Hitting the open seas in pursuit of sumptuous midnight
buffets, exotic ports of call, and unique shore excursions is no
longer a pastime exclusive to the rich and famous. The expanding
cruise line industry has made traveling by sea accessible to tens
of millions of passengers.
Like the ocean, though, there can be rough waters for those
eying investments in the cruise line industry -- but it's an
industry that could be a "bon voyage" if you make the right
What is the cruise line industry?
Cruises are a growing form of vacation travel, with passengers
boarding vessels that continue to grow in size and amenities. The
allure of hitting different destinations without having to repack
belongings is strong, and cruise providers offer up full slates
of entertainment and activities to keep passengers entertained
while the boats are at sea.
Sector consolidation over the years has resulted in just a
handful of providers owning most of the leading cruise lines.
is the industry's largest player. Beyond the two dozen namesake
vessels in its fleet, Carnival also watches over several lines
including Holland America, Princess, Cunard, and Costa.
follows with a fleet of 40 cruise ships across all of its lines,
including Celebrity, Pullmantur, and Royal Caribbean.
Norwegian Cruise Lines
, joining Carnival and Royal Caribbean as a publicly traded
company after its 2013 IPO, operates 13 ships.
According to industry group Cruise Lines International
Association, the Caribbean and Mediterranean are currently the
most popular sailing destinations, with 57% of the sailings in
2014. Warm beaches are conducive to year-round tourism, but
there's still growing demand for Europe, Alaska, and other
How big is the cruise line industry?
There are 410 ships in the global fleet of the members of the
Cruise Line International Association, with 467,629 beds. There
are nearly as many cruise beds today as there were total
passengers for all of 1970.
Global passengers clocked in at an estimated 21.3 million for
2013, with a forecast calling for 21.7 million people to take a
cruise in 2014. It's a far cry from the 500,000 passengers who
sailed in 1970, and even a healthy uptick from the 14.3 million
guests that sailed as recently as 2010.
It all adds up to big money. Carnival, Royal Caribbean, and
NCL combined generated nearly $26 billion in revenue in 2013, and
analysts see $27.2 billion in 2014 and $29.3 billion come
There is also huge potential for international growth, as U.S.
travelers still account for 52% of all cruise ship
How does the cruise line industry work?
Running a cruise line isn't for those light on financing. A
hefty $7.2 billion was spent on the 29 new ships that have gone
online in 2013 and 2014. Then comes the challenge of figuring out
how much passengers are willing to pay for the berths, which
include most of the meals on board. Just like the airlines,
different passengers pay different fares.
Cruise lines make most of their money on what passengers pay
to board their vessels. Carnival generated 75% of its 2013
revenue that way. The balance comes from the money it makes
onboard through drinks, shopping, gaming, shore excursions, and
Following cruise line stocks also involves brushing up on
terms that are unique to the industry. Key metrics include net
revenue yields (measuring the net revenue generated per available
lower berth day, or ALBD), fuel prices per metric ton, and net
cruise costs excluding fuel per ALBD.
Fuel is a major component of the cruise line's cost structure.
Carnival spends more on fuel than it does on payroll. It spent
more than twice as much on fuel as it did on food in 2013. After
all, its ships need to eat before its passengers do.
What drives the cruise line industry?
Innovation is a surprising driver for the industry. Cruising
used to be popular primarily with the wealthy or retirees, but
then ships began adding lively nightclubs, interactive
playgrounds, and more. Royal Caribbean made a plea to families
with teens by adding rock walls to its ships. NCL destroyed the
myth of stuffy restaurant experiences with Freestyle Dining,
which lets guests choose when and where to eat.
These days there are vessels with bowling alleys, zip lines,
and even ice skating rinks. Cruise ships have become so
entertaining that it's not odd to see passengers stay on board
when the boat docks at slated ports of call. Bigger ships and
expansion into new ports have opened cruise travel to the masses,
and onboard Internet access means that passengers don't have to
go without connectivity unless they want to do exactly that.
There will always be challenges. Fuel price volatility will
make sure that income doesn't always grow at a steady clip.
Stories of operating mishaps and disease outbreaks will be louder
than the vast majority of tales of passengers having perfectly
enjoyable treks. The cruise line industry knows how to navigate
the choppy waters, and that will reward the investors who know
where the vessels are ultimately heading.
More from The Motley Fool:
Warren Buffett Tells You How to Turn $40 Into
Cruise Lines: Investing Essentials
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool has no
position in any of the stocks mentioned. Try any of our Foolish
free for 30 days
. We Fools may not all hold the same opinions, but we all believe
considering a diverse range of insights
makes us better investors. The Motley Fool has a
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights
reserved. The Motley Fool has a