Norwegian Cruise Line May Make Waves In Luxury Travel

Call it the little cruise line that could.

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: 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.

‘Upper-Premium’ Travelers

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.

Even with the new Escape entering service next year and two
more vessels in 2016, Norwegian will still be a distant third in
size to the big two cruise companiesCarnival (
CCL

) and No. 2Royal Caribbean (
RCL

) . All three are based in Miami and have a heavy focus on the
Caribbean cruising market.

Stocks of the three Miami-based cruise operators jumped on
Wednesday after the U.S. and Cuba announced they would begin
normalizing diplomatic relations and lift some business,
financial and travel restrictions.

Cruising To Cuba?

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%, up from 8% without the Prestige ships. Carnival’s share, in
contrast, is seen at 48.7% and Royal Caribbean’s at nearly
23%.

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.

Where The Toys Are

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% over last
year to $2.21, the second year of double-digit growth since
Norwegian’s IPO in 2013. Revenue is seen rising 17% 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% over the earlier year
to $907 million. Adjusted earnings jumped 29% to $1.11 per
share.

Next year’s earnings are expected to rise 16% to $2.67 on $3.6
billion in revenue, up 17% 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.