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The cruise industry is booming – at least on the surface – like a stark response to economic naysayers. When consumers are ready to fill city-sized party boats to ride waterslides, play games and drink Bahama Mamas, how bad could the economy be?
Actually not that bad at the moment. Cruise lines, which have effectively shut down their core operations during the Covid-19 pandemic, are again near record passenger traffic levels, and customers are spending briskly at bars, restaurants and slot machines as soon as they board. Industry group Cruise Lines International Association expects cruise ship passenger traffic to grow about 6% above 2019 levels.
And in last week’s earnings reports, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. both investors with better-than-expected quarters and rosy updates on bookings through the first three months of the year, a period known as “wave season” because it marks a key window for reservations. As Royal Caribbean Chief Executive Officer Jason Liberty put it Thursday:
We knew demand for our business was strong, but what transpired was a record-breaking extended wave season, which translated into robust bookings and significantly better prices.
Harry Sommer, the new CEO of competitor Norwegian Cruise Line Holdings Ltd., noted that the regional bank deposit crisis was hardly registered as an outlier:
We were encouraged to see that, despite the financial market volatility caused by the banking sector, we did not experience any unusual booking or cancellation activity at any of our brands in March.
All of this certainly sounds encouraging, but shouldn’t the economy be headed for recession? Someone clearly forgot to tell the folks doing the electric slide on the lido deck, many of whom decided to treat themselves to the “deluxe” drink package.
More than a year after the Federal Reserve began raising interest rates, the US economy is slowing from its fevered post-pandemic recovery. Job growth is slowing, households’ excess savings are beginning to dwindle and surveys of bank loan officers suggest that credit is tightening. Meanwhile, the crisis among regional banks and the standoff on the debt ceiling add to the list of potential catalysts that could theoretically turn economic expansion on its head. But anecdotes like that of cruise lines seem to suggest consumers, the engine of US growth, aren’t really taking it.
At least part of this strength still reflects the pent-up demand from the pandemic years. In 2020-2022, the global cruise industry carried about a third the number of passengers it would otherwise have carried. Instead of carrying 29.7 million passengers per year (2019 basis), they carried about 5.8 million in 2020; 4.8 million in 2021; and about 20.4 million in 2022, according to CLIA data. The decline largely reflected government-mandated closures (from March 2020 to mid-2021) and then cautious resumption of travel from late 2021 to mid-2022, with many ships operating at limited capacity during this period.
At the enterprise level, you get a similar picture from “available passenger cruise days,” the industry-wide measure of capacity over a given time period. It’s essentially the number of cruise days times the number of cabins available times two (assuming two people per room). This is what `CD looked like for Royal Caribbean:
If everyone who hasn’t traveled during the pandemic tried to catch up, that would be about 58 million ocean-going passengers – enough to load ships for two years. Obviously, some of them have already spent their cruise money on something else, but many are still playing catch-up.
In June 2021, as a Bloomberg journalist, I sailed on the first cruise from a US port since operations ceased, and my wife and I took another fun cruise about a year later. Based on my grueling research of buffets and open-air dance parties, I can attest to the devotion of die-hard cruisers, some of whom have a pathological need to make multiple trips a year. They’ll dig deep into their savings to make sure they catch up.
The problem of pent-up demand has been a feature in other industries as well. New cars are still selling, of course, and at higher prices (partly because there haven’t been enough of them to buy during the pandemic). Residential property continues to rise despite much higher mortgage rates (partly because the market has been so underserved). But the cruise industry is taking the phenomenon to the extreme because the product has practically disappeared from the market for 15 months.
There is clearly a danger that all of this will be overestimated. The cruise industry will not dictate the direction of the US economy; it’s just a window where consumers stand. A sufficiently strong economic shock can certainly plunge the US into recession, but pent-up demand across the economy means the US consumer will be all the harder to stop.
More from the Bloomberg Opinion:
• Your vacation rental car will cost a fortune again: Chris Bryant
• Cracks in business travel recovery: Brooke Sutherland
• Get Ready for Summer Travel Hell, Part II: Brooke Sutherland
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg journalist in Latin America and the US, covering finance, markets and M&A. Most recently, he was the company’s Miami office manager. He is a CFA charterholder.
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