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Del Rio brushes off supply, recession 'chatter' but cruise shares dip

Frank Del Rio - No evidence of recessionary pressure on pricing or demand or that an increase in supply for the coming years is causing any pressure
Investor concerns about supply growth and the risk of a near-term recession have put a damper on cruise stocks for some time, and all traded lower Wednesday despite Norwegian Cruise Line Holdings' record first quarter profit and buoyant outlook.

NCLH president and CEO Frank Del Rio addressed a 'heightened level of chatter' about possible recession and 2019 and beyond cruise capacity growth during the company's Q1 earnings call.

'We do not see any evidence of recessionary pressure on pricing or demand ... or that the increase in supply growth over the coming years is causing any disruption in the marketplace,' Del Rio told analysts.

A leading indicator of economic health

The NCLH chief went on to suggest market analysts and government view the cruise industry's booking curve as a leading indicator of economic health, since that shows consumer confidence when it comes to a high-ticket purchase.

Following 2017, a record year despite its unusually disruptive hurricanes, 'The fact that we're ahead today on load and pricing should dispel any concerns about the industry's ability to absorb capacity, bounce back after hurricanes, sustain growth in the European business. All those are myths and ... should be dispelled not only by our commentary, but [that] of our peers in the industry.'

Business is 'meaningfully ahead in all markets,' particularly Northern Europe, Alaska and Cuba.

The company reported strong organic pricing growth across all three of its brands and all core markets. European cruises are performing well, fueled by demand from both North Americans—'North American consumers are returning to Europe in a very, very big way,' Del Rio said—and Europeans.

China pricing up in the second half

Pricing for China ship Norwegian Joy is up mid-single digits in the second half of the year—significant beause pricing typically dips for new ships in their second year, Del Rio said—and Q3's industry capacity decrease in China is 'helping.'

Less than 20% of Norwegian's 2018 business in China is coming from full-ship charters, a figure projected to dip under 10% in 2019.

That's healthy; it helps the company manage yield better. 'But we've got a long way to go,' Del Rio noted, 'before shifting from a full-ship charter model to where hundreds of travel agents fill a sailing.'

Cuba's Havana is the most popular port among mainstream cruisers, and, according to Norwegian Cruise Line president and CEO Andy Stuart, the Caribbean overall is doing well, ahead on both pricing and loads.

Eastern Caribbean rebound

The NCL brand returns to eastern Caribbean deployment in the fourth quarter, after switching to the western Caribbean following the late 2017 hurricanes, and Del Rio said sailings in the eastern region are performing well in loads and pricing, with pricing for Q4 better than at this time last year.

'We're very pleased with the way the eastern Caribbean has come back in Q4,' he said.

The recently delivered Norwegian Bliss enters revenue service in June in Alaska as the 'best-booked newbuild in Norwegian's history.'

Del Rio mentioned overall strength in on-board spending as well as ticket pricing.

Besides his upbeat 2018 outlook, he characterized 2019 as 'shaping up well,' with some brands already pivoting to selling next year's inventory. Del Rio even gave a positive early read on 2020, based on Seven Seas Splendor's record booking day, before reining himself in: 'I can't believe we're even talking about 2020.'

'Ridiculously low' share price

During the call, Del Rio responded to an analyst's observation about the lackluster share price by saying: 'We manage the business for the long term. I'm disappointed in the share price. We think it is ridiculously low.'

After opening at $54.93, NCLH traded lower, and was off about 1% at midday. Carnival Corp. and Royal Caribbean shares were down, too.