Cruise Demand Holds Strong as Carnival Posts Record Revenue and Yields

SPEAKER_1 (0:00)

For more on the report and the cruise stocks, we'll welcome in Jaime Katz, Senior Equity Analyst at Morningstar. Jaime, great to talk to you. We got our Q3 preview from Carnival for the rest of the cruise liners. We're seeing everybody moving higher in reaction to record revenue, record net income, record net yields. What is standing out to you most about the results that we got from Carnival this morning? And follow up to that, what does it tell you about the underlying health of the cruise consumer?

Jaime Katz (0:29)

Yeah, I think the thing that stands out the most is really that some of the concern around discretionary spending that has infiltrated other categories has not really eminently bled into the cruising segment. And so demand has held up pretty well. There was a lot of concern primarily when some of the geopolitical instability started earlier this year, and Carnival talked quite a bit about what Q1 looked like and that it was a little bit different in 2027 than some of the later quarters. But it seems like there's been a bit of a recovery in that demand. And given that we're already halfway booked for 2027, it does not really seem like consumers have shied away from vacationing.

SPEAKER_1 (1:14)

And Jaime, I was reading through your note that you put out after last quarter's earnings and you had noted the booking patterns were a bit lumpy because of those geopolitical concerns. Is this one quarter enough to say that we've moved beyond that? Or is it too early for us to draw that conclusion? Do we need to hear from more of the cruise liner names? Or do we need another quarter even?

Jaime Katz (1:37)

Well, I think people are starting to understand that maybe this is the new normal and if they want to continue to take vacations and they want to consider the value proposition given some of the other inflationary pressures that are impeding on their wallets, that this is probably the best way to do that. So I don't know that we're going to hear rhetoric that is completely different from the other cruise lines, particularly Royal Caribbean. I think these operators are offering something that consumers are interested in and the quality time sort of away with your family is still relevant for consumers. So I don't know that we need another data point. We just need sort of stability geo-politically from where we are now to continue the trend and not have that momentum disrupted.

SPEAKER_1 (2:24)

And you mentioned the value proposition there. And I know we've spoken in the past about one of your long-term arguments is that cruising still offers a significant value advantage versus land-based vacations.

Is that becoming even more important as we're seeing consumers really starting to feel the pressure from inflation and other household expenses? I mean, just this morning, consumer confidence was even lower than expected and the expectations weren't very high.

Jaime Katz (2:49)

Right. And I do think, right, as you get more and more stretched by, you know, gas prices at the pump and inflation in food prices and rents, you're looking to still sort of have the same life experiences and not sacrifice that. In fact, I think the CEO used the word that vacations were sacrosanct on the call this morning, right? People still want to enjoy life, but do it at a reasonable price. When you can travel and have your meals included and your entertainment included, it makes that sort of spending a lot more digestible because you can understand what the entire spending package looks like without really any surprises, if you don't want to have them down the line.

SPEAKER_1 (3:33)

Is there anything specifically in Carnival's bookings or pricing that you think changes any of the expectations that investors have going forward for Royal Caribbean and Norwegian when they report?

Jaime Katz (3:46)

I don't, I do think what was called out and questioned quite a bit today was the fact that there was going to be much more European capacity next year, and so I think that was settling to hear that the demand is there and the appetite to go to Europe, to travel to Europe still exists, especially given concern around higher airfares in recent quarters. So I think that will be sort of interesting to hear with respect to what Royal and Norwegian bring to the table next month.

SPEAKER_1 (4:13)

All right, well, we've got Carnival up almost 12% right now, Royal Caribbean up close to 6% just on the Carnival results. Jaime, great to talk to you. Jaime Katz, Senior Equity Analyst at Morningstar.