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Fitch: Strong Cruise Demand
Supports Positive Industry Outlook
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The competitive environment remains intense for the “big three” global cruise operators - Carnival (CCL), Royal Caribbean (RCL) and Norwegian Cruise Lines (NCL). This is particularly true in newer, rapidly growing international markets like China, where these operators are vying for market share. 

The industry remains highly concentrated with the big three together accounting for approximately 82% of total global industry berths in 2016. CCL remains the global market share leader at 47%, with RCL at 25% and NCL at 10%. The industry’s concentrated structure continues to support net yields, which are likely to grow in the range of 2%-6% in 2017.

RCL has the longest tenor and arguably the strongest competitive position in China, having entered the market in 2007. However, it only launched its first bespoke ship for China, Ovation of the Seas, in Tianjin in July 2016. CCL and NCL also deployed bespoke ships for the Chinese market recently. Examples include CCL’s Majestic Princess (3,560 berths) and NCL’s Norwegian Joy (3,900 berths). Australia, New Zealand and Cuba are other international markets where cruise operators are expanding and realizing higher margins.
 
Fitch has a positive view of cruise line expansion in China given the country’s low penetration rate, increasing middle-class population and the positive track records of RCL and CCL in the country. Nevertheless, Fitch sees medium to longer term growth challenges for the China cruise market, primarily resulting from insufficient port infrastructure and a possible risk of market oversaturation.

Hurricane Irma is not expected to have a meaningful medium to long-term impact on cruise operators’ fundamentals. Despite near-term consequences, including some sailing cancellations and eastern Caribbean port infrastructure damage that is still being assessed, cruise operators’ ability to quickly alter itineraries to destinations such as Cozumel and the western Caribbean will allow future Caribbean sailings to continue. Strong performance earlier in the year and Irma occurring in non-peak booking season should mitigate potential medium to long-term disruptions.

Cruise operator balance sheets are well positioned to navigate the competitive environment. Leverage is at its lowest point in the last 10 years for each of the big three operators, as shown in the chart below. These operators will prioritize shareholder returns over debt paydown and Fitch expects industry debt levels to rise incrementally to fund the expected increase in newbuild deliveries. However, we believe that organic cash flow growth will offset the higher debt, resulting in stable operator leverage that is consistent with issuers’ financial policies.

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