By: Susan Young From Travel Agent Central

Today [Oct 12], Norwegian Cruise Line Holdings (NCLH) became the latest cruise company to announce its entry into the Chinese cruise market with a purpose built ship for 2017.

Looking at the big picture, financial analyst Robin Farley of UBS Investment Research has addressed the burgeoning lineup of Chinese-targeted ships. She says the key to understanding the Chinese market is that: “It’s the volume increase that matters; price is already where it needs to be.”

Beyond the Tipping Point

Norwegian Cruise Line announced today it will enter the China sourcing market. // Photo by Susan J. Young
Number one factor according to Farley? “The growth of pricing in China has already surpassed the tipping point about two years ago where a ship is more profitable in China than an incremental ship [that the lines might place] in the Caribbean.

Farley reports that Carnival Corporation is growing yields in China at a single digit rate this year after double-digit growth in 2014; that’s with the company’s 45 percent capacity increase in China this year.

She also notes that after growing yields at a double-digit clip, Royal Caribbean Cruises Ltd. is now seeing mid- to high-single digit yield growth in China, on top of yields that already made for the company’s two best performing ships last year in terms of profitability.

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In addition, Quantum of the Seas is selling for 35 percent higher than it was selling in the Caribbean earlier this year. And Farley adds that Quantum’s price in the Caribbean was already at a double-digit premium.

While Royal Caribbean Cruises Ltd. and Carnival Corporation will also home port some cruises from Tianjin next year – with prices perhaps slightly less than Shanghai – even a 15 percent discount to Shanghai still puts Tianjin cruises above the entire Royal Caribbean Cruises Ltd. fleet, on average.

The China Story

“The China story has never been that pricing was going to keep growing at a double-digit rate,” Farley says. “The China story is that volume is growing massively because of the high China price premium, and that also helps capacity and price in existing markets.”

Price checks with several large travel sellers in China reveal that “cruise tour products are well liked by Chinese travelers and have good momentum,” says Farley.

Prices of China-Japan and China-Korea lines at the moment are largely the same as those lines in 2014, and prices in September and October are a bit more expensive than those in July and August.

Farley’s Points

Here is the jist of Farley’s message to cruise line investors:

Even without an increase in yield in China, adding ships to China is yield accretive [growth by a natural addition] to the cruise lines overall.
It is even further accretive to earnings growth, since expense per unit comes down with big scale increases.
China pricing is already higher than average. So profitability is already greater for lines to put ships there versus the Caribbean.
Even if prices in Asia were down in 2016, it would still be a good return for the lines since prices in China are higher than the company averages.
Cruises in China are driven by the growing middle class.
“As long as there is wage growth in China and as long as GDP growth causes China’s middle class ranks to continue to swell, that is the source market for cruises — not VIP wealth and not stock market wealth,” Farley emphasizes.
Positive on Cruising

Farley says her firm is positive on the cruise sector and has placed “Buy” ratings on Norwegian Cruise Line Holdings, Carnival Corporation and Royal Caribbean Cruises Ltd.

“For the industry, we believe China could be a source of growth, even for operators like NCLH that don’t have a significant presence in China, because they will benefit from capacity shifting out of existing markets,” she stresses.

For more on this story go to: http://www.travelagentcentral.com/cruises/what-norwegian-cruise-lines-china-move-means-cruise-industry-53451