Cruise lines build up capacity despite global headwinds, hoping for better days ahead

Key Points
  • To increase the capacity at ports, cruise lines have started to build out terminals.
  • Royal Caribbean invested $250 million in the newly launched Terminal A at Port Miami.
  • Royal Caribbean CEO Richard Fain acknowledges that trade tensions could affect cruise bookings.
Cruise ship anchored off the shore of Grand Cayman Island, Royal Caribbean cruise liner Mariner of the Sea
MyLoupe | Universal Images Group | Getty Images

With market watchers debating the future of the economy, the cruise industry is making a bold bet on the consumer.

Analysts say 17 cruise ships are expected to hit the market next year on the expectation that demand for cruising will rise as more baby boomers retire and the industry carves out new offerings.

To increase the capacity at ports, terminals are being built and expanded to ensure there is enough room.

Royal Caribbean invested $250 million to launch Terminal A at Port Miami, often referred to as the cruise capital of the world.

Royal Caribbean plans to bring a number of its ships — including the Symphony of Seas — to Terminal A and over time, lease it out to other cruise lines in the industry.

Royal Caribbean bets big on Miami
Royal Caribbean bets big on Miami

The cruise operator says with the new terminal, its bookings are expected to rise from 750,000 to 1.8 million over the course of the next year.

Norwegian Cruises in conjunction with Port Miami has also broken ground on a terminal which is expected to be fully operational by February 2020, slightly later than its initial fall 2019 target. Miami-Dade County is spending $100 million on the new terminal while the cruise line is allocating up to $65 million to cover costs among other items.

Other cruise lines are expected to follow suit.

Cruise analysts say while domestic demand is the underlying driver behind the forecasted growth in the cruise industry, a critical component over time will getting international passengers on board.

While bullish on growing cruise bookings, Royal Caribbean's CEO Richard Fain concedes that a number of challenges exist — including geopolitics and trade tensions.

"I'm a free trade advocate and anything that creates tensions about free trade…I view economically as a bad thing. But our business in China continues to do well," said Richard Fain at the launch of Terminal A.

Miami-Dade Mayor Carlos Gimenez recognized that trade tensions are a concern but is hopeful that a deal will be worked out.

"We need to make investments to be ready," Gimenez said.

The timing of these new terminals also comes as investors question whether consumers will continue to spend money on travel if the economic backdrop deteriorates.

Royal Caribbean CEO says company has been overcoming rising fuel costs
Royal Caribbean CEO says company has been overcoming rising fuel costs

Patrick Scholes, managing director at Suntrust Robinson Humphrey who covers travel and cruise stocks said that travel is an economically sensitive sector and if an economic downturn does occur then consumers will be less willing to spend their money on travel — and that includes cruises.

"A strong economy gives consumers the confidence to book travel in advance," said Scholes.

Any sign of the consumer pulling back from making bookings could have a meaningful impact on cruise operators, many of which are making investments in new ships and infrastructure to cater to strong demand in the coming years.

Scholes is also watching to see if cruise operators across the industry raise prices next year as input costs related to fuel continue to rise. The risk is that over time the consumer will get priced out if ticket fares go up substantially. But Scholes says at this moment we're far away from that being a concern.

So far in 2018, all of the major cruise line stocks are trading down 9 percent to 11 percent.