- Cruise operators are confident that their businesses will see a sharp rebound but fuel and labor costs are squeezing margins
- Stocks of cruise operators have performed admirably in line with the “value” rebound, but inflation may hit demand as cruise passengers remain more sensitive to price increases
When the pandemic first hit, floating palaces, an homage to the decadence and luxury of cruising, became nothing more than gilded prisons.
Conjuring images of the end times, the world looked in horror as entire cruise ships with thousands of passengers and crew were denied berthing, almost as if doomed to roam the high seas, never to land ashore again.
Two years later and these images seem like a distant memory as last month, the 18-deck 7,000 passenger Wonder of the Seas, the world’s biggest cruise ship, set sail.
Owned and operate by Royal Caribbean, the Wonder of the Seas reflects growing confidence by cruise line executives about the prospects of an industry that for the past two years had to deal with deaths, hellish conditions from on-board quarantines and billions in losses.
The situation though may have taken a turn for the better.
According to Royal Caribbean rival Carnival, last week was said to be the busiest for bookings in its 50-year history and next month, the final ship in its 23-strong fleet will return to service, after having been laid up because of the pandemic.
But beneath the veneer of optimism, worries remain on the rebound of the cruise industry.
Fuel costs have been soaring, eating into margins and there has been a shortage of labor just as coronavirus infections are on the rise again.
The highly virulent Omicron variant hit bookings during the crucial January cruising season – the most popular time of year for customers booking a cruise.
But that hasn’t stopped investors from snapping up shares of cruise companies, in line with the so-called “value” rebound.
While the S&P 500 has struggled this year, the shares of operators like Norwegian Cruises, Carnival Corporation and Royal Caribbean Cruises have been on a tear.
Helping things along, the U.S. Centers for Disease Control and Prevention dropped its advice last week to avoid cruise travel.
Pent-up demand is also seeing revenues per passenger cruise day soar, including for everything from dining to entertainment and spa treatments.
But the Russian invasion of Ukraine has caused costs to soar, with food costs spiraling and pressure on wages forcing cruise operators to up staff salaries, which will crimp margins.
And as inflation bites, discretionary spending on things like cruises could also take a dent, with the U.S. contending with the fastest pace of price increases in forty years.
Higher interest rates could also dent the ability of cruise operators to gain access to cheap funding, providing another layer of risk for investors.
Investors looking to bet on a turnaround in the cruise industry may soon find that the going will not be as smooth sailing as they had hoped.
