“Many factors come into play,” Arison said, “starting with the strategic needs of the individual brands and the markets, and ultimately, if we can get the return that we expect.
“In today's market, it is extremely difficult to get acceptable returns based on newbuilding costs for both dollar- and euro-denominated brands,” said Arison. “Last time we signed a newbuilding order for a dollar brand was two-and-a-half years ago. Instead, we have more newbuildings under construction for our non-dollar brands. But the escalating costs of newbuildings is impacting the non-dollar brands as well.”
Fain said that Royal Caribbean is looking at both building and deployment (fuel) costs. “With the higher cost level,” he said,” it becomes harder to justify newbuildings.”
By the time the pace may slow down (2011-2012), Arison said that Carnival will have more than 100 ships. “We are talking about a slowdown in newbuildings and not in market demand,” he said. “With demand continuing to grow and less new capacity entering the market, yields and earnings may grow faster.”
If currencies and commodity prices stay were they are, Carnival (Corporation) and Royal Caribbean will cut back noticably on newbuldings, predicted Tim Conder, managing director of leisure equity research at Wachovia Capital Markets.
The upside to the cruise lines may be that as the newbuilding space slows down, the yards can be expected to become more aggressive and then Carnival will step back in again, Conder projected.
Currencies, materials and fuel can have violent short-term impact, said Leisure Analyst Robert Simonson at William Blair & Company, but he expects the industry to continue to build.
Currencies are cyclical over time, according to Simonson, who said there will come a time when the currency will be much more favorable to building new ships. Commodity prices will change too, he predicted.
If the dollar regains half what it has lost against the euro, said David Leibowitz, analyst at Horizon Assets, the cruise lines would be very pleased to add capacity to their dollar-denominated brands. The lull at the moment is to absorb the existing capacity in light of all the uncertainty, he said.
According to Michael Paladino, senior director for gaming, lodging and leisure at Fitch Ratings, North American orders have peaked in periods of strong economic growth. He said that when the economy picked up in 1993-1994, orders spiked, and they spiked in the late 1990s and 2000. 9/11 changed all that, he said, and not many ships were ordered before 2005, when orders picked up again.
“The big debate is whether it makes economic sense to build ships carrying 4,000 passengers and more. Carnival has not yet gone that route, and there is a reason for that,” Paladino said. “The QM2 was the largest ship when she was introduced and she generated excitement. But Carnival has since shied away from the race and Royal Caribbean has the biggest-ship title. Carnival is more focused on returns.”
The cruise lines will find ways to continue to build ships, concluded Simonson. “They are dealing in long-lived assets while Wall Street is focused on short-term results,” he said. “They (the cruise lines) know they will be out of synch with Wall Street from time to time.”
Simonson also thinks it is time to place new orders, since it takes two-and-half years to build a ship and longer than that to design and build a prototype, and he does not think the recession will be here four years from now.
Excerpted from Cruise Industry News Quarterly Magazine: Fall 2008