Carnival Corporation currently sells its cruises at hugely attractive rates, with pricing being considerably lower than other cruise lines and even land-based vacations.
While it’s something Carnival passengers will welcome, the cruise company is making changes that mean cruises will become more expensive, particularly in 2023.
With the stock price taking a hit in a series of disappointing results in the last two years, Carnival is struggling to recover from the damage done during the pandemic. However, where many paint a picture that shows the world’s largest cruise operator is in a bad way, many factors show an entirely different picture.
Carnival Prices are Significantly Lower
As many will have seen if they booked a cruise onboard the Carnival Corporation ships, of which there are 91, prices are significantly lower than competitors. Something that has scared investors and made the stock price drop significantly.Â
But with ships sailing at 90% occupancy or more and bookings and onboard revenue higher than ever, Carnival has taken a path that may not be the best in the short term but certainly seems to be the right way in the long term.
The short term is great news for those wanting to take a cruise, as it means a much cheaper cruise than what you would pay at Royal Caribbean and Norwegian Cruise Line. So low that taking a cruise onboard a Carnival ship is now cheaper than land-based vacations.
Cruises are being sold at rates that are below $50 dollars per person per day, while for some, rates are at the $25 dollar per night point. Great news indeed for cruisers. It’s not great news if you are at the head of the company:
Josh Weinstein, Carnival Corporation’s CEO: “We are delivering a great all-inclusive vacation experience, convenient, great dining and entertainment choices, fantastic itineraries, beautiful and innovative ships, and the most amazing onboard teams, providing a higher level of personalized service than you can find anywhere on land or sea.”
“We are delivering a phenomenal product. The issue is we are way too much of a value. We should not be priced at a significant discount to land, which is exactly the case today, anywhere from 25% to 50% based on itineraries.”
The long term shows a different plan, where Carnival is significantly raising prices for 2023. And that has not had a negative impact until now. Bookings are high, onboard revenue looks promising, Carnival has a younger fleet than it did two years ago, and guests are raving about the onboard experience.
Why is the Stock Price at a Record Low?
But if Carnival is doing so well, why is the stock price crashing, and do we only hear negatives about the company? First of all, size matters. Carnival has 91 ships in all. Keeping those ships up to date while there was no revenue put a huge strain on the company during the pandemic.
This meant taking out loans, which means paying interest, which is where a considerable amount of money is now going. Money that is being paid to loans is not being paid to investors as dividends. Why would an investor pay for a stock that will not give a return?
One area that caused the lower-than-expected revenue that Carnival showed in the 3rd quarter came from a huge amount of Future Cruise Credits (FCC) extended during the pandemic. With the relaxation of COVID measures in the 3rd quarter came a huge influx of bookings made with FCCs.
This is money that has been taken in during the last two years but does not reflect the company’s current status. The FCCs will likely be coming down in the coming months and virtually disappear during 2023.
Carnival’s CEO Josh Weinstein expects this to be less than 1% of bookings in 2023: “For the full year 2023, our cumulative advanced book position is slightly above the historical average and at considerably higher prices compared to record 2019 levels normalized for FCCs. While I do expect an impact on 2023 yields from the FCCs, the impact is likely to be less than one percentage point for the full year 2023.”
So What is the Plan?
Carnival does suffer from the cruise ban, which remains in place in China. Costa Cruises had developed a massive investment in the Chinese market. With that plan going down the drain, the company has been forced to make numerous changes, which will only start paying off late in 2022 and through 2023.
Weinstein: “In light of the continued closure of cruise operations in China and our Costa brand’s significant presence there pre-COVID, we are reducing Costa’s capacity by 10% from 2019 levels while bolstering our highly successful Carnival Cruise Line brand through the previously announced transfer of three ships.”
“Including two via our innovative Costa by Carnival initiative launching in 2023. All three ships will be placed on new itineraries, allowing Carnival to expand its drive to cruise offering.”
While this has been a change the company has been forced to make, it does provide a great opportunity to increase capacity for Carnival Cruise Line, which has been sailing at 100% and over of late.
Only now the ships are sailing full will Carnival Corporation be able to take full advantage of the eagerness to cruise that is definitely there. The company has a fleet with 10% higher fuel efficiency, 6% more efficiency in remaining operating costs, a richer cabin mix, more berths, and larger overall platforms to deliver onboard experiences than two years ago.
With new ships such as Mardi Gras, Carnival Celebration, Iona, Costa Smeralda, AIDAnova, and more Excellence-class cruise ships, Carnival has put itself in a position to be able to recover much quicker than many would possibly expect.
It could very well be that Carnival Corporation does offload one of its nine brands to create more flexibility and financial room. And, to keep the ships full, a lot of money will be invested in advertising, marketing, and promotions in the near future.
Weinstein: “​​Throughout the pause, we have benefited from the dedicated support of our loyal guests. Now, as we grow capacity in 2023 and beyond, we are redoubling efforts to attract new-to-cruise guests. About one-third of our guests have historically been new to cruise. And as you probably know, two of the most important drivers of new-to-cruise are word of mouth and advertising.”
But there should be no doubt that Carnival Corporation is a business known for massive profit margins, and it will want to return to that point sooner rather than later. To do that, it will target new cruisers at much higher pricing while providing the right incentives that these guests will return at that same price point.
