Royal Caribbean Strong On Efforts, Coronavirus Woes Persist

Royal Caribbean Cruises Ltd. (NYSE:RCL) is benefiting from robust net revenues yield growth, cost-cutting initiatives and technological & other innovation. However, the coronavirus outbreak is likely to hurt the company’s performance in the near term. Let’s delve deeper and analyze these factors.

Growth Catalysts

Since 2017, Royal Caribbean has been consistently witnessing strong demand from its key markets of operations. In 2018 and 2019, demand for all brands and itineraries of the company increased sharply.

On the supply front, the company has been committed to increasing capacity to match rising demand. Based on current ship orders and predicted capital expenditure, Royal Caribbean anticipates capacity growth of 4.8% for 2020. Itineraries in North America account will account for 60% of the total capacity in 2020. The Asia Pacific region is expected to make up 17% of 2020 capacity. Moreover, Australia and Alaska sailings are likely to account for 7% and 5%, of capacity in 2020, respectively. The company stated that European sailing will account for 17% of capacity in 2020.

The company continues to report robust net revenues yield growth. In 2019, net yield increased 8% in constant currency. The company expects net revenue yield growth of 2.25% to 4.25% in 2020. This will mark the company’s 11th consecutive year of yield growth. New hardware, robust demand for the company’s core products, and sustained improvement in onboard revenue areas is likely to drive yield growth in 2020. Moreover, introduction of four new ships in 2020 is likely to be a significant contributor to the company’s net yield growth.

Royal Caribbean continues to make use of digital tools for marketing, product development and enhancement of consumer experience. These include revamped websites, new vacation packaging capabilities, support for mobile apps and increased bandwidth onboard to help its guests remain well-connected while at sea. With busier customers preferring more digital devices that help in saving time, introduction of superior Internet bandwidth and online check-in accompanied with radio-frequency identification technology should continue to bolster occupancy.

Concerns

Royal Caribbean, which space with Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) , Carnival Corporation (NYSE:CCL) and AMC Entertainment Holdings, Inc. (NYSE:AMC) in the Zacks Leisure and Recreation Services space, continues to suffer due to the coronavirus outbreak in China. Travel warnings and cruise cancellations are starting to take a toll on the company. In fact, the outbreak has compelled management to trim 2020 guidance further.

The company announced that it has put travel restriction on those who have travelled from, to or through mainland China or Hong Kong in the past 15 days. The coronavirus outbreak has persuaded the company to cancel 30 cruises in Southeast Asia. The company has also modified several itineraries.

The company now expects earnings to be down by 90 cents due to the cancellation of cruises. Notably, it had previously projected 2020 earnings to be impacted by 65 cents. The company further added that if it has to cancel remaining cruise sailings in Asia through the end of April, it would hurt earnings by another 30 cents.

China remains of utmost importance to the Royal Caribbean brand. According to 2020 Cruise Industry News Annual Report, China constitutes 7.6% of the global cruise industry. Notably, the outbreak of the COVID-19 virus resulted in the cancellation of a number of voyages in other parts of Asia as well.

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