Norwegian Cruise Line May Make Waves in Luxury Travel

Norwegian Cruise Line Holdings (NCLH) has built as big or bigger ships than rivals two to four times its size, and with bells and whistles second to none.

The most recent is its 4,000-passenger Getaway that set off from Miami in January, less than a year after the 4,000-berth Breakaway left on its maiden voyage from New York to Bermuda, replete with three Broadway shows, the Rockettes and a send-off by Cardinal Timothy Dolan.

Next November, the 4,200-berth Escape will start cruising out of Miami year-round, the first of four in the "Breakaway Plus" class. Now Norwegian is going smaller -- and more exclusive.

With eight new niche ships under two new cruise brands acquired last month from Prestige Cruises, it's dipping into the high-end luxury cruise market.

As part of the $3 billion deal that closed last month, Norwegian took over five small to midsize "upper-premium" vessels under Prestige's Oceania Cruises brand and three all-suite ships under the Regent Seven Seas brand, aimed at luxury travelers.

The eight ships together have just 6,442 berths, but attract an older demographic of loyal, seasoned cruisers who pay higher prices for highly personalized services. With Norwegian's existing 13 ships, that makes for a fleet of 21.

If restrictions on all travel to Cuba -- including tourism -- eventually were lifted, it would open up a new cruise destination to what is the largest island in the Caribbean, unseen by most Americans for decades. But lifting all restrictions on travel and tourism would require congressional action.

Norwegian estimates its share of the 2015 cruise market at 9.5 percent, up from 8 percent without the Prestige ships. Carnival's share, in contrast, is seen at 48.7 percent and Royal Caribbean's at nearly 23 percent.

Norwegian has just about zero chance of moving into the No. 2 spot, let alone the No. 1 spot, says CEO Kevin Sheehan. The only way that would happen, he says, is if it buys one of its two larger rivals. That's unlikely.

Sheehan liked being a small "nimble" No. 3 player before the acquisition, and says he still does. For one thing, the company can move ships around easily.

"There's nothing to be gained in this industry from being bigger. It means you're pushing against other players and that leads to pricing (pressures)" he said in a phone interview with IBD. "We're happy where we are."

The eight new ships presumably make him happier. They not only fetch higher prices, they also add more international cruising options, including in Europe and Asia.

New supply in the popular cruising pond of the Caribbean has kept a lid on pricing over the last year. That has impacted cruise operators in the region, including Norwegian, which offers itineraries skewed heavily to Bermuda and the Caribbean.

"The acquisition is game-changing," said Patrick Scholes, an analyst with SunTrust Robinson Humphrey. "It helps them diversify out of the Caribbean with more of an international cruise (business)."

Cruise prices in Europe this year were up by double-digit percentages, albeit from depressed levels. Pricing in the Caribbean has been flat at best.

"Secondly, it gives them exposure to a much higher priced customer," Scholes said. "In this economic recovery, the higher end has done better than the mid-end, which is more Carnival's kind of customer."

Prices at Prestige's two cruise brands are almost double those of Norwegian cruises, Scholes says. "It's not the Love Boat."

Sheehan says the new ships give the company an opportunity to cross-sell Prestige customers Norwegian cruises, by way of its Haven section, a higher-priced private enclave with key-card-only access.

"They can have that high-class experience they are used to with Regent and Oceania but on a bigger ship," he said.

Norwegian's newest cruise ships in recent years have been well-received, Scholes says.

"They have the bells and whistles consumers want," he said, citing a wide array of dining, entertainment, shopping and other activities.

Royal Caribbean also has big ships with big amenities. Its newest, the 4,180-passenger Quantum of the Seas, features robotic bartenders, a skydiving simulator, bumper cars and "futuristic entertainment" that incorporates new technology.

If Norwegian's newly acquired little ships don't move the needle a whole lot in terms of passenger numbers, financials might be another matter.

Norwegian expects the Prestige acquisition to be accretive to 2015 earnings, boosting them in the "high single digits." It expects "day one" synergies of $25 million.

Analysts expect 2014 earnings per share to climb 63 percent over last year to $2.21, the second year of double-digit growth since Norwegian's IPO in 2013. Revenue is seen rising 17 percent to $3.05 billion.

This year's results include revenue from the Getaway, which wasn't in service in 2013, and more than a month of service for the two Prestige cruise brands.

Revenue in the third quarter rose 13.7 percent over the earlier year to $907 million. Adjusted earnings jumped 29 percent to $1.11 per share.

Next year's earnings are expected to rise 16 percent to $2.67 on $3.6 billion in revenue, up 17 percent from 2014, according to Thomson Reuters.

Prestige's ships have "significantly higher net yields and profits per available passenger cruise day," wrote analyst Felicia Hendrix in a report for Barclays.

"Over time, we believe the company could benefit from cost synergies beyond the initial $25 million, in addition to revenue synergies as the three brands share best practices," she wrote.

The cruise company will be getting a little bigger every year.

Counting new Norwegian vessels, a brand-new Regent ship to be delivered in 2016 and the purchase of Ocean Princess from Carnival's Princess Cruises (for its Oceania line), to close in 2016, Norwegian will take delivery of at least one new ship a year through 2019.

Source: NADSAQ