Andrea Zelinski
Business is so strong in the cruise industry that the Big Three cruise companies have collectively raised their full-year guidance multiple times this year.
At the same time, hotels have said that growth in some sectors is cooling off, and some have lowered their RevPAR guidance, said Robin Farley, a travel industry analyst with UBS.
This made her curious: with hotels lowering their guidance, what evidence is there that cruise lines can keep growing? To answer this question, in one of her latest reports she examines the price gap between land-based vacations and cruises.
Cruise executives have long talked about closing the value gap between hotels and resorts while also acknowledging that gap has kept cruises a good deal to consumers and relatively safe from a downturn in the economy.
Prices across both cruise and land travel have climbed since the pandemic, Farley said in her report: U.S. hotel rates this year compared with 2019 climbed 20%, resort rates increased 31% and the Caribbean's average daily rate rose 49%.
While not apples-to-apples, the best comparison in the cruise industry is net per diems (net revenue per passenger cruise day). At the Big Three, net per diems grew over 2019, albeit slower: 6% at Carnival Corp., 9% at Norwegian Cruise Line Holdings and 16% at Royal Caribbean Group.
There is a clear gap in the rate of growth between these two sectors. But Farley argued that when she digs further to determine the price gap, it's wider than it looks. "And a wider gap means more potential growth for the cruise lines," she said.
"Cruise lines don't have to be cheaper than 2019," Farley said in her report. "They just have to be cheaper relative to hotels than they were in 2019."
To support her case about the price gap being wider than it appears, she pointed to onboard revenue. "Net per diem" in cruise industry vernacular includes ticket prices and onboard revenue. (In her report, Farley also said that the increase in direct bookings may also contribute to net per diem growth, because commissions are included in gross per diems but pulled out of the net per diem figure.)
All three cruise companies grew their bundled or precruise onboard revenue since the beginning of the pandemic. For instance, Farley attributed Royal Caribbean Group's relatively higher growth in net per diem to its private island, Perfect Day at Coco Cay, which had only been open six months before the pandemic. Carnival Corp. has said 37% of its onboard revenue is now sold in advance, and NCLH said prebooked onboard revenue per capacity day increased by 15% as more guests opted for precruise purchases.
Farley said the UBS team believes that onboard revenue has grown at a faster rate than ticket price. That's because it's easier to adjust prices for onboard products than for fares, which can be booked six months out. In addition, lines have added more onboard revenue options, such as cabanas to rent and WiFi packages.
So if net per diems roll together ticket price and onboard revenue, cruise lines have even more space to grow their prices without getting too close to rates for hotels and all-inclusive resorts.