Carnival Cruise Lines, the US focused contemporary market brand in the Carnival Corp & plc group, should invest more in upgrading its existing vessels in order to regain pricing power that has been hurt in incidents involving its ships in the recent past, a cruise industry analyst says, adding that the same goes for the industry as a whole.
Karl Burns, analyst at Panmure Gordon in London, told the Financial Times that the decline in yields “bodes ill for the future as we think Carnival will struggle to regain pricing power.” He added that “the market must begin to appreciate there are structural as well as cyclical challenges to the Carnival business model.”
“The focus seems to be on new ships. Older vessels need to be marketed better to boost revenues,” Burns told Cruise Business. More investment may be needed in upgrading older vessels to allow them to obtain better yields.
Carnival Corp & plc recently unveiled a $700 million programme to technical upgrades to reduce the risk of incidents such as the one that crippled Carnival Triumph in the Caribbean in the spring. About $300 million of the total will be invested in the ships of Carnival Cruise Lines. The incident combined with bad publicity that followed has put Carnival Cruise Lines’ yields under downward pressure and the parent company issued a profit warning yesterday, largely as a result of these problems.
Burns welcomed the investment decision, but added that it might serve the industry as a whole well to focus investment on upgrades of existing ships rather than adding capacity on the market by contracting newbuildings. Yields per berth have trended lower over a long period of time and weak consumer markets in Europe in particular and to some degree also in the US indicate that the situation is unlikely to improve in the near future.
Cruise operators have struggled to stimulate on board spending too, which combined with low ticket prices poses a headache for the industry. “By investing more in upgrading existing ships, you could get the dual benefit of higher yields and no capacity growth,” Burns said, concluding that the bottom line of the industry's current problems is that it has not succeeded in significantly increasing its penetration rate on key markets, such as North America and Europe.
