Cruise control .
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There are not many industries that combine massive
operating leverage , low working capital needs , growth
tied to an ageing rich world and a seemingly benign
competitive landscape .
The pleasure cruise business is one of those few .
This week the shares of third-largest player , Norwegian
Cruise Line , which were already 73 % up since its2013 IPO ,
jumped a 10th on news that it would acquire the niche
luxury line Prestige Cruises International . Norwegian
( enterprise value $10 billion ) ,Carnival ( 39 bn ) , and Royal
Caribbean ( $ 22 bn ) have 90% of the global market in cruising.
The trick for the big three is to keep ships filled withought
resorting to excessive discounting .
According to the CLIA trade body , in 2014 about 22mn
passengers will board 410 river and ocean cruise ships .
More than half of passengers are American and a third
European . Half of all cruises are in either the Carribean
or Mediterranean .
Because ships cost anywhere from $500mn to $1.4 bn each ,
return on invested capital runs in the single digits , based on
Norwegian's own calculations .
On the plus side though , if business is growing then working
capital becomes a source of cash , as travellers pay in
advance for trips that are weeks or months away .
At Norwegian , for example , 2013 cash flow from operations
was four times net income because of working capital ( as well
as the add-back of depreciation costs from those heavy
investments ) . While cash conversion is nice , efficiency
matters most . The key measure is growth in " net yield " - how
much daily revenue minus direct costs is generated per room .
At Norwegian , while gross revenue has grown at a 10% rate
over the past five years , net yield has grown at just 4% .
Prestige , whose brands are Oceania and Regent , is a
compelling addition to Norwegian .
Its eight luxury liners , whose posh customers are less sensitive to
recessions , add 6,500 rooms ( a fifth ) to
Norwegian's count . Prestige takes up to $500 a day per room ,
more than double the Norwegian average .
Cut overheads and cross-sell cruises across the Norwegian
portfolio , and the benefits compound .
The Costa Concordia , a Carnival ship that sunk in 2012 , casts
a long shadow , however-a tragic example of the industry's
risks . The sinking might have been an aberration , but cruising
is a retail business , where reputation matters most of all...
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HERE IS THE MOTION IN THE OCEAN ( % share of cruise
destinations ) : Mediterranean 19%
Carribean 37%
Europe 15%
Australasia 6%
Alaska 5%
S.America 3%
Asia 4%
Other 15%
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