Carnival Cruise Line has 'the longest way to go' in travel rebound

Citi Leisure & Travel Analyst James Hardiman joins Yahoo Finance Live to discuss Carnival Corp's latest stock upgrade, the state of cruise lines as travel demand is expected to rebound this summer, and examines the state of the consumer through the lens of experiential spending.

Video transcript

AKIKO FUJITA: Well, we are sticking with a travel theme going into Memorial Day weekend. But we're now focusing on your investments. Citigroup raising Carnival to buy from a neutral and lifting its price target to $14, saying the cruise industry is seeing positive momentum, and it is not slowing down.

Joining us now, we've got the analyst behind the call, Citi Leisure and Travel analyst James Hardiman. James, good to talk to you today. We talk about the call that you made here, upping your price target from 10 to 14. But specifically, you've said pandemic tailwinds to the cruise industry are greater than any macro headwinds. Talk to me about what you're seeing.

JAMES HARDIMAN: Yeah, I think that's right. While so much of the economy over the last few years was emerging from this pandemic, I mean, the cruise industry was laid up for an extended period of time. We call this the last remaining reopening story.

And it really wasn't until the fall really, almost into the wintertime last year, where the final COVID restrictions were lifted. You know, I think people were not only worried about getting COVID on these cruise ships, but I think more importantly, they were worried about getting stuck, right, and all of the sort of testing requirements that went into not only getting on the ship, but getting off the ship.

And so if I think about what's happened since that time, you know, and all the data that we look at in terms of both pricing and booking activity, we think that was a turning point and that things really picked up since then and carried through into this year's wave season. The wave season is the first three months of the year, where a disproportionate number of the bookings take place. And by all accounts, it's been an excellent wave season.

SEANA SMITH: James, give us a better sense of that pricing and the traffic that you just mentioned there, how that compares to 2019 levels pre-pandemic?

JAMES HARDIMAN: Yeah, it's a great question. So from a booking perspective, we're finally starting to comp favorably to 2019, where we're sort of at the higher end of historical booking levels. Pricing, we think about is more of an opportunity than anything. By our numbers, we think cruise ticket pricing specifically on board is much higher. But cruise ticket pricing is only up a couple of per cent in aggregate for the industry versus 2019. And of all of the cruise companies, Carnival is the biggest laggard here.

We're starting to see that inflect positively. And we think that's a big opportunity. Effectively, this is an industry that was sitting on the sidelines for three years while everything else in consumer were driving prices higher and higher and higher. And so on a relative basis, I think a lot of consumers are going to look at cruise travel and say to themselves, you know, my dollars aren't going as far as they used to. This is a bargain for all intents and purposes.

AKIKO FUJITA: And that's exactly my question, James, because I'm thinking back to 2019 pre-pandemic. This is an industry that had a lot of loyal customers, but very specific customers, right? When you think about the momentum that we're seeing right now, is this about that same group returning or are a lot of these cruise liners are companies bringing new travelers into the fold?

JAMES HARDIMAN: I think it's both, I think early on in the restart. So if we were to rewind a year ago, call it maybe even a little bit more, it was all about, you know, people that were regular cruisers and that had missed a trip or two, right, and they were sort of making up for lost time.

I think in the last 6 to 9 months, we've seen the new to cruise segment really come back in full force. And most of these cruise companies are now saying that the new to cruise portion of the mix is similar, in some cases better than it was in 2019, which I think speaks volumes.

SEANA SMITH: James, are you seeing any signs of the consumers trading down and opting for maybe some of the cheaper options that the cruise lines are offering?

JAMES HARDIMAN: It's a great question. We're not seeing that per se. I would tell you that what we are seeing, and I think this feeds into to yesterday's upgrade to a certain degree, is that the premium offerings, right, the higher end, more expensive offerings were early on doing well. We're outperforming in a meaningful way.

Fast forward to today, and we're starting to see some of the more, they call it contemporary in the cruise space, but maybe a little more value-focused offerings, playing catch up. And so on a year over year basis, Carnival, the brand Carnival, not the company, but the Carnival brand based on a lot of the pricing data that we look at is the best performing brand in the industry right now, on a year over year basis. Some of that is ultimately playing catch up. But we'll take it nonetheless

AKIKO FUJITA: Yeah. And so as you look at the other names in the space, I mean, clearly you've given an upgrade to Carnival. You like what you see there. But are they best positioned to maintain or at least take more market share and be able to benefit from the momentum we're seeing right now?

JAMES HARDIMAN: Yeah, I think the way that Carnival has the most juice for sure. And some of that is that they've got more distance to go. Long before the pandemic started, I think a lot of Carnival's brands-- and to give you an idea, the Carnival proper, right, the namesake brand is their biggest, but it's far from their only brand. They have nine different brands. Princess is another big one. Costa is another big one. Those are the three biggest brands for Carnival.

I think there have been challenges for all three of those brands. There have been some missteps along the way. There's been some really bad luck along the way. But I think there's the opportunity. And so much of this upgrade, that Carnival has a newsy, newish CEO. He's been there for about a year now. I think there's a huge opportunity for Josh Weinstein to start to, you know, turn this ship around, so to speak.

SEANA SMITH: James, we talk about a lot, the consumers are focused on experiences. And I know you cover Six Flags. How are regional theme parks positioned in the event of a downturn or in a time when some consumers are looking to save a little bit of money and not splurging for that vacation?

JAMES HARDIMAN: It's a great question. And even coming into last year, as people started to have concerns about the macro environment, the theme park space was our sort of top industry pick because historically they have been trade down beneficiaries.

I think last year, if you think about what we saw in the broader economy, the broader consumer sector. We saw a lot of those low end consumers fall out of the bottom end. But we didn't see sort of that trade down piece, right? The higher end consumers that are opting not to go to, you know, Florida or Mexico or Europe.

The hope is that we begin to see that favorable offset here in 2023. But I would tell you so far. I mean, most of the industry data that we've looked at has been somewhat disappointing thus far. So, you know, when I think about the cruise industry, it's the one sector that I cover and really more broadly across consumers. Hard to say-- to say the following about a whole lot of sectors. And that's that, you know, a recession would be an improvement for the cruise space versus where they've been the last few years.

And I have a high degree of confidence that 2023 is going to be better than '22, and that '24 is going to be better than '23. You can't say that about a whole lot of sectors right now.

AKIKO FUJITA: James Hardiman, Citi analyst, good to talk to you today. Appreciate the time.