China to remain the world's fastest-growing cruise market over the next several years. In Carnival's Q1 report, the company said the Asian business of its Costa brand saw double-digit yield growth, indicating "pent-up demand in the region and building confidence in the long-term potential for growth."
Carnival and Royal Caribbean have both made high-profile overtures to China recently. Carnival COO Alan Buckelew relocated to Shanghai last year, and Carnival has entered into a memorandum of understanding with Fincantieri and in-country businesses to explore the possibility of building cruise ships in China. Meanwhile, Royal Caribbean announced in March that when its huge Quantum-class Ovation of the Seas is finished next spring it will homeport in Tianjin, the first time any cruise line has sent a brand-new vessel to serve Chinese cruisers. When Ovation arrives, Royal Caribbean will have five vessels sailing from China, compared to Carnival's current four.
But over the next seven years, Carnival will be bringing new ships online at a rapid clip and could use that new stock to ramp up its presence in China. Apart from the sheer numbers involved, more ships to deploy means Carnival would have more potential for market segmentation in China, should the company choose to do so.
More efficient ships can cut fuel costs
Two of the biggest fluctuating costs for cruise lines are fuel prices and the relative strength of the U.S. dollar. Carnival says the new ships on order will be "the most efficient ships in the company's history," which could dampen the effects of fuel-price hikes. More efficient new ships could also provide a design platform for further efficiency improvements going forward, after engineers and designers see how these nine ships perform in the field; Carnival's agreements with Meyer Werft and Fincantieri also include an option for more new ship construction "over the coming decade."
Positioning the company for long-term growth and savings
If Carnival's deals with Fincantieri and Meyer Werft are finalized and financed, it could help solidify the company's industry-leader status by bringing in more revenue while lowering fuel expenses. In the meantime, it will be interesting to see where Carnival sends the nine new ships that are already in the pipeline for delivery in the next three years, and how many of them will set sail for China.