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In the last few weeks there’s been a rather notable change of attitude among investors.
Maybe the world isn’t about to end, with imminent economic collapse just a matter of months away following some unspecified macro meltdown (probably starting out somewhere on the periphery of Europe).
Perhaps there’s even – dare I say these positive words – grounds for some optimism as both the UK and, more importantly, the US economy show signs of more robust growth.
Here in the UK unemployment rates have not risen by anywhere near as much as many had expected and there’s evidence that consumer spending might be stabilising as inflation rates slip back to the longer-term historical average.
The key bit of evidence though for the optimists relates to the US and its housing market, which is almost certainly bottoming out and in many key metropolitan areas is actually showing signs of rather impressive growth.
Neither update contained any great surprises, with the most smiles on display at Thomas Cook.
Summer 2012 lates seem to be holding up very well, with consumers opting for Turkish, Spanish and Greek destinations.
The UK turnaround plan is also ‘delivering on its objectives’ and the troubled travel giant should hit (low) market expectations for the coming full year.
Tui Travel’s update was – as you’d expect – even more upbeat, although the bottom line message was the same, which is that everything appears to be ‘on track’.
Summer 2012 numbers were strong with improved margins and load factors, and there’s even an encouraging start to the winter 2012/13 season, especially in the UK where products like all-inclusive resorts appear to be selling well.
But much the most interesting set of numbers hasn’t come from the UK but from American-based cruise giant Carnival which released its third quarter numbers at the beginning of last week.
As with both Thomas Cook and Tui, the headlines from Carnival were broadly positive, with earnings (at $1.53 per share) exceeding the market consensus – although overall revenues quarter on quarter declined by 7%.
But once you dig into the numbers a nuanced, slightly more complicated picture emerges.
Business was strong as you’d expect in the core US market where consumer spending is surprisingly robust but trading was also surprisingly positive in the UK and Germany with the Southern European markets the inevitable laggards.
Looking forward to the next three quarters – in 2012 and 2013 – the management revealed in a call to analysts that advance bookings are likely to be behind last year’s numbers with prices slightly lower, although both those metrics had “recently strengthened” with Europe surprisingly positive.
Stepping back from these patchy but positive numbers, one is struck by a number of observations.
The first is that Carnival runs a remarkably tight ship, literally. Dig into the details of that analysts call and you discover that Carnival is brilliant at cheesegrating costs.
Over the last four years between 2008 and 2012, despite US inflation, Carnival has managed to reduce its net cost excluding fuel by 2.5% on a unit basis – compound inflation over that period will probably have exceeded 10%, by contrast.
And even on that all-important fuel charge, Carnival is slowly chiselling away at its massive oil bill with constant investment in new equipment which is delivering one or two per cent savings year in, year out.
On the revenue side Carnival is also slowly but consistently increasing on-board sales at a rate of about 2% to 3% per annum.
Combine that relentless focus on cost savings, with a drive to get passengers to spend more on its ships and you can understand why it can afford to cut holiday prices in order to attract new business, as well as grapple with volatile passenger demand in varying geographies.
Given this strong economic position, it’s no wonder that Carnival is still highly regarded by investors who absolutely buy into its business model – and rate its shares at a much higher level than those for Tui Travel.
The worry is that as the cruise giant continues to expand, its underlying return on capital carries on falling – an important issue for a company that consistently looks to raise money on the debt markets to expand capacity.
Many investors are slightly concerned that that return on capital might start to move ever closer to its funding rate via those debt markets.
That concern has played a (small) part in the recent underperformance (relative to the FTSE 100 benchmark) of the Carnival share price – although Carnival’s share did increase by 3% on the 3Q results.
This return on capital matters absolutely because Carnival is still in a massive capital expansion phase, with new capacity regularly coming out of the world’s big shipyards – much of it on its way to the fast expanding Asian markets.
Carnival’s sneaky plan might be to keep pushing prices down to such a point that it’s more heavily indebted rivals are pushed to the edge first, but more than a few investors I’ve talked to are concerned that cruise travel is becoming a little too mass market for its own good.
Nevertheless, I’d expect a bumper year for Carnival in 2013 as its new capacity kicks in, oil prices slide gently lower and the Costa Cruise Concordia sinking nightmare is slowly laid to rest.
That Costa tragedy also hasn’t turned out to be quite as bad (in financial terms at least) as many had at first expected.
Carnival’s management did reveal that occupancy rates fell by a staggering 11% in the second quarter of 2012 and a further 6% in the third quarter, with an estimated $500m ‘negative swing’ as a result of the incident.
But internal market research shows that brand perception for the Costa brand is “gradually improving”, with turnover for the segment back on track by 2013.
This robustness is hugely impressive – imagine what damage this scale of disaster would have had on the balance sheet (or share price) of a Thomas Cook or even a Tui Travel?
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