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Royal Caribbean, Carnival Cruises Might Have to Get Cheaper

Cruise lines Royal Caribbean and Carnival face a problem, but there may be a silver lining, according to a new report.

Since cruising from North America returned in July 2021, both Royal Caribbean (RCL) - Get Royal Caribbean Group Report and Carnival  (CCL) - Get Carnival Corporation Report have taken a measured tone when discussing their business.

Executives from both companies have made clear that the road back from a complete shutdown to normal operations would be long.

In the most recent quarter, however, both cruise lines had spoken positively about their booking trends.

"We continue to see strong demand for leisure travel and cruising," Royal Caribbean Chief Executive Jason Liberty during his company's first-quarter earnings call

"The robust secular trend of experiences over things that propelled our business in the past years is now recovering toward pre-covid levels. Consumers are now reengaging with the world, and as a result spending on travel in 2022 is set to outpace prepandemic levels with consumers planning to travel more frequently."

Carnival Chief Financial Officer David Bernstein made similar, albeit more tempered, comments when his company reported Q1 results in its late-March investors call.

"[Our] cumulative advanced book position for the second half of 2022 is at the lower end of the historical range," he said. 

"However, we believe we are well situated with our current second-half 2022 book position given the recent improvement in booking volumes, coupled with closer in booking patterns and our expectation for an extended wave season. 

"We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023."

That's all optimistic, but a new report from Truist Securities equity research analyst C. Patrick Scholes suggests that pricing and booking trends may face some major headwinds.

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Cruise Lines May Need to Lower Prices

Cruise lines -- Royal Caribbean and Carnival were not called out specifically -- "will have to lower prices in the second half of 2022 to fill ships because cumulative bookings are 'in a deep hole' compared with 2019 levels," Travel Weekly quoted the analyst as saying.

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"Consumers are clearly responding to the attractive prices/promotions, most notably for sailings within 90 days, especially in light of record room rates for land-based hotels and home rentals. However, prices are nowhere near where cruise lines want them to be, even more so with rising food and fuel costs," Scholes said in the report.

The author also noted that while the cruise lines may need to lower their ticket prices, they have been spending onboard at record levels.

"Travel agency executives speculate that there is a shifting paradigm to give up more on the headline ticket price in order to get people on board to spend," the report said.

Royal Caribbean's CEO did not comment on pricing during the earnings call, but he did mirror what the report said about onboard spending.

"Strong demand for cruise experiences continue to translate into robust onboard revenue performance for us across all categories from casino, beverage and shore excursions to Internet, retail and spa," he said. "[As] a result, we continue to see increased penetration of precruise purchases, which is leading to significantly higher total spend per guest."

Carnival Pushes Back on Pricing

While the report suggests that nonluxury cruise lines (which would include Carnival and Royal Caribbean) would need to lower ticket prices, Carnival was very clear in its earnings call that it was holding the line on pricing.

"Our revenue management teams held on price when we experienced an impact on bookings for near-term sailings, optimizing our longer-term prospects for future revenue and pricing," said Bernstein, who also noted that onboard spending was up.

"Once again, our onboard and other revenue per diems were up significantly in the first quarter 2022 versus the first quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause."

Carnival CEO Arnold Donald made similar remarks on pricing earlier in the call.

"We did maintain price as we said we would," he said. 

 Scholes said that he had seen prices dropping. He did not specify a cruise line.

"Prices are often not sticking when it comes time for final payment a month out from departure," Scholes wrote. "Some prices have dropped by 20% to 30% since the time of the initial booking."