Cruise Lines: Investing Essentials

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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 bookings.

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. Carnival 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.

Royal Caribbean 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 port-backed destinations.

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 2015.

There is also huge potential for international growth, as U.S. travelers still account for 52% of all cruise ship passengers.

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 other items.

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.

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The article Cruise Lines: Investing Essentials originally appeared on Fool.com.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: CCL , NCLH , RCL

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