Barron's Streetwise - Ready for a 9-Month Cruise?

Episode Date: October 29, 2021

Bookings are strong, says Royal Caribbean CEO Richard Fain. Plus, predicting Grey Poupon demand within 1%. Learn more about your ad choices. Visit megaphone.fm/adchoices

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What we need to do is demonstrate to them, as we're doing today, that cruising is back. And I think we'll see bookings continue to be very strong. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The voice you just heard, that's Richard Fain. He's the longtime head of Royal Caribbean Group. And this is not primarily an episode on cruising in the time of COVID,

because it's time for investors to look beyond that. Vaccines for kids are right around the corner, and COVID cases have been falling for weeks. This past week, Royal reported quarterly results that missed revenue estimates, but showed strong bookings for future quarters. It even recently launched what it calls the Ultimate World Cruise. That'll last nine months and hit more than 150 destinations in 65 countries.

It's for travelers who are so sick of being cooped up, they're ready to make up for lost time and then some. So what does that say about the outlook for Royal Shares and the cruise industry more broadly? We'll hear from Richard

and a Wall Street analyst. Time to shove off. I'll hold your Mai Tai if you want to take a quick run at that onboard water slide. Works every time. Listening in is our audio producer, Jackson. Hi, Jackson. Hi, Jack. Thank you very much for filling in for me last week.

You did a great job on cryptocurrency. Anyone who hasn't listened to that episode should. How much cruising experience have you had? I've been on a Washington State ferry. Okay. Is it like the Staten Island Ferry? I mean, what kind of experience are we talking about? It's great.

They had clam chowder and jigsaw puzzles. So it's two for two on my amenity list. greens are we talking about? That's great. They had clam chowder and jigsaw puzzles. So just two for two on my amenity list. Making people jealous now. There was a time in my young twenties when I packed a single suitcase that could convert into a backpack and I bought a one-way flight to Cairo and I traveled from country to country and continent to continent for the better part of a year and stayed in $4 dorm rooms and swore I'd never be one of those lunatics who spends vacations going to Disney parks. But decades later, I have a couple of kids who've been to Disney parks more than a half dozen times. So I guess I became one of those lunatics. I'm ready now for something new.

And I was thinking about national parks, but those are packed right now because people aren't flying. So is a family cruise a good idea? I don't know. I mean, these days they have onboard surfing and rock climbing and basketball and all kinds of stuff for my kids to try once in between asking for more iPad time. All kinds of stuff for my kids to try once in between asking for more iPad time. And I like that cruises stop for a day at destinations I might not otherwise get to. I've been to Mexico a dozen times, but I've never been anywhere close to Cozumel. I'm not a Cozumel guy.

I'm an SPF 25 and keep it in the shade guy. But I'm definitely a Cozumel for a day guy if I'm on a ship that's stopping there. I can't picture ever booking a flight to Greenland or Curacao, but put me down for a day or two in either if it's on the way. Then again, if you go on a cruise, do you end up spending a lot of time with the same people every day? Because that can go either way in a hurry at a Benihana. I can only imagine on a seven-night cruise. One thing I can tell you for sure is that COVID is no longer stopping me from booking anything a couple of months out or further. My family's been careful and safe, and I'd imagine the kids will be vaccinated by Thanksgiving. Cases are falling, and we haven't

taken a big trip in close to two years. We're definitely ready, and it seems we're not alone. Right now, the good news is that the forward-looking indicators that we are seeing are actually looking good for 2022. So there's definitely a light at the end of the tunnel. There's a tremendous amount of pent-up demand, the consumer wishing to go out there. And we're seeing that in the 22 forward indicators, load factors, booking pricing are now actually trending above, if you remember, 2019 had record levels in any number of metrics. So those are all kind of good signs. That's Tuna Amobi. He's a stock analyst with an independent research group called CFRA, or Center for Financial Research and Analysis, and he covers the three biggest U.S. cruise lines,

Carnival, Royal, and Norwegian, all based in Miami, home to the world's busiest cruise port. You heard Tuna mention positive trends in bookings and pricing and something called load factor. That last one is a measure of whether cruise lines are filling up their capacity. Few industries were hit harder by the pandemic than the cruise industry. U.S. cruise lines were ordered to stop sailing by the U.S. Centers for Disease Control and Prevention until about a year ago. Revenues disappeared. To preserve cash, cruise lines scrapped ships that they would otherwise have operated for years longer, and that removed capacity. Today, cruise lines are operating

under a conditional sailing order from the CDC with lots of safety guidelines, which were recently extended through January 15th. After that, the CDC expects the guidelines to become voluntary. Technically, they're already non-binding in Florida because of a disagreement between the state and federal government and a court injunction. But generally, the relationship between cruise lines and the CDC has been cooperative, and many ships have already returned to sea. And they've operated safely, and load factors and pricing look strong, as do bookings. Tuna says the industry has a few more quarters to go before it gets back to more normal conditions. And returning ships to service will be expensive in the near term,

but cruise lines no longer look as financially vulnerable as they did earlier in the pandemic. The cash burn has been tremendous, and I think most of them have been holding on for dear life and have entered the market several times to refinance their debt. Carnival is still burning north of $500 million per month in cash burn, $300 million each for Royal Caribbean and Norwegian. So those are not chump change by any means. And they will accelerate. But they've got

significant liquidity now, we think, to tie them through until things get back to normal. Tuna has buy ratings on both Royal, ticker RCL, and Norwegian, ticker NCLH. And he has a hold rating on Carnival. He says the difference in his ratings comes down largely to things like valuations and balance sheets. Wall Street expects Royal to burn a lot of cash this year, but just a little next year before returning to strong free cash generation in 2023 and onward. Shares trade now at 12 times early forecasts for 2023 free cash flow, so if you believe the financial recovery for cruise lines will be as fast as expected or faster, shares might be reasonably priced. To learn more about

the outlook for cruise lines, I spoke recently with the chairman and CEO of Royal Caribbean, Richard Fain. And I had to admit to him that I've never been on a cruise, and that was awkward for me. What? You're killing me. You're killing me. This is... I am appropriately ashamed. So, you know, I'll see when I get the opportunity to do something about it. No, no, no, no, Jack. I'm not going to let you get away with that. You have the opportunity now. In fact, I have over here a credit card machine. I take Visa, MasterCard.

I mean, I'm ready. Richard has been running Royal Caribbean since 1988. Think of that. You ever hear of a show called The Love Boat filmed on a cruise ship with Cap'n Steubing and Isaac the bartender and Yeoman Gopher? No. You've really never heard of it? What's the show called? The Love Boat. You've never heard of a show called The Love Boat? Love. Oh, no.

Exciting and new. Come aboard. You and you and you. We're expecting you. I think it's in the wrong key for me. Does this take place before or after The Suite Life on Deck with Zack and Cody? That's the sequel. Life on Deck with Zach and Cody. That's the sequel.

Anyhow, the Love Boat aired new episodes through 1986, but then it had some specials that debuted as late as 1990. So I think technically Richard took over at Royal when the Love Boat was still in production. I'm realizing now that was a long voyage for a not especially necessary fact. Moving on. Richard stresses that cruising now is safe. You are safer today, statistically, than walking down Main Street in USA.

And that's because we can control it. Almost everybody on board is vaccinated. Everybody is tested. We have protocols. So basically, this is back to the future. That's good to know. But what's the experience like? Is it still fun or is it like a COVID restricted approximation of fun? Richard says it's regular fun, just like before the pandemic. Yes, you have to show that you've been vaccinated if you're eligible for it. And you have to take a test just to make double sure.

But once everybody's gone through that screening process on board the ship, it's just the way it was two years ago. You'll see no real difference. There are differences behind the scenes. The air conditioning systems, we put extra filtration systems in. When you go through the buffet, instead of serving yourself, the crew member serves you. Richard says the past year and a half were difficult, but that he's pleased today with Royal's cash position and its satisfaction scores and its outlook. Business school never had a course in how to run a business on zero revenue, and it really does turn out to be more difficult. So we made a lot of changes. We did sell off some of our

older ships, and we did mothball the fleet for a year and a half. And then we also had to raise funds. We had to raise about $12 million of new capital to see us through this period. But it did get us through the period and gave us a nice liquidity cushion. We now have about $12 billion of new capital to see us through this period. But it did get us through the period and gave us a nice liquidity cushion. We now have about $4 billion in cash. But now the ships are back in operation. Satisfaction levels are high. Bookings for next year show there's a lot of pent up demand. The future is looking very good for us. I asked, do young people cruise? I mean, I realize that cruise lines have segmented offerings with Caribbean cruises for families and around the world cruises, which tend to attract retirees.

But is the average cruiser, let's say, younger or older than Thurston Howell III from the old Gilligan's Island show? Well, you haven't got the knack of being idly rich, you see. You should do like me, just snooze and dream, dream and snooze. The pleasures are unlimited. How many years before I reach average cruising age? Turns out, I'm several years past it. It really is remarkable just how popular this is.

We have higher interest levels from millennials than we do from baby boomers. In 2019, the average age was 45 years old. People have the wrong impression. that only peak cruisers would want to cruise, that people who had never taken a cruise would not be willing to step on board for the first time. And that just turned out to be totally wrong. Jackson, you spoke recently with a couple of cruise veterans. What'd you learn? Yeah. First I talked to Brittany Sambovna, who in 2018 achieved her childhood dream and became a singer on a cruise ship. She told me it's shorter cruises that tend to attract that younger crowd. There's differences. So you have a week cruise, you have a two-week cruise, and then you have these weekend cruises that they have for three to four days.

And that, that is when you see all the young people come out because it's a cheaper price. It usually goes to the Caribbean or someone really fun. So you're literally getting on, drinking, getting off. That's where you would see most of the younger people. Thanks, Brittany. Who else, Jackson? Yeah, you mentioned earlier Royal Caribbean's planned record-breaking ultimate world cruise. The ultimate, yes. I spoke with David Mutton, an Australian psychology

professor who sailed with his partner Roger on the last world record attempting cruise. That was a 245-day offering from Viking that was cut short halfway because of COVID. Oh no, so no record. No record. But David does have tickets for a Viking world cruise in December, and he gave me his pitch for ultra-long world cruises. On a short cruise, most people are trying to do everything that the cruise has to offer. So there's a bit of a manic pace to do everything and go to every dining venture, go do every activity. Whereas on a world cruise, people are a bit more chilled because you'll do them eventually, but you don't have to do them within two weeks. You've got four or five months to do them all. Did David have any tips for being around the same people for nine months?

Yeah, he said something that might help out with your flashbacks of sitting with strangers at Benihana. Do you know what? It's just finding a little nook or a cranny where you can curl up with a book or an iPad and not be interrupted, even hide from your partner if you want to for a few hours. Thanks, David. That new nine-month around-the-world cruise from Royal, it costs about $60,000 to $116,000 per person, depending on room choice and whether you prepay. It includes business class flights, a pre-cruise gala, and drinks and laundry service. And it departs in December 2023. Jackson, you spend like 60 grand a year on laundry alone.

That's pretty far off. It's hard to find quarters there. That's pretty far off. It's hard to find quarters there. Richard says it's time so that passengers arrive at each destination during the perfect time of year, from Carnival in Brazil to Cherry Blossoms in Japan. He says bookings have been strong even though the cruise was just announced. But he said Royal's typical cruise length is six or seven nights. He said the biggest

change Royal Caribbean has made in recent decades is to greatly expand the number of activities and choices for passengers. Over the last couple of decades, we've really expanded the opportunities. A lot of people have an image that it's a sedentary vacation. Well, it's hard to think of it as a sedentary vacation when you can go ice skating on board the ship, when you can do skydiving on board the ship, where you do snorkeling or scuba diving off the ports that we go to. On the last ship that we had delivered, we had 27 places you could have dinner. So it's really all about choice today, all about flexibility. all about choice today, all about flexibility. I read somewhere that Americans are among the world's top cruisers, but at the same time,

only 4% of Americans have ever been on cruises. I asked Richard about the long-term growth opportunity, and he said that once someone has been on a cruise, they're five times more likely to go on another one than someone who's never cruised is to take their first cruise. Richard says that fact, combined with Royal's ability to recruit first-time cruisers, bodes well for growth. China was the company's fastest growing market. It's still closed to Royal because of the pandemic, but Richard expects it to return to growth. And he says Germany was, in his words, almost non-existent as a cruise market a decade ago, and that now it's one of the largest and fastest growing in Europe, which he says is growing nicely. I asked about the

environmental impact of cruising. Many of the world's cruise ships run on diesel fuel and have sizable carbon footprints. The pandemic led some cruise lines to scrap the least efficient ships in their fleets, and many newer ships run on liquefied natural gas. Royal Caribbean this past week announced a plan to get to net zero carbon emissions by 2050, including the delivery of a net zero ship by 2035. Within the next two years, a Royal brand called Silversea Cruises will launch what it calls the industry's first hybrid power ship, which will use fuel cells and batteries, along with dual fuel engines, which primarily burn liquefied natural gas. I asked about Royal's supply chain.

As difficult as it is to keep stores stocked today, stores don't float across the ocean. They have to believe that keeping cruise ships full of all the goods they need is difficult too. Richard says it is, but he's managing in part because of high predictability. We can't stop in the middle of the ocean and say, do you have any Grey Poupon? One advantage we have is that we are able to predict our needs with high degree of accuracy. We know how many bottles of Grey Poupon we need. I can tell you now what we will need next February, and I won't be off by 1%.

Whoa, whoa, whoa. Do you have any Grey Poupon? I mean, quoting 1980s television, it's like half my job. Pardon me, would you have any gray poupon? But of course. Thank you. Richard says hiring has gotten more difficult, and he thinks that might continue, but also that Royal is finding the workers it needs, and that he feels it's an attractive employer. I asked which is his favorite ship and itinerary, and he wasn't having it. He said he loves his eight grandchildren equally, and his 60 vessels equally. But if any of his grandchildren are listening, I got the feeling that he likes you a little more than the others. Richard says he's had a lot of conversations about COVID over the past

year and a half, as you might imagine, and that now he's looking to the future and that it's bright. We're very popular among the young generation. And one of the fastest growing segments of our business is families, because people can go, they can be with their children. They can be together when they want to be. Not everybody wants to be with their children. They can be together when they want to be. Not everybody wants to be with their children every moment of the day. I don't know what you mean as a guy who spent close to two years in my home with my kids and dogs. Yeah, exactly. Not everybody wants to spend every waking moment with them.

And so the beauty of what we do is they can go and be with their friends and other kids of their age and then come back. The whole family has great vacations. Thank you, Tuna and Richard and Brittany and David. And thank all of you for listening. If you have a question you'd like answered on the podcast, just tape on your phone. Use the voice memo app and send it to jack.how. That's H-O-U-G-H at Barron's dot com. on the podcast, just tape on your phone, use the voice memo app, and send it to jack.how, that's H-O-U-G-H, at barons.com. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple,

write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.