The cruise industry faced severe setbacks in 2020 with travel restrictions and health concerns surrounding the Covid-19 virus leading to the suspension of operations and the cancellation of numerous bookings. However, with the gradual reopening of economies and the restoration of consumer confidence, the industry is making a comeback and regaining some lost ground. Norwegian Cruise Line Holdings Ltd. (NCLH, Financial), one of the key players, stands out in this industry as it capitalizes on the post-pandemic recovery due to several key factors.
Norwegian Cruise enjoys strong brand recognition and a devoted customer base; two factors that are helping it gain momentum as the demand for cruise travel increases. Furthermore, the company's innovative product offerings and adaptable financial strategy further bolster its position. With a fleet of 30 ships that traverse over 500 destinations globally, the company is one of the largest cruise line operators in the world.
What sets Norwegian Cruise apart from the competition is its unique "freestyle cruising" concept, enabling guests to tailor their vacations by providing an extensive range of choices in dining, entertainment and activities. This emphasis on customization and flexibility appeals to both new and repeat customers seeking personalized experiences. The company's recovery strategy is proving to be successful, as evidenced by its first-quarter financial results that surpassed expectations across all key metrics.
Improving numbers
On May 1, the company's first-quarter 2023 results showcased its resilience and adaptability. Norwegian Cruise Line surpassed analysts' expectations with a lower-than-expected net loss and higher-than-expected revenue. Revenue of $1.82 billion marked a 249% year-over-year increase, driven by a full restart of operations after the challenging period of suspended voyages from 2020 through May of 2022. The company reported a net loss of $159.30 million, an improvement of more than 84% from the previous year.
One of the key factors contributing to Norwegian’s recent success is its phased occupancy ramp-up strategy, which achieved a 15-point sequential improvement to approximately 101.5% in the first quarter. This surpassed the guidance of approximately 100%, reflecting the company's commitment to delivering exceptional guest experiences. Furthermore, the initiative is expected to be completed in the second quarter at approximately 105%, demonstrating the company's strategic shift toward longer, more immersive itineraries.
The strong consumer demand is also evident in the company’s cumulative booked position for the remainder of 2023, which is ahead of 2019 levels. Despite only an 18% increase in capacity, the booked position continues to show promising growth, accompanied by higher pricing. As of March 31, the company achieved a record advance ticket sales balance of $3.4 billion, representing a significant increase of approximately 26% compared to the previous quarter and around 60% compared to the first quarter of 2019.
Norwegian Cruise also continues to focus on enhancing onboard revenue generation and increasing pre-sold revenue from guests prior to sailing. This approach has proven effective in driving higher overall spending throughout the cruise journey, bolstering the company's financial performance. As a result, total revenue per passenger cruise day exhibited a notable increase of approximately 18.3% in constant currency during the quarter compared to 2019.
The company’s dedication to enhancing liquidity and financial flexibility remains unwavering. As of March 31, the company's total debt stood at $13.1 billion, while its liquidity reached approximately $1.9 billion. This includes $701 million in cash and cash equivalents, nearly $600 million available under its revolving loan facility and a $650 million undrawn commitment. The company is also set to benefit from an additional unsecured and undrawn commitment of $300 million, which will enhance future liquidity. Further, the company’s proactive measures to optimize its balance sheet and reduce leverage include increasing export credit agency-backed commitments by approximately 1.7 billion euros ($1.86 billion) in April. These additional funds will be utilized to finance improvements, changes and modifications to certain newbuilds, reinforcing the company’s commitment to enhancing its offerings and ensuring an exceptional guest experience.
Additionally, the company's ongoing margin enhancement initiative has started to yield positive results, as evidenced by the significant sequential improvement in operating costs during the first quarter. Gross cruise costs per capacity day decreased to approximately $301 in constant currency, compared to $323 in the second half of 2022. Moreover, adjusted net cruise costs, excluding fuel per capacity day in constant currency, improved to approximately $161 compared to $187 in the second half of 2022, which was better than the guidance of $165. These cost savings from the margin enhancement initiative were realized earlier than anticipated.
Norwegian Cruise is also awaiting its return to sailing in Asia with its newly revitalized Norwegian Jewel set to make a grand entrance to Tokyo on Oct. 19 after more than three years. The company believes Asia is a key market today and that adventure-loving guests will book Asia-bound cruises later this year.
During Norwegian Jewel's extensive six-month Asia season, it will offer 16 immersive itineraries visiting 11 countries and sailing from nine different departure ports. These ports include Tokyo, Yokohama, Taipei, Bangkok, Bali and Kuala Lumpur. The itineraries range from 10 to 14 days, allowing travelers to explore various destinations at their own pace.
The company’s focus on destination immersion ensures guests will have the opportunity to experience the wonders of trending destinations like Japan, the Philippines and Indonesia. The itineraries also provide flexibility, allowing passengers to combine their cruise with land tours. Moreover, there will be fewer sea days, longer stays in ports and more overnight stays, giving guests ample time to explore and enjoy the vibrant cities and cultures of Asia.
With the industry's recovery underway, Norwegian Cruise Line Holdings is confident in its ability to navigate the post-pandemic landscape successfully. By focusing on enhancing its offerings, fortifying its financial position and prioritizing guest satisfaction, the company aims to establish a solid foundation for sustained and profitable growth in the long run.
Takeaway
With impressive passenger revenues, rising occupancy rates and a reduction in operating costs, Norwegian Cruise Line is well-positioned to capitalize on the anticipated rebound in demand for cruise vacations. At a forward price-earnings ratio of 17, the stock is not too expensively valued, presenting a good opportunity for value investors to consider before the company's improving financials push the share price higher.
