Carnival Demand Persists Despite Recent Macroeconomic Uncertainty

Carnival’s CCL profitability is trending in the right direction as the appetite for travel persists. The key booking season has proved fruitful despite some economic softness, with Carnival noting it had the highest booking volume for any quarter in its history across both its geographic segments. This resulted in a massive cash haul, with customer deposits reaching $5.7 billion in the first quarter, well above the $4.9 billion balance at the end of November. In our opinion, this indicates the willingness of customers to commit in advance given a pent-up demand for travel, and Carnival confirmed the booking curve has lengthened in recent periods. First-quarter yields (pricing per diem) were just 8.5% below the same period in 2019. This pricing gap is set to close ahead, with flat net yields in the second quarter of 2023 expected, which implies a healthy pricing set up for the back half of 2023. If Carnival can capture 1%-2% net yield improvement over 2019 in 2023, the second half would imply mid-single-digit growth over prepandemic levels.

Costs remain clunky, however, which should constrain near-term profit improvement, hindered by the ongoing occupancy gap as well as fuel and currency headwinds. We don’t believe either of those issues are structural, which should allow net cruise cost growth to moderate incrementally over the remainder of the year (first-quarter adjusted net cruise costs per diem were 8.5% higher than in 2019). While higher input costs (food, labor) stemming from general inflation over time could persist for some time, operating efficiencies, helped by the mix of the fleet, should allow costs to exit 2023 around 8% higher than in 2019. Neither the price nor cost outlooks for 2023 impact our long-term assumptions calling for low-single-digit growth in both. As such, we don’t plan any material change to our $22/GBX 1,830 fair value estimate for no-moat Carnival after assessing its first-quarter results and an updated 2023 outlook.