The cruising industry seems to be coasting these days. Market leader Carnival (CCL +6.99%) recently posted its largest annual profit since 2011. It also raised its divided rate for the first time in more than four years.
The leading cruise line landed ahead of Wall Street's profit targets in each of fiscal 2015's four quarters, and it wasn't even close. Carnival surpassed analyst expectations by at least $0.08 a share every single time out.
It's not just Carnival that's rocking. Shares of rivals Royal Caribbean (RCL +7.34%) and Norwegian Cruise Line (NCLH +4.79%) soared 25% apiece last year. The entire industry is humming along, and industry group Cruise Line International Association expects a whopping 24 million passengers to go on a cruise this year, well above the the 15 million guests who did so a decade ago.
This would naturally set Carnival up nicely as it heads into 2016, but let's go over a few of the things that could go wrong for investors in the year ahead.
1. Fuel prices could head higher
Carnival's performance through 2015 was a tale of two sides of the same income statement. Profitability soared as earnings rose 40% for the year. Things weren't as pretty on the top line where annual revenue dipped by 1%. The unfavorable impact from currency exchange rates weighed on those results, but even if were to back out that $800 million hit, Carnival's revenue would have inched just 4% higher.
A big reason for the disparity in Carnival's financial performance is that fuel costs -- a major expense on these floating cities -- plummeted through 2015. Fuel prices plunged to $316 per metric ton for Carnival by the fourth quarter, 46% below where things were a year earlier.
That could change, of course, and any spike in the costs to get around would naturally eat into Carnival's fat profits. Carnival posted double-digit net profit margins in 2015, the first time we've seen that since fiscal 2011, according to S&P Capital IQ data.
Carnival tries to hedge its risk by engaging in fuel derivatives, but we saw the dramatically favorable impact that cheap fuel had on margins. Net cruise costs excluding fuel inched higher last year. If fuel goes up sharply in 2016, it will leave a mark.
2. Global events can reshape the narrative
There's no denying that any negative terrorism or economic events would send the entire industry into a waterspout. We've seen what happens when potential cruise ship customers feel an economic pinch. Carnival, Royal Caribbean, and Norwegian Cruise Line all suffered declining revenue in 2009 following the 2008 banking crisis.
Things would naturally get even uglier if passengers no longer feel safe in international waters. Folks heading out on a Caribbean cruise don't give a second thought to Somali pirates, but it would be a different mind-set if terrorism strikes closer to home.
3. Carnival can have another unfortunate mishap
The world's largest cruise line operator has 99 ships across various brands. That's a good thing when it comes to brand awareness, buying power, and marketing, but it also means that there's a better chance of something going wrong on one of its vessels.
Carnival ran into a rough patch a few years ago. There was the horrific Costa Concordia grounding of 2012 and the infamous Carnival Triumph "poop cruise" of 2013. Revenue and earnings at Carnival have yet to recover to 2011 levels, and the negative press that it received from the mishaps on Concordia and Triumph probably was a big reason for customers souring. Royal Caribbean and Norwegian Cruise Line are ringing up a lot more revenue than they did four years ago.
Time heals most reputation wounds, and Carnival's done a good job of avoiding disaster since 2013. However, another on-board mishap could bring back all of those fading yet unwelcome memories to the brand.
Carnival's doing great these days. It just needs to navigate its way around potential challenges to deliver another market-thumping year in 2016.
