3 key takeaways

  • While the cruise industry has rebounded, it is yet to obtain the trajectory of the land-based hospitality sector.
  • Passenger demand is present, but the cost of servicing debt accrued over the pandemic and suppressed revenue will continue to impact profitability in the short to medium term. 
  • The global energy crisis and supply chain issues will potentially combine to further draw out the recovery of cruise lines.

Hospitality sector going strong; cruise industry playing catch up

With global travel resuming, many related industries are making a comeback. The Travel and Hospitality sector, for instance, has made a substantial rebound to pre-pandemic levels. According to the KPMG Financial Performance Index (FPI), this sector registered 92.94 (out of 100) in Q3 2022, regaining its Q4 2019 form (93.18) since emerging from the COVID-19 turmoil 

However, it hasn’t all been smooth sailing for the Cruise sector as it faced acute challenges, due to the unique nature of the industry and operating model, as seen in the recent KPMG FPI numbers. In Q2 2022, the “Big Three'' cruise operators — the three firms that account for more than 80 percent of the market — registered a combined score of 39.51, which is a sharp drop from 84.53 in the previous quarter. Their latest FPI score in Q3 2022 saw a rise to 70.03, but it is still far from their pre-pandemic performance (97.64 in Q4 2019).

Market, profitability and debt position of the cruise industry


Cruise industry chart

Rising tides: Interest rates, inflation, operating costs

During the pandemic, cruise lines had to maintain fleets that were moored in docks, while being unable to generate any revenue. In contrast, hotels could generate cash flow by being repurposed as quarantine facilities, or pivoting toward attracting domestic staycationers. 

Given this complete lack of income, cruise firms borrowed heavily to simply stay afloat. The combined net debt of the “Big Three” is expected to climb to US$57 billion by the end of 2022, from US$25 billion in 2019. The impact of rising interest rates will be felt on the bottom line, with debt levels elevated higher than those before the pandemic.

Furthermore, ships are depreciating assets. Thus, when entire fleets are put out of service for two years or more, the complex financial models which underpin the cruise business were severely upended. 

“Cruise lines have put their fleets back in service, and are reporting healthy booking rates,” says Phil Quinlan, Restructuring Lead for KPMG in Australia’s Hospitality, Tourism and Leisure sector. Occupancy rates in 2022 on many cruise lines have increased over 100 percent in Q2 2022. In 2021, the average occupancy for the “Big Three” hovered just below 50 percent. This indicates close to full capacity.

“The pent-up demand given the travel disruptions over the last two years is surely strong; consumer spending on travel is currently high,” notes Quinlan. Total cruise bookings increased 17 percent year-over-year for June 2022, compared to June 2019. 

But this resurgent demand has been largely aided by a reduction in ticket prices in 2022. Average ticket prices for the “Big Three” were US$45 per person per day (which includes onboard expenses) in 1Q22 – lower than pre-pandemic prices of US$80 per person per day. Furthermore, US cruise ticket prices were 7 percent lower in May 2022, compared to May 2019, reflecting an increase in near-term discounts to reinvigorate the cruise business.

And, with a global recession looming, it’s not clear how much longer this rebound in cruise bookings will last, much less be sustained. Quinlan notes that “it’s about when and how households are going to tighten their belts; consumers in some countries have already had to respond to rising costs of living. Other countries may have to do the same soon. Some families might choose to splurge on a year-end holiday now, and reign in spending in the new year.”

Hence, a return to profitability for cruise firms still appears some way off, because they face the same challenges as their passengers: rising fuel prices and other costs as a result of global inflation. And, supply chain woes tend to compel businesses to increase their working capital commitments, which might add an additional financing burden. 

As a result, the “Big Three” and others in the industry have continuously pushed back forecasts for when they expect to regain expected levels of profitability. Eventually, they might need to increase fares.

Remaining seaworthy: Liquidity and turnaround

To reduce costs, some cruise firms have hedged on fuel prices, and are procuring food supplies from cheaper sources. Others are engaging in more creative measures, such as reworking routes and reducing sailing speeds to manage fuel consumption. 

One other option for cruise companies to engender a return to profitability is to reconsider and innovate their product offerings and operating models. “Cruise lines could look to different market segments, for example catering for solo travellers instead of families or couples, or look toward creating itineraries for younger demographics,” says Quinlan.

Potentially, there are insights to be gleaned from other adjacent sectors, such as the airline industry. Cruise firms could, for instance, undertake a budget differentiation strategy to diversify their offerings beyond their current single flagship-carrier approach. Or, they could look to shift away from an asset-heavy vertically integrated business model toward a more services-oriented approach. This necessity for reinvention comes at a particularly trying time, but recovering market share quickly will be worth the investment.

The KPMG FPI numbers for Q4 2022 will be closely watched: there are potential revenue gains to be reaped from the strong tailwinds of the holiday season, as well as from the expected growth in demand in 2023. It remains to be seen whether cruise companies take the opportunity to find other sources of liquidity, or undertake corporate action.

About KPMG’s Financial Performance Index

KPMG FPI includes 40,000 listed companies across the 50 largest stock exchanges worldwide. The data set represents more than 99.9% of all public companies. Unlike similar rating methods that focus on credit worthiness, the custom FPI algorithm goes beyond by interlinking financial history, market performance, and micro trends into one practical output.

The KPMG Financial Performance Index is available now at home.kpmg/fpi.


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