JAMES HAYWARD: Cruising is no longer only for retirees

Depending on personal preference, one’s idea of an ideal holiday may not involve being confined to a ship at sea. But for every person who dislikes the idea of a holiday on the ocean, at least one other loves it. 

The cruise ship business is booming. It is serious business. In 2023 more than 30-million people had cruise holidays, with a choice of more than 300 cruise ships around the world, managed by more than 50 cruise operators. To keep these passengers entertained and fed, the industry employs about 1.2-million full-time staff, earning altogether about $50bn a year. 

Cruise ships come in all shapes and sizes, but some are truly huge, such as Royal Caribbean’s new Icon of the Seas. It cost a staggering $2bn to build and can accommodate 6,700 guests and more than 2,000 crew.

Today the cruise industry is flourishing again, but three years ago it was on its knees as Covid-19 wreaked havoc. A floating city, where close contact is unavoidable, is not the best place to isolate. Passenger numbers dropped about 75%, and most cruise operators had to borrow more to stay “afloat”.

Rapid recovery

However, the industry has shown its resilience, with demand bouncing back to pre-Covid levels by 2023. Over the past three decades demand for cruise vacations endured and its popularity even rose. One would assume this growth would be linked to the GDP growth of its main passenger hubs, the US and EU, which combined account for 75% of passengers.

However, a quick comparison between the annual growth rate of passenger volumes and annual GDP growth in the US and EU shows passenger volumes are rising far faster than GDP in the two primary markets.

In fact, over the past 33 years, passenger volumes rose at a compound annual growth rate of 6.4% versus GDP growth in the region of 2.5%. On only two occasions has the growth in passenger volumes lagged GDP growth.

One contributor to this strong growth is repeat customers. A 2022 Cruise Traveller Sentiment Study found that 85% of past passengers would like to go on another cruise. Another industry study pointed out that 58% of participants who had not been on a cruise before were considering one.

Notably, not only are former customers returning and new customers considering cruises, but operators are also adapting their offering, catering to new markets and expanding their opportunity set in the process.

Shifting trends

One of the interesting trends among cruise line passengers is their age demographic; passengers are getting younger. Today, nearly 70% of passengers are younger than 60, with the average age being just 46 — the lowest it has been in 20 years. In the Asian market, the average age is only 39 — practically juvenile in cruise ship years.

This bodes well for future demand. In industry surveys, 88% of millennials (aged 28 to 43) and 86% of GenX (aged 43 to 59) cruisers indicated that they would be cruising again. If these numbers are remotely accurate, it represents a long runway of returning clientele for cruise ship operators.

This shift did not happen by chance though. Cruise lines have for years been focusing on expanding their addressable market, targeting younger families with a range of themed cruises and child-friendly activities. This is working. Today, 73% of passengers are travelling with family, representing at least two generations. Solo travellers are also being targeted, with more economical single berths and events aimed at solo travellers.

Investment implications

Given the positive outlook and enduring demand for cruise lines, what are the opportunities available to investors? The industry is dominated by three large players: Carnival Corporation, Royal Caribbean and Norwegian Cruise Lines. Between them they control more than 75% of passenger volume and revenue. However, Royal Caribbean has been the standout performer, outperforming its peers by more than 50% over the past year. 

It did this by focusing on operational efficiency, expanding its target market and investing in innovative vessels. The success of its approach is leading to happy, loyal customers. Royal Caribbean was voted the best overall Cruise Line for 21 years running.

After an impressive recovery from Covid-19, Royal Caribbean set itself a number of targets, all of which are on track to being achieved earlier than expected. This, along with the company citing record-breaking demand, has been appreciated, and rewarded, by the market.

Royal Caribbean is another example of an investment opportunity available outside the well-trodden, AI- and tech-dominated sectors. Finding such companies is achievable when you consider investment opportunities all over the world.

• Hayward is an equity analyst at Flagship Asset Management.