Cruise Operators Steam Into China

Cruise companies steam into China

I often write about the travel and leisure industry in this space, with special focus on hotels and online travel agents that are reaping big profits from China’s fast growing middle class with plenty of money to spend on vacations. But another less visible group set to profit from the boom is the cruise industry, which is rapidly discovering a Chinese fondness for traveling aboard vacation palaces at sea. A new report on the trend seemed like a good opportunity to focus on the market, which looks set to offer big growth potential for industry leaders Carnival Corp (NYSE: CCL) and Royal Caribbean (NYSE: RCL).

Both of the big US-based cruise operators are investing heavily in China, with my adopted hometown of Shanghai emerging as the home harbor for their new and quickly growing fleet of locally-based ships. Industry forecasts vary quite a bit, but the numbers look quite impressive no matter who you believe.

The Asian Cruise Association predicts the broader Asia cruise market will grow to 3.8 million passengers annually in 2020, nearly triple the number from 2012, with China accounting for more than 40 percent of the total figure by that time. Royal Caribbean is even more bullish, predicting Asia will grow to 7 million passengers by 2020, accounting for about a fifth of the global market. (English article)

I recently wrote about the cruise industry from a more local perspective, since many of the companies are basing their fast-growing China operations out of Shanghai where I live. (previous post) Carnival is one of the most aggressive, and will have 4 ships based in China when it moves a new liner into the market next April. That bet is based on rapid growth that has Carnival forecasting its China-based passenger volume will grow to 500,000 next year, up 42 percent from this year’s 350,000.

Royal Caribbean also sees strong growth, with its China passenger volume expected to reach 400,000 next year, double the figure from 2 years ago. Like Carnival, Royal Caribbean is also rapidly expanding its China-based fleet, which will grow to 3 liners with the arrival of a new ship next year.

Investors don’t seem to excited on the China story for Carnival, whose shares trade at about the same level now as they were a year ago. That’s more likely due to larger issues, most notably a massive liability from a major ship accident in Italy 2 years ago. But shares of Royal Caribbean have done much better, up about 70 percent over the last year, and the China growth story has undoubtedly helped to fuel that rise.

As a regular person on the ground here in China, I do agree that potential for this industry looks quite good. Chinese are always looking for the next trend in travel, and have shown they’re not afraid to spend their hard-earned dollars to try out the newest thing. That taste for travel has fueled a huge boom in the domestic hotel industry, where both domestic and big international brands have posted massive growth over the last decade, often in the triple-digit range.

But as with many things in China, too much enthusiasm often leads to development of too much capacity, which has sharply eroded profits for many hotel operators at the moment. The cruise business is a little different due to a much smaller field of players and the industry’s relative youth in China. For that reason, I expect we should see some strong annual growth for the next 10 years, probably in the 30-50 percent range. That growth could fuel similar profit growth for the cruise operators in the next 3-5 years, but the contribution could slow after that if the market becomes oversupplied.

Bottom line: Cruise companies should see strong profit growth from their China operations over the next 3-5 years, but the contribution is likely to slow after that as the market becomes oversupplied.

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