The cruise industry has showcased remarkable resilience, particularly in the wake of economic uncertainties that have affected various sectors. As major players in the industry have consistently raised their full-year guidance for earnings, this success stands in sharp contrast to the performance of the hotel sector, where growth has exhibited signs of deceleration. According to travel industry analyst Robin Farley, the disparity between these two sectors prompts a critical inquiry: what underpins the cruise industry’s continued expansion when hotels struggle to maintain growth momentum?
At the heart of this discussion lies the concept of pricing. Unlike land-based vacations, which have experienced sharp increases in prices—U.S. hotel rates have surged by 20% compared to pre-pandemic levels, while resort rates have jumped by 31% and Caribbean daily rates by a staggering 49%—cruise prices have exhibited a different trajectory. The critical metric for comparison in the cruise realm is the “net per diem,” a figure encompassing net revenue per passenger per cruise day. Even though the Big Three cruise companies—Carnival Corp., Norwegian Cruise Line Holdings, and Royal Caribbean Group—have observed growth in their net per diems since 2019 (6%, 9%, and 16%, respectively), the rate remains significantly lower compared to the substantial price hikes in land-based accommodations.
Farley’s analysis illuminates an intriguing hypothesis: the price gap between cruises and hotels may be broader than it seems. Essentially, the cruise lines do not necessarily need to compete with 2019 prices; instead, they should aim to remain competitively priced relative to the growing costs of hotel stays and land-based vacations. This broader price gap opens up opportunities for cruise companies, suggesting potential for further growth as they can raise prices without directly impacting their competitive stance against hotels.
A significant point of consideration in this analysis involves onboard revenue—a crucial component of the cruise experience that influences the net per diem figure. Indeed, onboard revenue encompasses ticket prices and ancillary revenues generated during the cruise, such as dining packages, excursions, and entertainment options. The added value of these experiences allows cruise lines to enhance their revenue streams beyond initial ticket sales.
Notably, the increase in direct bookings has positively impacted the growth of net per diems. This trend indicates a greater acceptance of pre-paid onboard experiences, which can stabilize revenues and enhance profitability for cruise operators. This strategic evolution means cruise companies, like Royal Caribbean Group with its expanding offerings at Perfect Day at Coco Cay, can strategically develop premium experiences that entice travelers to spend more onboard.
In light of increasing onboard sales and the emerging trend of bundled offerings, cruise lines find themselves in advantageous positions to alter their pricing models. The relatively slower growth of ticket prices, which can be locked in well in advance, allows flexibility in adjusting rates for onboard activities and services. This nimbleness can generate substantial profit margins, particularly as companies diversify their offerings. Cruise lines have embraced this approach by introducing new amenities such as exclusive cabana rentals and comprehensive WiFi packages, leading to substantial gains in onboard revenue.
As the cruise industry navigates the post-pandemic landscape, its growth trajectory seems promising in comparison to the hotel sector. While hotel prices have surged to unprecedented levels, cruise lines can strategically position themselves through competitive pricing and innovative onboard offerings. By addressing the price gap and focusing on increasing onboard revenues, the Big Three cruise companies are poised for sustained growth. As they innovate and adapt in a rapidly evolving marketplace, these operators stand to redefine the value proposition of cruising, making it an attractive alternative for travelers seeking comprehensive vacation experiences.