The cruise industry is booming and an American cruise company is creating brand fans in its wake, writes Sally White

Carnival is on a roll. First quarter net income tripled on revenues up over 3%. Currency and the oil price have been moving in its favour, dry-docking costs are coming down and holiday prices and bookings are up. Further good news came with approval from Cuba for Carnival to be the first US-based cruise operator to sail there. And, after starring in recent weeks in the UK TV documentary series ‘The Cruise’, the Regal Princess in Carnival’s Princess line has seen a 40% rise in web traffic.

This, the world's largest cruise group, is giving a further boost to its future prospects by adding around 20 new ships to its 100-plus fleet by 2020.Brokers are tipping the stock, telling clients that earnings per share could rise as much as 40%. Anyway, for sure Carnival will be giving their investments a boost with dividend increases and plenty more share-buy-backs.

The company took the unusual step in its 2016 Q1 announcement of increasing its full year forecast, much earlier than usual for it to give guidance of this sort. Brokers read this as a sign of the underlying strength of the business. The shares have risen by 11% over the last four weeks.

While acknowledging the general growing popularity of cruises, Carnival puts much of its gains down to its own hard work. President and CEO Arnold Donald said, when announcing these results, that: "Our ongoing guest experience innovations coupled with our increasingly effective marketing and communication efforts have driven additional demand for our brands, resulting in a strong booked position.

“The lower levels of inventory remaining for sale for the balance of the year, particularly for our peak summer period, positions our brands well for continued revenue yield growth and builds confidence in our full year earnings forecast."

The boom in cruise is a major trend in world outbound travel, with the Cruise Lines International Association (CLIA) forecast numbers to reach 24 million this year. In its ‘2016 State of the Cruise Industry Outlook’, CLIA puts the rise in the last decade at 73%.

“The industry is continuing to evolve to ensure there truly is a cruise for every travel style and budget,” Cindy D’Aoust at CLIA commented. “By creating unique ships, new experiences and access to destinations around the world, the evolution, appeal and value of cruise travel continues to drive the overall growth of the industry.” This point was underlined when low-cost UK package holiday group Dart added Croatian cruises to its Jet2holidays range for this summer.

Cautious moves

Yet, despite the buoyancy of its market, Carnival has not thrown caution over the side. It announced a few weeks ago that it had postponed making a major break into China by nearly a year, to spring 2018. While it gave no detail, brokers are suggesting that Carnival is being wary of a slowdown in Chinese consumer spending growth.  The market has been extremely bullish about prospects for China, with total cruise capacity forecast to rise 70% this year and nearly 40% in 2017, after an increase of 60% last year.

Carnival has not thrown caution over the side

Last October, Carnival announced that that it had set up a 40:60 JV with China's largest shipbuilder, China State Shipbuilding Corp, to buy and operate cruise ships. The plan is to invest $4 billion over ten years, aiming at a market expected by research group Euromonitor to be worth  $11.5 billion by 2018 (up from $6.8 billion in 2013). The lure is the 10 new ports for cruise ships planned by China for 2020 as it ramps up domestic tourism to boost consumer spending.

Carnival Corp already operates Costa Cruises and Princess Cruises in China and plans to launch two more lines, Carnival Cruise Lines and AIDA Cruises.

About 90% of Chinese outbound travel happens in Asia, with most destinations reachable by sea, Carnival comments. “We believe the cruise segment of the Chinese vacation region has significant long-term growth potential given its early stage of development with healthy demand from a large and growing middle class population...and increasing support from the Chinese government.”

Currently Carnival's largest market is North America, which represents more than 50% of sales. Other major markets include Europe, with 33% and Australia and Asia combined 14 per cent.

China apart, Carnival latest strategic document shows just how large the global opportunity for cruise is. Research data from cruise research group GP Wild showed that in 2015 only 4% of the population of Australia and New Zealand had been on a cruise, 3.4% in North America, 2.7% in the UK and 1.9% in Europe.

Carnival is spending heavily on marketing its ten brands. Recently it has been shifting its efforts from print media to online and social media, utilising Facebook, YouTube, Twitter, Flickr, and Podcasts. Its aim is to ‘create brand fans’.