C.M.O. 12.16.2009
Credit Market Overview
December 16, 2009
With the Dow Jones Transport Index giving back very little of Monday’s 14-month high close yesterday Charles Dow’s theory seems to be hanging tough even after all of these years.
In keeping, then, with the spirit of things that move things and in contrast to the current focus towards purchases that are non-discretionary and most definitely away from purchases that are non-discreet the cruise ship industry seems to be headed on a different course.
Royal Caribbean Cruises Ltd. (RCL) just launched the largest vessel to serve the passenger cruise line industry. Containing 13 retail shops, 21 pools, a 300 ft. water slide, 24 restaurants, clearing the water by 20 stories and costing $1.4BN to build the “Oasis of the Seas” displaces 225,000 tons and has, as CEO of competitor Carnival Corp (CCL) Micky Arison says, the feel of “a huge mall”. Rod McLeod of McLeod, Applebaum & Partners, a cruise industry consultant, went a bit further in saying, “This is as close as the industry has gotten to a Las Vegas resort”.
Undaunted RCL’s CEO, Richard Fain said, “I think Oasis of the Seas will be one of the highest returns on investment our industry has ever seen”. He also went on to say that “At some stage in [Oasis’s] life we’re going to have big ups and big downs. This is probably a bigger down than we ever imagined”, so it would appear the size of the bet Mr. Fain has made is not lost on him.
Anyone thinking it would be tough to duplicate a Vegas style experience while plying the seas should know that the Oasis’s “Royal Loft Suite” is a 1,524 sq. ft. multi-story space with a 843 sq. ft. balcony. And what is Vegas without gambling? To answer that Oasis has gaming tables and 1,500 slot machines along with a 1,380 seat theater, and exercise center with 200 machines, twin 40ft. rock climbing walls, a skating rink (think Dubai on a smaller scale) and seven “neighborhood” including one named Central Park. Obviously the muggers are held below decks until needed.
RCL is not the only company building boats at the moment. CCL is going the “two is better than one” route; just launching a ship about half the size of the Oasis but placing an order for a similar sized boat almost immediately. Norwegian Cruise Lines (private) took the middle heading scheduling the launch of its 150,000 gross ton “Epic” this summer, having canceled its order for a sister ship earlier this year. Kevin Sheehan, NCL’s CEO summarized his thinking as “You have to be on the cutting edge, not the bleeding edge of innovation”.
Although yields (the profit margin per passenger) are down 15% this year and travel agents are saying 4Q09 bookings remain soft, they also see signs of a turnaround in 2010.
A look at the CDS/equity combo for RCL would prove this out as the CDS has been on a steady decline since March while the exact opposite is true for the stock closing at its high for the year $26.15 on Monday and giving back just $0.23 of that yesterday.
The same can be said for CCL’s CDS/equity combo although CCL’s stock made its ’09 high on 9/24 at $33.95 before trading off to $29.12 and recovering to $33.88 yesterday.
For both of these companies it appears they have navigated the economic storms and are cruising more tranquil seas.
Enjoy the week.
Jim Delaney
