The coronavirus is having a detrimental impact on the travel and tourism sector, with thousands of flights and hotel bookings already cancelled.
Shares in airlines, hotels and cruise lines have fallen sharply over the past month. Interestingly, out of these the cruise line sector has fallen the most — so does this drop represent an attractive opportunity for the long-term investor?
After a flurry of deals in the 1990s, the cruise line industry consolidated into four major players.
Carnival Corp, Royal Caribbean Cruises, Norwegian Cruise Line Holdings and MSC Cruises today control more than 80% of the market between them (in terms of annual number of cruise passengers worldwide) and earn 90% of the industry’s annual revenue of about $50bn.
A third of about 300 cruise line ships operating worldwide are deployed in the Caribbean, making cruise passengers a crucial source of income for many tiny islands in the region.
Another third is deployed in Europe, inclusive of the Mediterranean Sea.
More than half of all cruise passengers are from North America and almost a quarter are from Europe, which implies significant growth potential in other markets, given the relative affordability of a cruise holiday.
A modern cruise ship can easily cost more than $1bn to build, which is why the industry is characterised by high fixed costs and a focus on maintaining occupancy rates as close to full as possible.
We don’t know how bad the coronavirus’s impact will be on cruises, but occupancies should rebound
The unit economics of the cruise line industry bear out the good value that a cruise represents: on average, a cruise passenger pays $150 per day for the cruise ticket and spends an additional $70 per day on extras (another round of margaritas, anyone?) while the cruise line only makes $20 net profit per passenger per day.
Occupancy rates will almost certainly drop as a result of the coronavirus crisis, particularly given the ill-fated quarantine of the Diamond Princess cruise ship in the port of Yokohama, Japan, for much of February.
About 700 of the 3,700 people on board became infected with the coronavirus, with health officials admitting that imposing a quarantine might not have been the best decision.
‘Perfect incubator’
The Financial Times, in fact, described the Diamond Princess as the "perfect incubator" for the infection — after all, thousands of passengers packed together turned out, unsurprisingly, to be the perfect way to spread a disease, rather than control it.
But the industry has recovered from bad news before.
In 2013, there was widespread coverage of the "poop cruise" when the Carnival Triumph lost power and the toilet system stopped working.
In 2012, the Costa Concordia ran aground off the coast of Italy after its hapless captain attempted a sail-by salute near the island of Giglio, resulting in 32 fatalities.
Each time, however, occupancy rates have rebounded.
Carnival Corp, operating more than 100 cruise ships, is the largest of the cruise line operators, with a market cap of $21bn.
Listed in New York and London, it owns brands such as Princess, Costa, P&O, Holland America and Cunard.
Its shares are currently trading at a historical p:e of 7.1, a dividend yield of 6.3% and slightly below tangible book value of $33 per share.
Royal Caribbean Cruises, listed in New York, has a market cap of $16bn and is trading at a p:e of 8.3.
It is on a dividend yield of 3.8% and a 40% premium to tangible book value.
It owns the largest cruise ship in the world, the massive Symphony of the Seas, which can accommodate more than 6,000 passengers and has 22 restaurants, 42 bars and lounges, a zip line and even an ice rink.
Norwegian Cruise Line Holdings has a market cap of $7.3bn and is also listed in New York.
It is trading at a p:e of 7.6, a 45% premium to tangible book value and offers no dividend yield.
The company pioneered the concept of freestyle cruising — doing away with set schedules and dining times.
This added freedom has attracted a younger generation of cruise passengers.
And the fourth-largest cruise line operator, MSC Cruises, is privately owned and operates worldwide, including offering popular cruises around the SA coast.
It was founded in 1970 by group chair Captain Gianluigi Aponte, who has led MSC from a one-vessel operation to a major player in the container and passenger shipping markets.
We don’t know how bad the coronavirus’s impact will be on the popularity of cruises in the short term, but occupancies should rebound over the long term.
We choose Carnival as our top pick in the sector.
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