Inflation: Cruise lines facing 'some pushback on pricing,' analyst says

Citi Leisure Analyst James Hardiman joins Yahoo Finance Live to discuss the decline in cruise stocks ahead of the summer travel season, the demand for travel amid inflation, the state of the economy, and the outlook for the cruise line sector.

Video transcript

BRAD SMITH: Cruise stocks are setting sail for a Rocky comeback, with all three major cruise lines right now, they are lower across the board today. After seeing significant losses this year, they're hoping to recover from COVID-19 joining us now to discuss the future of cruise lines is Citi Leisure Analyst James Hardiman.

James, great to have you here with us. So cruise lines and the re-engagement campaigns that they've been trying to move forward with for some of their most loyal customers, how is that faring for them right now? And, really, when it comes down to having them get back on these boards-- or on these ships, rather, how are they reinstituting some of that confidence?

JAMES HARDIMAN: Yeah. I mean, I think there's a couple issues at play here. These companies are all getting their ships back on the water. And in most cases, they're starting out at occupancy levels well short of historical levels.

And the challenge is as you get more and more people on these ships, we are seeing some price deterioration, particularly for lower end consumers. I would go out on a limb and say that it's not as dramatic as the impact that we've seen on these stocks as of late, which is probably overdone. But I do think there is a meaningful difference.

You guys talk a lot about the high end income consumer versus a more mass consumer. We're absolutely seeing that in the cruise space, where there has been some pushback on pricing among that lower end or even mid-tier consumer.

BRIAN SOZZI: James, I've been a little bit surprised by the commentary closing out the second quarter on these cruise lines. The sentiment has really shifted negatively. Let's say we do get another demand shock-- are any of these stocks zeros?

JAMES HARDIMAN: I don't think so. And that's really what hurt Carnival in particular yesterday-- in particular yesterday. There was a note out suggesting a downside scenario of zero. Interestingly enough, it was not a sort of bankruptcy call, which is, ultimately, what you need to see, I think, for any of these stocks to go to zero.

And while you can't entirely rule that out, I think it's exceedingly unlikely. I think these companies are going to continue to find willing lenders. And there is certainly a downside scenario in which we have to issue even more equity, which nobody wants to see happen. But no, the simple answer is, no. I don't think any of these stocks are zeros.

JULIE HYMAN: James, it's Julie here. What has happened in the past to the cruise industry during recessions? Do people still view them as sort of an affordable way to get out and travel and they keep booking cruises? Or do we see a big pullback?

JAMES HARDIMAN: Yes, so a couple of things. People continue to cruise during a recession. The ships historically have sailed north of 100% occupancy. You do see it in the pricing.

And so as you think about cruise yields, right-- so revenue per room-- those tend to deflate to the tune of maybe mid-single digits. So pricing ultimately comes down mid-single digits. And there's a significant fixed cost base here. So during the Great Recession, there was about a 30% decline in profitability across the industry.

But I think you made a great point there a minute ago in terms of relative value, right? If you compare cruises to traditional land-based vacations, there used to be about a 25% to 30% discount in comparable cruises. That discount today is closer to 45%-- 40% to 45%. And so I think there is a big opportunity here.

I think it's pretty obvious why that discount persists. There are some structural regulatory reasons why a lot of people still haven't gotten back on a cruise ships. There's vaccine requirements, testing requirements, et cetera. But I do think people look at that value and, time and time again, we've seen people-- price speaks volumes as people are looking for compelling vacation opportunities.

BRAD SMITH: And so across the experience economy right now for these vacation experiences, if the operators are not seeing either full occupancy or even high occupancy, how much does that continue to impact their cash burn?

JAMES HARDIMAN: Yeah, it's a great question. The good news is we're at a place right now where we're seeing an inflection really across the industry. Now, some of that may prove to be short-lived. Number one, we're getting into sort of the seasonal peak in terms of cash generation. And two, if we're heading into a recession, right, all bets are off.

But ultimately, all three of these companies are at a place where they should at least be in positive EBITDA territory. Hopefully cash flow from operations will be positive. Whether or not they can sustain that is ultimately a different question.

JULIE HYMAN: James, good to see you. Thanks so much. James Hardiman, Citi Leisure Analyst, appreciate your time this morning.