To regain pricing power, invest in upgrading fleet - analyst

Details

Written by Kari Reinikainen Kari Reinikainen

Category: Top Headlines Top Headlines

Published: 22 May 2013 22 May 2013

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.

"Worst may not be over yet for Carnival brand” – Farley

Details

Written by Kari Reinikainen Kari Reinikainen

Category: Top Headlines Top Headlines

Published: 22 May 2013 22 May 2013

The worst may not be over yet for Carnival Cruise Lines, the US focused mass market brand in Carnival Corp & plc  group, says Robin Farley, leisure, lodging and gaming analyst at UBS Invesrment Research in New York.

Farley downgraded Carnival to neutral from buy after a profit warning on Tuesday.

“We had maintained a buy rating after previous incidents due to the belief that the worst was behind for the Carnival brand and that perception issues would start to resolve going forward. Tonight's news signals that the worst may not yet be behind for the Carnival brand, and the guidance reduction suggests that booking trends have gotten worse, not better, in the last two months, signaling that perception problems may not have bottomed yet,” she said in a research note emailed to Cruise Business.

“Remaining on the sidelines in the near term may be the best course of action until the tide turns on Carnival's perception problems.  Carnival management has been one of the best regarded management teams in the consumer sector and on a wider basis for more than a decade.”

“Our downgrade is a change in our view of the stock, not a change in our view of the company. This management team will right the ship. Our downgrade is only a matter of timing.

“Downgrading after bad news has already happened, but our concern is that the worst is not behind Carnival just yet. We had maintained BUY after previous incidents with belief that perception issues would start to resolve going forward, but lower guidance tonight means bookings have gotten worse, not better, in the last few weeks.”

Carnival group management is focused on rebuilding the Carnival Cruise Lines’ brand and re-establishing service to travel agents for improved relationships. “Constant negative publicity has damaged the Carnival brand more than what management had expected when CCL (Carnival group) last gave guidance in March’13, and that is particularly notable for a management team that historically has been viewed as guiding conservatively. “

“Based on the 75 bps of lowered guidance due to the Carnival brand in March, and now an additional 250 bps of yield decline attributable to the brand, the cumulative 325 bps of yield reduction for Carnival Corp suggests that the Carnival brand, which is about 30% of Carnival Corp, may be seeing yield declines of 10-11% at the brand level this year,” Farley stated.