What happened
What went up just came back down.
Yesterday was a banner day for cruise tourism stocks Royal Caribbean, Carnival Corporation, and Norwegian Cruise Line Holdings, each of which sailed away with stock market gains -- boosted by Carnival's announcement of its "busiest booking week in the company's history."
Today is different:
- Royal Caribbean stock is down 3.8%.
- Carnival stock is off 6.4%.
- And Norwegian Cruise is leading the sector lower with a 6.8% loss as of closing.
So what
So what changed between yesterday and today? Factually, not a whole lot -- but how investors are interpreting the state of the cruise industry does seem to have changed.
Consider: Just 24 hours ago, news that Carnival was just a month away from having all 23 of its cruise ships back at work, and indeed, would soon have more capacity to carry guests in 2022 than it had before the pandemic in 2019, set investors to cheering -- and predicting similar good news for Royal Caribbean and Norwegian Cruise.
So capacity looks good, and reservations for upcoming cruises are booming -- all of which implies strong demand for cruising, and strong profits for cruise stocks. As website CruiseHive.com reports, it wasn't just Carnival, but "nearly all cruise lines went through one of the busiest weeks in history" last week.
Now what
But here's the thing: Capacity and demand may imply strong revenue for cruise companies -- but revenue is only one component of what goes into profitability. The other part is costs, and costs are going up alongside revenue.
As CruiseHive points out, both "Norwegian Cruise Line and Carnival have already announced increased gratuity rates to combat inflation." It seems "costs for cruise lines have gone up," and so "they have started to look at passing costs to guests ... in the form of increased prices for WIFI packages, drinks packages, or specialty dining," for example.
Again, on the one hand this could be good for cruise stocks. Higher prices, even on such incidentals, can help to cover rising costs, and potentially even pad profit margins. (In fact, according to data from S&P Global Market Intelligence, in its most recent quarter Carnival's cost of goods sold rose only 23% -- but the company's revenue grew 26%, resulting in improved gross profit margin.) On the other hand, though, the fact that cruise lines feel the need to raise prices and make cruising more expensive threatens to -- eventually -- depress demand for cruising.
All of which should just serve as a reminder: Going forward, keep an eye out for positive trends in rising revenue for the cruise companies -- but keep an eye on rising costs as well.
