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WIKI ANALYSIS
Carnival is the largest operator of vacation cruise ships in the world. With 81 cruise liners carrying over 7 million passengers worldwide in 2006, the company commands around 44% of the global cruise industry.[1] The company makes money from ticket sales as well as on-board revenue from gambling, shore excursions, bar revenues, and other amenities across brands including Carnival Cruise Lines, Princess, Costa, Holland America Line, P&O, AIDA, Cunard, and Seabourn.[2]
Surveys estimate that there are some 127 million potential passengers for cruises in North America alone (defined as members of households with a minimum income threshold of $40,000, headed by a person at least 25 years old), and that half of these individuals have expressed an interest in taking a cruise. Yet, only about 17% of this captive market has ever taken a cruise, meaning there is room for greater market penetration and maturity.[3]
Furthermore, over 60% of worldwide cruise passengers are over the age of 40.[4] Despite the risks associated with terrorism, rising oil prices, and natural disasters, then, cruises have and may continue to become increasingly popular as Baby Boomers enter retirement.
Financial and Operating Metrics
Below are several metrics of financial and operating performance. The company has slowly but steadily increased its top line as it has added new ships and greater total capacity while enjoying higher ticket prices per passenger.
As seen in the table below, the company has increased its total number of ships and passengers. Its growth in passenger volume has exceeded that of the market, indicating that the company has successfully captured market share away from competitors.
| Metric | 2004 | 2005 | 2006 |
| Ships | 77 | 79 | 81 |
| Passengers | 6,306,000 | 6,848,000 | 7,008,000 |
| Rev/passenger | $1,542 | $1,619 | $1,689 |
Trends & Forces
- Discretionary income. Cruise lines compete for the discretionary income of consumers. Cruises and vacations are discretionary purchases, luxury goods enjoyed only when income is available for spending after necessities are covered. Thus, the discretionary income levels of the company’s customer base can have a material effect on the company’s sales. Not surprisingly, the company operates in places like the United States and Western Europe, where the per capita discretionary income is on average substantially higher than in many other countries.
- CCL is superior in brand diversity, price discrimination, and international exposure. CCL's strategy has been to leverage its extensive brand portfolio to price discriminate and capture various market segments and demographics. CCL has more brands (also more well-recognized brands) than chief competitor, Royal Caribbean Cruises (RCL), which gives it a leg up in capturing global market share. It also makes more of its money from international operations and has been in non-North American markets for more time than RCL. This gives it greater international market penetration and brand awareness, and the geographic diversity helps partly shield against isolated economic effects in any one of its markets.
- Aging baby boomers. As the baby boomers continue entering retirement, the company stands to benefit from the tailwinds of an increase in senior traffic, as it derives a large percentage of its income from passengers over 55. It is likely that seniors may continue to gravitate toward warmer-weather vacations. Coupled with the fact that retirement means more time to one’s self, and for many baby boomers, time to travel, the company has significant demographic tailwinds working in its favor.
- Terrorism and Geopolitical Risk. The company is at risk of declines in its business from terrorist attacks and geopolitical unrest, even if not targeted specifically to its ships. Cruise-goers may be frightened by the possibility of an attack on their ship, leading to declines in ticket sales. Generally, travel at large declines notably in the wake of a terrorist attack, and cruises are no exception. To be sure, consumer attitudes matter. The market, of course, realizes this: in just days after September 11, 2001, the company’s shares lost around one third of their value.
- Rising oil prices. Rising oil prices have important negative effects on the company. First, one of its largest inputs is fuels for its cruise liners, so unhedged increases that cannot be passed on to customers will have a negative impact on margins. Second, high oil prices lead to lower discretionary household income, which, as discussed previously, is an important driver for the company. Fortunately, the company has greater international presence than chief rival RCL, which may help offset the relative effects of rising oil prices on consumer behavior as the falling US dollar has exacerbated negative effects for American cruisers more than international cruisers.
- Hurricanes, natural disasters, and weather patterns. The company can be adversely affected by particularly bad hurricane seasons, natural disasters, and inclement weather patterns. Many of the company's cruises are to Caribbean destinations, where hurricanes pose a major threat to business. Consumers are less likely to buy, for instance, a Caribbean cruise if a major hurricane is anticipated. Furthermore, the company depends upon the availability of ports, so coastal weather patterns can limit CCL’s ability to procure ports. If inclement weather or disasters hit port areas, the company can struggle to call on vital ports, which would adversely affect its business.
- Continued financial viability of travel agents. The vast majority of the company's sales come from travel agents who arrange cruises on behalf of clients.[8] The travel agency business is not necessarily what it used to be. Given the emergence of internet-based travel bookings and direct to consumer models of selling airline tickets, their business in general has declined. Because the company depends on a broad base of going-concern travel agents, any prolonged slump or major consolidation in the travel agency business could adversely impact the company. Furthermore, if travel agents force the company to increase commissions in order that they compete successfully, the company can see major pressures on margins. The approximate 10% commissions offered to travel agents now is the company's largest variable cost,[9] so changes here can have big effects on the company's bottom line.
Competition and Market Share
The company competes against a number of smaller cruise line operators, but as the market leader, with a 44% market share, it enjoys certain competitive advantages and economies of scale that competitors do not. With the largest number of ships and the greatest capacity, the company spreads much of its corporate overhead over a larger cruise liner base and has heftier margins, since it can do things like leverage size for more favorable purchases of on-board equipment and supplies. Its largest competitor is Royal Caribbean Cruises (RCL) which commands a nearly 23% market share. Other notable competitors include Star Cruises (which operates Star Cruise Line and Norwegian Cruises) and Mediterranean Shipping Company (which operates MSC Cruises and Disney Cruise Line).
Below is a table of relevant competitive metrics for each of the two companies.[10]
| Company | Revenue (2006) | Operating Margin | Passengers (millions) | 5 yr Psgr. Growth | No. of ships | Berths[11] | Market Share[12] |
| CCL | $11,839 | 22.1% | 7 | 14.9% | 81 | 143,676 | 44.6% |
| RCL | $5,230 | 16.4% | 3.6 | 5.9% | 34 | 67,550 | 22.9% |
| Star Cruises | N/A | 2.8% | N/A | N/A | 21 | 35,000 | ~10% |
| Industry | ~$27,000 | N/A | 15.7 | 7.8% | 231 | 306,000 | |
Footnotes
- ↑ Compiled from CCL 2006 10-K, "Business," pg 4, 12
- ↑ CCL 2006 10-K, "Business," pg 12
- ↑ CCL 2006 10-K, "Business," pg 12
- ↑ CCL 2006 10-K, "Business," pg 12
- ↑ CCL 2006 10-K, EXHIBIT 13, pg F-1
- ↑ CCL 2006 10-K, EXHIBIT 13, pg F-1
- ↑ Compiled from CCL 2006 10-K, "Business," pg 2-12 & EXHIBIT 13, pg F-1
- ↑ CCL 2006 10-K, "Business," pg 14
- ↑ CCL 2007 10-Q, Q3, "MD&A," pg 11
- ↑ All data compiled from companies' Annual Reports
- ↑ Berths is a industry standard measure of capacity, which assumes that two persons can occupy each cabin. A berth, than is the number of cabins times 2
- ↑ Calculated by dividing company data on passenger volume by industry passenger volume of 15.7 million passengers, obtained from CCL 2007 10-K, "Business"
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