MID-OCTOBER 2014 CRUISE PRICING SURVEY EBOLA IMPACT

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1 MID-OCTOBER 2014 CRUISE PRICING SURVEY EBOLA IMPACT OCTOBER 20, 2014 Todd Jordan Felix Wang, CFA David Benz HEDGEYE.COM OCTOBER 20,

2 CALL TO ACTION Our current survey supports our overall cautious tone for the cruiser stocks. The Caribbean looks a little worse to us while Europe continues to weaken, as indicated in our last survey. We turned positive recently on NCLH and indeed, pricing for the Norwegian brand seems to be holding up much better. SUMMARY In our Mid-October pricing survey, we note discounting for most of the fall/winter itineraries in the slow shoulder period ahead of Wave The Caribbean still has not gained any traction, for this year at least. And 2015 European pricing (which we warned about on Sept 28 in our note CCL/RCL RISK WHERE YOU LEAST EXPECT IT) continues to weaken. Pricing dropped even in the stronger UK market and a new risk may be emerging in South America. Are Ebola fears to blame for the recent discounting? Maybe. Investors certainly have been spooked, with the cruise stocks falling ~15% since the end of September. We re hearing that agents are reporting some cancellations due to the intense Ebola press coverage. Luckily for the cruisers, the Ebola media blitz is before the start of Wave CCL was the clear laggard in the Mid-October survey: 1) Costa pricing has not improved while YoY comps are getting much harder 2) sharp fall in P&O UK brand pricing 3) surprise (or not) discounting from the Carnival brand for FQ4 2014/FQ NCL is also being pressured in the Caribbean for Q4, with shrinking Breakaway and Getaway premiums. However, it did not discount as much as CCL and RCL did, and its European pricing remains solid heading into Oceania/Regent pricing continues to be the role model in the luxury space as pricing was steady or growing across all regions in mid- October. While our pricing survey signaled a mixed performance for RCL in mid-october, with better marginal pricing from the RC brand in Europe offsetting weakness in the Caribbean and South America, we remain concerned on the stock given its high sensitivity to European trends. RC brand YoY European pricing for summer 2015 remained negative. RCL investors should also keep an eye on Q South America pricing, which was surprisingly weak in mid-october; we believe it accounts for ~10% of total ALBDs in FQ and FQ We have added a new section called NEW SHIP PRICING POWER which details how pricing for upcoming new ships compares with that of its respective peer group. No surprise Quantum has a major edge in this category, but the magnitude is impressive despite the rare price cut it made for FQ4 sailings seen in this past survey. RCL is on tap for Q3 earnings next Thursday. We expect a 3Q beat with cautious 4Q yield guidance given the struggles we re seeing in close-in pricing from our recent survey. The FY % net yield guidance should be left intact. HEDGEYE.COM OCTOBER 20,

3 MID-OCTOBER SURVEY PIVOTS CCL: Negative RCL: Neutral NCLH: Positive SURVEY METHODOLOGY We track YoY and sequential pricing for 13,500 ship itineraries spanning across 8 geographic regions. We follow brand pricing for the following: Carnival, Royal, Celebrity, Pullmantur, Princess, Holland America, Costa, Cunard, Azamara, Norwegian, AIDA, P&O Cruises UK, Oceania, and Regent. We rely on sequential pricing trends (defined as how pricing has changed relative to pricing seen at the last time the company provided guidance) for price pivot signals. PIVOT HISTORY HEDGEYE.COM OCTOBER 20,

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5 SURVEY DETAIL CCL It could be a tough close to the year for CCL. Caribbean discounting kicked into high gear for the fall/winter itineraries, particularly Western/South Caribbean which has exposure to Galveston, TX, where the Ebola lab worker departed on Carnival Magic. For CCL s European itineraries, pricing has stalled or fallen in mid-october. And a troubling Argentina economy has resulted in poor pricing in the South American region, which is just about to start its cruising season. Caribbean Carnival brand o Eastern Caribbean - Sequential pricing dropped off the cliff in mid-october for FQ4 2014/FQ itineraries. For Q overall, this pushes YoY pricing growth into high single digits rather than the mid-teens it was averaging through September. FQ pricing also took a hit but continues to average 5-10% growth. o Western/Southern Caribbean - Galveston/Los Angeles pricing was also hit hard. As the chart on the next page shows, FQ4 2014/FQ pricing suffered a 20% YoY decline in mid-october, bringing overall Q pricing closer to the flat line and negative pricing for Q CARNIVAL BRAND WESTERN/SOUTHERN CARIBBEAN PRICING SEQUENTIAL CHANGE 1% 0% -1% -2% -3% -4% -5% -6% -7% -8% Q Q Q Q Q * Sequential pricing trends (defined as how pricing has changed relative to pricing seen at the last time the company provided guidance) for price pivot signals HEDGEYE RISK MANAGEMENT HEDGEYE.COM OCTOBER 20,

6 CARNIVAL BRAND WESTERN/SOUTHERN CARIBBEAN PRICING YOY CHANGE 3% 2% 1% 0% -1% -2% -3% -4% -5% Q Q Q Q Q HEDGEYE RISK MANAGEMENT Princess/Holland America - Surprisingly, Princess pricing grew modestly in mid-october. Princess had been one of major discounters recently in the Caribbean. Holland America, which had already been discounting through this summer season, followed the footsteps of the Carnival brand and cut prices in the double digits. Europe Costa FQ pricing did not budge sequentially which is not good enough as YoY pricing continues to worsen. 20% COSTA EUROPEAN PRICING YOY CHANGE 15% 10% 5% 0% -5% -10% Q Q Q Q HEDGEYE RISK MANAGEMENT P&O Cruises UK pricing dropped significantly since mid-september (-20%). Is the UK market finally showing some kinks in the armor or just a head fake due to Ebola? HEDGEYE.COM OCTOBER 20,

7 P&O CRUISES UK PRICING SEQUENTIAL CHANGE 10% 5% 0% -5% -10% -15% -20% -25% -30% Q Q Q /18/14 09/17/14 10/15/14 * Sequential pricing trends (defined as how pricing has changed relative to pricing seen at the last time the company provided guidance) for price pivot signals HEDGEYE RISK MANAGEMENT Alaska AIDA pricing slipped for 1H 2015 itineraries All other European itineraries were relatively flat Early stable pricing for Princess and Holland America for Summer 2015 but due to difficult comps, is down modestly on a YoY basis. Asia/Australia Weaker Q pricing for Princess and Holland America South America Costa pricing came under some pressure in Mid-October for its Buenos Aires itineraries - Last Friday, Costa canceled four planned departures of Costa Pacifica from Buenos Aires, citing commercial difficulties and economic situation of the region as the main reasons for this decision. It could also be related to the high operational costs on the River Plate waterway (source: Cruise Business). Holland America pricing also moved down modestly in sympathy with Costa HEDGEYE.COM OCTOBER 20,

8 NCLH NCL discounting in the Caribbean is nothing new. What may be new in mid-october is that the Norwegian brand discounted the least among the 3 operators for F4Q itineraries. In addition, 1H 2015 Caribbean pricing looks quite strong. European pricing was also very solid as pricing strengthened for the Norwegian, Regent and Oceania brands. Caribbean Norwegian brand o o F4Q lower pricing in the Caribbean across the board Breakaway/Getaway premiums shrank. (more details in NEW SHIP PRICING POWER section) 1H 2015 pricing strengthened significantly sequentially and YoY Regent/Oceania pricing remained stable Europe Norwegian brand o o Pricing was steady for FQ4. A substantial pickup in pricing for FQ1/FQ Pricing, on average, has reached double-digit growth for 1H 2015 Alaska Regent/Oceania pricing grew slightly Strength across Norwegian brand and Regent/Oceania. Hawaii Recovered from past struggles and has flat pricing for Q HEDGEYE.COM OCTOBER 20,

9 RCL The mid-october pricing survey was mixed for RCL. For the RC brand, European pricing improved slightly, though remain negative YoY. The RC brand discounted heavily in the Caribbean for close-in Q4 itineraries and lost pricing power in South America. Similar trends are seen for Celebrity. Quantum also saw a rare price cut in mid-october. Caribbean Royal Caribbean brand o o o Sequential pricing dropped for most of the RC brand itineraries for FQ4. The discounting extended to Allure of the Seas and Oasis of the Seas. On a YoY basis, FQ4 pricing is trending down mid-single digits, worse than mid-september s projection of down slightly. Early 1H 2015 pricing is slightly down YoY with positive sequential pricing trends. Quantum gave up some pricing power for its winter itineraries while 1H 2015 pricing has been solid 0% -2% -4% -6% -8% -10% -12% -14% ROYAL CARIBBEAN BRAND CARIBBEAN YOY PRICING CHANGE Q Q Q Q Q HEDGEYE RISK MANAGEMENT 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% ROYAL CARIBBEAN BRAND CARIBBEAN PRICING SEQUENTIAL CHANGE Q Q Q Q Q * Sequential pricing trends (defined as how pricing has changed relative to pricing seen at the last time the company provided guidance) for price pivot signals HEDGEYE RISK MANAGEMENT HEDGEYE.COM OCTOBER 20,

10 Celebrity - FQ pricing fell double digits sequentially and YoY. Overall FQ4 pricing has now dropped more than 10% YoY. FQ1 2015/FQ pricing remain steady and flat, sequentially and YoY. Europe Royal Caribbean brand o Sequential pricing gained slightly but YoY pricing remain negative for F2Q o After some discounting in September, Anthem of the Seas pricing mildly recovered in mid-october to be closer to that of Allure of the Seas. 25% ROYAL CARIBBEAN BRAND EUROPEAN PRICING YOY CHANGE 20% 15% 10% 5% 0% -5% -10% Q Q Q Q HEDGEYE RISK MANAGEMENT Celebrity - Strong pricing for F2Q 2015 (well above double digit growth) and the trend is steady Alaska Off to a strong start for the RC brand pricing for Q Celebrity pricing is relatively flat for next summer. Asia/Australia The RC brand struggles continue in Singapore while Celebrity is seeing pricing growth. South America Pricing for Splendor of the Seas departing from Santos, Brazil is down significantly YoY. Pricing for Celebrity s Galapagos itineraries was mixed. HEDGEYE.COM OCTOBER 20,

11 RCL Q3 PREVIEW RCL should report a ho-hum 3Q beat on Thursday driven by stellar pricing from their European and China-sourced itineraries and reiterate FY yield guidance of 2-3%. Slightly lower than expectations F4Q yields and a stronger dollar should be offset by lower fuel expense guidance. Despite the Ebola coverage, management will likely voice their optimism over the European and China business and outlook for 2015 but we would warn them not to be too positive as the demand environment may not be as favorable in Europe next year and there could be other risks as well (e.g. South America). The stock is currently fairly valued at 13.5x 2015 EPS, in our opinion. Source: Hedgeye, Factset HEDGEYE.COM OCTOBER 20,

12 NEW SHIP PRICING POWER Quantum of the Seas (RCL) Quantum was not immune to the carnage in mid-october, falling over 10% sequentially in FQ4. However, on average, Quantum premiums are still ~70% higher than that of Oasis/Allure for FQ4 itineraries and >100% premium over NCL s Breakaway, which also operates in the NYC/NJ market. 1H 2015 is holding steady for Quantum with premiums still trending well above industry average HEDGEYE.COM OCTOBER 20,

13 Anthem of the Seas (RCL) Despite the differences in destinations, we were surprised to see Anthem trade at a discount to Allure in mid-september. But the gap is closing. Compared with the other RC brand ship (Explorer) and the upcoming P&O Britannia (a Carnival brand) in the Southampton market, Anthem is generating quite healthy premiums. HEDGEYE.COM OCTOBER 20,

14 Costa Diadema (CCL) Diadema is performing on par with expectations with pricing growth in the teens over the existing Costabranded fleet that operates in the Mediterranean, although pricing for 2015 has declined recently. HEDGEYE.COM OCTOBER 20,

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16 Breakaway/Getaway (NCLH) Breakaway commanded no premium over Gem in mid-october as they await the arrival of Quantum in November. However, on average, Breakaway pricing was 16% higher than Gem for Q4 probably good enough to please management expectations. Getaway pricing premium narrowed as well in mid-october in the tough Caribbean market. HEDGEYE.COM OCTOBER 20,

17 P&O Britannia (CCL) It is still early but Britannia pricing is slightly below that golden double digit premium level that is generally expected out of new ships. Is the UK market starting to falter? CONCLUSION Ebola crisis likely hurt close-in FQ4 pricing in mid-october, although the degree of impact varied among the Big 3 operators may close with a whimper, rather than a bang. CCL looks like the company with the most risk heading into Wave While RCL did not see further European pricing declines this month, it remains most sensitive to European shifts and we continue to be concerned with the demand environment there heading into NCL performed the best in the perennially discounting Caribbean, and with the Prestige benefit, could outperform its peers in HEDGEYE.COM OCTOBER 20,

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