The arrival of COVID-19 vaccines could give the beleaguered travel industry a much-needed shot in the arm in 2021. But analysts caution there’s still a long way to go before it’s smooth sailing for the cruise lines.
“The vaccine may not be a panacea for the cruise line industry versus airlines or leisure hotels, where the outlook is a little bit better,” Jason Ader, CEO of SpringOwl Asset Management, tells Yahoo Finance Live. “The perception of the cruise industry is that it's a floating petri dish. And that's a bad perception.”
Previous coronavirus outbreaks on cruise ships left thousands of passengers stranded, and that’s affected sentiment for people who have never cruised before. A recent SpringOwl Asset Management survey found that 80% of respondents who have never cruised say they would avoid getting on a ship.
“I don't think you'll see a return to peak profitability in the cruise industry until 2030,” says Ader. “And that's just not a function of demand coming back, because I do think the cruise industry will see people want to go on cruises. But the prices will be a challenge. People aren't going to pay a premium for it right away.”
Cruise passengers tend to be a loyal group. Research from the cruising agency Mundy Cruising found that 81% of luxury cruise passengers plan on taking a cruise next year, although the majority will wait until they have been vaccinated first.
Ader says there are currently a lot of great deals to be had in the leisure travel market, so the price benefit that the cruise industry has historically provided is no longer as competitive. He points out that it also costs a lot more to keep the ships clean.
“I give the cruise industry, Carnival, Royal, Norwegian — tremendous credit. They've made unbelievable innovation on surface cleaning, air filtration. They're doing an amazing job,” says Ader. “That's really where I struggle with the stock price performance of the cruise industry relative to the likely outlook that it's going to be a very long road to get back to where we were in 2018 and 2019 before COVID-19.”
Year-to-date, Royal Caribbean’s (RCL) stock is down 46%, while Carnival Corporation (CCL) and Norwegian Cruise Line Holdings (NCLH) have each plunged nearly 60%.
Cost of air filtration and cleaning
In June, Royal Caribbean and Norwegian put competition aside to form the Healthy Sail Panel, a group of top medical and scientific experts who created new health and safety protocols to protect guests, crew and the communities that cruise ships visit. Together, they filed 74 safe sailing protocols with the U.S. Centers for Disease Control and Prevention, including testing and deep cleaning.
“These programs for surface cleaning and air filtration just don't come without added expense,” says Ader. “The time to clean and the utilization of the cruise ship is going to be lower for the foreseeable future. So to get back to normal levels of profitability, it just doesn't take demand coming back, it takes pricing, not just to go to where it was, but to even greater than where it was to offset the added cost of air filtration and surface cleaning. And honestly, that's going to take quite some time.”
From 2016 to 2018 the cruise line operators went on a building boom and that means at least 15 new ships are scheduled to come online in 2021.
“We're facing pretty significant industry capacity over the next few years, which will require more ships to come out of service just to absorb that capacity,” says Ader.
“It's a very concentrated industry at the top with Royal Caribbean, and Carnival, and Norwegian having a very high market share. It doesn't really leave much room for consolidation. But you may see some significant capacity come out of service. And I think prices will stay low for quite some time.”
Alexis Christoforous is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AlexisTVNews.
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