After what felt like the longest winter ever, summer is just around the corner. For many, this means a chance to travel to exotic locations, spend time with the family, and enjoy the sunshine. For some people, this will involve cruise ships, which have become increasingly popular over the last decade thanks to huge investments from cruise giants Royal Caribbean Cruises Ltd. (NYSE:RCL), Carnival Corporation (NYSE:CCL), and even The Walt Disney Company (NYSE:DIS). However, recent problems with some cruise ships, including fires and engine failure, have had people re-thinking cruises as vacation options, and for investors it has meant sinking share prices in the short-term.
Small industry, big costs
Unlike other industries, the cruise ship industry is small in terms of the number of competitors. This is mostly due to the costs of owning and maintaining a cruise ship that is both profitable and comfortable for passengers. The average price to build a cruise ship can run anywhere from $420 million to nearly $1.5 billion, which is a big investment for just one unit. This tends to limit the number of entrants into the marketplace, and since it’s a small industry, it means any negative publicity with cruise ships tends to have a ripple effect across the whole industry. Disasters with ships like the Costa Concordia and the Grandeur of the Seas have hurt the cruise ship market, as well as led to massive costs in repairs and marketing to try to regain the public’s trust.
Ship safety hurting company profits
Following Royal Caribbean Cruises Ltd. (NYSE:RCL)’s recent problem when its ship, the Grandeur of the Seas, caught fire, the share price impact was immediate. It came as a precursor to the company losing 10¢ per share in earnings, which isn’t good for the company headed into the peak summer season, when ships make their money for the year. Thankfully for the company, Moody’s hasn’t cut its credit rating from Ba1 after this downturn,. This will enable the company to borrow money, if need be, for repairs, as well as any expenses that will come from regaining passengers in the future, which will limit damage to the share price.
As troublesome as that was for the industry, the biggest headache came from Carnival Corporation (NYSE:CCL) after a fire on the ship, Triumph, left 3,100 people stranded at sea, leading to serious questions regarding the safety of cruise ships. Company reports have also shown a decline in revenue per passenger, despite an increase in bookings due to decreased cabin prices, leading the company to drop its profit estimates to $1.45-$1.65 per share, far below analysts’ expectations of $1.99 per share. Part of this downturn has also been aided by increased fuel costs and less-than-favorable exchange rates. While that hurts the entire industry, Carnival Corporation (NYSE:CCL) has also had to increase marketing expenses to win back consumer confidence, which may turn out to be a long-term profit bleeder.