Cruise stocks poised for 'productive' year as pent-up demand plays out: Analyst

Citi Leisure & Travel Analyst James Hardiman examines the travel demand trends tied to cruise lines and their growth outlooks in the leisure and travel industry.

Video transcript

DAVE BRIGGS: This week, we learned President Biden intends to end the COVID-19 national and public health emergencies on May 11. So with the pandemic firmly in the rearview mirror, or in this case, wake, is it time for the cruise industry to complete that slow turnaround? Citi leisure and travel analyst James Hardiman says this could be a banner year for the industry. Nice to see you, sir. Why do you say that?

JAMES HARDIMAN: Yeah, I mean, I think if you think about the rest of the economy, certainly, the rest of the consumer space, everybody has moved on from the pandemic, arguably, years ago, right? It hasn't been nearly as easy for that crew space. And so I think there's a good argument to be made that there's still some pent-up demand here. There were about 50 million people that would have otherwise taken a cruise in 2020 and 2021 and ultimately didn't get to.

Now some of those people have gotten back on in the year or so since. But a significant portion has not. I think the other thing that helps-- and we're entering what's called wave season, right, when a disproportionate number of bookings are made for the upcoming spring break and summer season, that was really marred last year by the onset of the Russia-Ukraine conflict and then also the outbreak of Omicron. This year's wave season, by all accounts from the work that we do, is off to a much better start. And by all accounts, it's off to a strong start. And so I think that sets the table to have a much more productive year.

JARED BLIKRE: Let me ask you about going forward. Now we had over the pandemic, we had a number of habits and behaviors that change. I'm just wondering, for the average person who doesn't, let's say, go on a cruise very often, have they been able to penetrate, or are they relying on repeat customers? I'm just wondering what their TAM currently is versus the general population that may have some lingering misgivings about going on a cruise.

JAMES HARDIMAN: Yeah, it's a fair point. I think it's a critical question. I do think it's safe to say that in the early reopening stages, it was overwhelmingly repeat customers, right? In addition to all of the angst surrounding the pandemic, not a whole lot of people that have never set foot on a cruise ship were willing to sort of add that extra anxiety. I think as we've gotten into late '22 and early '23, we are hearing about new cruisers getting back into the space, which I think is a critical component.

You could argue, sort of based on my previous commentary, 50 million people that are sort of regular cruisers, that you don't necessarily need that new customer in the early going. But for this industry to get back to where it would like to get to, you need that new customer. I also think it's worth noting that only about 15 million Americans have ever been on a cruise, right? And so if you think about the TAM being certainly most Americans, they're just scratching the surface. And so it doesn't take a ton of new cruisers to grow that 15 million number pretty dramatically.

SEANA SMITH: Well, James, just looking at the price of some of these stocks here since the start of the year, Royal Caribbean, I know you've got a buy rating on that. That stock up 38%, just since January 1. How much of this good news is already priced in? And if it's not, what's the upside potential for that?

JAMES HARDIMAN: Yeah, I mean, it really depends on how you frame it, right? Since the beginning of the year, these stocks have been on a tear. If you compare it to 2019, right, for an overall market that's up 25%, 30%, Royal Caribbean is just half of what it was trading coming out of 2019. Now that is maybe not an apples to apples comparison because they have layered on a lot of that. But it just goes to show that this is an industry that's been left behind by the rest of the market. And so they have a long way to go playing catch-up here.

DAVE BRIGGS: My assumption-- and it could be an incorrect one, James-- they often are-- is the typical cruise customer is just shopping around trying to get the best deal. But you have Royal Caribbean as a buy. So what is their competitive advantage against their competitors?

JAMES HARDIMAN: Yeah, I mean, price is very important. So you're right from that perspective. But in a lot of instances, not as important as some other factors, most notably the itinerary, right? And Royal Caribbean is arguably the most glocal cruise brand. And I think that helps if you're trying to go to a remote destination, some of the most attractive destinations.

I think they're a best bet, and I think they're a good combination of breadth of their offering and also perception of their brand. I would probably put them number one, those two factors combined. But yeah, I think there are a lot of factors. The newness of the ships, right? The features on the ships, and certainly, the destinations play a big role. And RCL is certainly no slouch in that perspective.

JARED BLIKRE: James, we got to leave it there, but really appreciate your insights here. James Hardiman.