The "Great Cruise Comeback" is complete, Norwegian Cruise Line Holdings Chief Executive Frank Del Rio declared last week. Yet, his business still hasn’t arrived at the destination that matters most to investors: a positive bottom line.
In December, Norwegian said in a filing it would be undergoing a broad and continuing effort to improve operating efficiencies to attain sustained profitable growth. That initiative started with big-ticket items like a 9% head-count reduction in current and planned shoreside roles. Now they are getting a lot more granular—in some cases, worryingly so.
In a note earlier this month, UBS analyst Robin Farley called Norwegian’s cost savings "a work in progress." She wrote that, based on a recent management meeting, Norwegian believes itself to be still in early innings with regard to identifying areas of cost savings, but that it intends to look at "many small things." Examples given include swapping out 9-ounce burgers for 7-ounce burgers and a reduction in turndown service for non-premium cabins.
These might seem like small concessions—the average restaurant burger size is 4 ounces, for example, while housekeeping standards have long varied based on hotel tier—but they are little luxuries that have, collectively, helped to elevate the Norwegian name in consumers’ minds. A Norwegian spokeswoman said the company is always "fine-tuning" its offerings and is "committed to delivering an exceptional guest experience."
Ticket prices for Norwegian cruises were running around 40% higher last month on average than those for Carnival Corp. cruises, a Jefferies analysis found. This is a premium that Norwegian investors expect it to continue to earn in order to meet profit goals. Yet channel checks from UBS show a growth in ticket sales to families with children recently, with one large seller noting the average age of passengers declining. That cohort tends to be drawn more by bargains, and price sensitivity in general has risen.
Norwegian said it achieved industry-leading yields last year. Rather than discounting, Norwegian said it got there by investing in marketing its brand. With the industry "on its knees," Mr. Del Rio said heightened marketing spending was necessary for regaining lost momentum in his business, an investment he has said "was well worth it."
For the fourth quarter, the result was an occupancy rate of 87%, slightly above that of Carnival for its most comparable quarter but well below Royal Caribbean’s nearly 95%. Now, the company says it expects to pare marketing spending to save money, betting that it can maintain the momentum it has gained.
On the whole, Wall Street seems too optimistic, forecasting Norwegian can generate upward of $1.8 billion in adjusted earnings before interest, taxes, depreciation and amortization this year, now that occupancy is back up and pricing power has grown.
Progress is slow, though. After reporting a larger-than-expected loss for the fourth quarter, Norwegian said last week it expected to have roughly 33% lower earnings per share this year than Wall Street had been modeling, with first-quarter adjusted Ebitda guidance coming in around 8% lower than analysts forecast. The midpoint of Norwegian’s full-year guidance now implies the company’s adjusted Ebitda will be below 2019 levels. On more than one occasion, the company previously had called for record profit on that basis this year.
On the positive side, Norwegian said last month it is returning to its regular cadence of reporting annual and quarterly guidance, suggesting confidence in returning to business as usual. But that announcement belies behind-the-scenes changes the company will apparently need to make to get there and potentially underestimates their effects.
Shares of all three major cruise operators are up significantly this year and Norwegian’s are no exception, rising around 25% year to date. Norwegian’s shares initially fell more than 10% following the company’s disappointing fourth-quarter earnings and 2023 guidance, but they have recovered somewhat.