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A fading wave season has raised concerns about the fortunes of the cruise sector, according to an update from Morgan Stanley.
The bank issued its latest “Cruise Chat” report as Royal Caribbean moved to dampen first-quarter expectations in a trading update this week.
Morgan Stanley said its monthly US travel agent survey suggested the wave peak selling season made a “solid start”, “but that this faded after the stock market weakness, Istanbul attacks, and Zika”.
Although it noted Royal Caribbean has said the impact of the Zika outbreak is expected to be negligible, the bank noted “31% of US cruise passengers are aged 25-40”.
Morgan Stanley said its webscraping survey has indicated cruise prices have weakened and it said China remains a concern.
In its update Royal Caribbean blamed higher than anticipated costs of growing in the China market for its more pessimistic outlook.
Morgan Stanley compared price movements today to one month ago finding Carnival had gone from +10% to +5%, Royal Caribbean from +15% to +13%, Celebrity from 0% to -4%, Princess from 2% to -2%, Costa Cruises from +6% to -1%, and P&O Cruises from +3% to -6%.
The report said: “The bigger hit at the premium lines and European lines reflects their larger exposure to more exotic deployments and destinations that are perceived to be riskier.
“Contemporary lines are still enjoying price increases taken in Q4, but some of these seem to be reversing too. We caution about reading too much into webscraping given calendar/channel shifts, but this data is concerning.”
The Morgan Stanley report stated: “Qualitative survey of US cruise travel agents shows that January’s ”wave” season started well but tailed off recently.
“Agents cited particularly strong demand for the Caribbean and Alaska, boosted by the strong economy, USD, new ships, new advertising campaigns, and refreshed product.
“Promotions are high, but continue to be amenity- rather than price-led, with RCL recently tightening its price integrity policy.
“However, demand seems to have slowed in recent weeks after the Istanbul terrorist attacks, weak stock market, Presidential election distraction, and Zika virus.
“Cruise lines are not panicking but some agents indicate perks are rising and rates falling slightly. Agents say Royal Caribbean’s product continues to resonate more than Carnival’s with consumers.”
Setting a target price for Royal Caribbean shares of $99, Morgan Stanley concludes: “We remain on the sidelines for cruise stocks.
“We are concerned about signs of weakening demand in this Cruise Chat survey, noting consensus revenue yield expectations are high.
“We are also worried about the Zika virus having a bigger than expected impact
“Finally, we remain nervous about China, and on its Q4 call RCL (Royal Caribbean) admitted its new ships are impacting pricing on older ships here, and there has been some stress in the distribution network.
“The China market has to succeed if it is to absorb much of the record 31% industry capacity growth to 2020, and we still question whether premium revenue yields and margins are sustainable in China, when the market will experience 40% capacity growth in both 2016 and 2017.”