Adding ships to the Chinese cruise market generates better yields to cruise lines than an incremental ship would do in the Caribbean, although the rise in yields in the first named market will slow down this year from 2014, said Robin Farley, cruise industry analyst at UBS in New York
"China is an important market for the cruise lines not because it is growing price at an outsized rate, but rather it is important because the growth of pricing in China has already surpassed the tipping point about two years ago where a ship is more profitable in China than an incremental ship in the Caribbean," Farley said in a research note.
Carnival Corp & plc (CCL), the world’s largest cruise shipping group, is growing yields in China at a single digit rate in 2015 after double-digit growth in 2014 and that is with CCL's 45% capacity increase in China this year.
After growing yields at a double-digit clip, Royal Caribbean Cruises Ltd (RCL), the industry’s number two group, is now seeing mid to high single digit yield growth in China, on top of yields that already made for RCL's second best performing ships last year in terms of profitability.
“Our checks found Quantum (of the Seas) selling for 35% higher price in China than it was selling in the Carib. earlier this year, and while that has the benefit of summer seasonality, we would point out that Quantum's price in the Caribbean was already at a double-digit premium to other Caribbean product. RCL & CCL will also home port some cruises out of Tianjin next year, which price checks suggest may be a little lower than Shanghai, but even a 15% discount to Shanghai puts it above RCL fleet on average,” Farley said.
Even without an increase in yield in China, adding ships to China is yield accretive to the cruise lines overall. It is even further accretive to earnings growth, since expense/ unit comes down with big scale increases. The China story has never been that pricing was going to keep growing at a double-digit rate. “The China story is that volume is growing massively because of the high China price premium, and that also helps capacity and price in existing markets,” Farley noted.
While the stock market pull back in China has concerned investors about consumer demand, and we also frequently get questions about the revenue declines in gaming, we would point out that cruises in China are driven by the growing middle class. As long as there is wage growth in China and as long as GDP growth causes China's middle class ranks to continue to swell, that is the source market for cruises -- not VIP wealth and not stock market wealth.
