Shares: Tour firms look plain sailing: Cheap cruises to galvanise holiday industry

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The Independent Online
CRUISING looks increasingly likely to become the holiday boom area of the 1990s, thanks to a convergence of factors. The world population is becoming older and richer, bringing even pricy sunshine cruising within reach of more customers. At the same time, aggressive new cruise ship operators such as Carnival Cruise Lines, the market leader in the US, and Airtours, the fast-growing UK package holiday group, are slashing prices to create a mass market.

Carnival Cruise Lines, recently renamed Carnival Corporation, is a phenomenon and the acknowledged model for Airtours, which is testing the market with its first cruise ship. Formed in 1972, Carnival has grown to the point where it has 21 ships, including the just- launched Fascination, and a passenger capacity approaching 24,000 berths. This year it will carry more than a million passengers on its cruises, mostly in the Caribbean, Bahamas and Gulf of Mexico. Rewards for shareholders have been dramatic. Between 1986 and 1993, revenues have grown from dollars 421m ( pounds 270m) to dollars 1.56bn and earnings per share have soared from 89c to dollars 2.25. The shares hit a low of dollars 8 in 1986 and currently trade at dollars 47 after a peak of dollars 52 in February. The latest quarterly figures to 31 May showed revenue up by 13.2 per cent to dollars 795m, net income up 23.4 per cent to dollars 142.9m and earnings per share rising 23.2 per cent to dollars 1.01.

Forecasters are looking for group revenues to have topped dollars 2bn in 1995, with earnings per share going to dollars 2.75 for 1994 and dollars 3.15 in 1995. That gives price-earnings ratios of 17.1 and 14.9, which is inexpensive by US standards, for a growth stock which is a market leader.

The worry is that although demand currently outstrips supply in the cruise market, the new capacity will put pressure on profit margins of more than 21 per cent for Carnival last year. New entrants, including Walt Disney, are planning to enter the market. The Norwegians, who share the world market with US-based companies, have also lost market share and are fighting back.

But it is a big-bucks game to play. Carnival brings a new cruise liner on stream each year, and the costs are huge. After new ships this year and next, in 1996 Carnival plans to launch the biggest-ever cruise ship at more than 100,000 tonnes, which will be capable of carrying 3,300 passengers and will cost dollars 400m.

There are very few companies with the financial muscle, expertise and marketing and distribution capacity to contemplate placing bets at this level. Then they face the challenge of making money while charging as little as dollars 629 for a four-day cruise, with a vast range of activities and food all included in the price. Our guess is that margins may narrow but that there are several years, at least, of impressive sales and earnings growth ahead. The shares look attractive.

The company that could be the UK answer to Carnival is Airtours, which is an old favourite of this column and has already enjoyed spectacular success in winning a larger and more profitable share of the UK package tour market. Followers of the shares will know about the early success operating from regional airports with low prices and free places for children.

Airtours pioneered cheap long-haul holidays to the Caribbean and, in recent years, has successfully launched its own airline and made a string of acquisitions, buying hotels in such prime holiday spots as Majorca, and creating a big retail network with its Going Places chain of travel agents.

The latest moves are twofold. The group has acquired SAS Leisure, the market leader in the Scandinavian tour market, for pounds 72m. It is also buying a cruise liner, to be renamed Seawing, from the Norwegian group Klosters, for a cost of pounds 16m, to include a complete refit.

Timing of the SAS deal looks perfect, since big cuts in capacity have been agreed within the industry, which should lead to a sharply improved performance this year and next. Analysts are looking for the enlarged Airtours to top pounds 1bn in turnover in a full year, with pounds 300m plus of sales from the new acquisition. Profits are expected to rise to perhaps pounds 75m this year and pounds 85m next (to end September) for a prospective p/e falling close to 10 at 475p.

Against these big numbers, Airtours' purchase of one cruise ship might seem small beer. But the potential and enhancement of earnings quality could soon be significant. Airtours is buying, for about dollars 2.5m, a ship with top-class facilities and 800 berths, which would cost dollars 100m to replace new. The group's huge marketing and distribution capacity means additional overheads for the ship are limited to two or three extra head-office staff.

But the real breakthrough is on pricing. The average price of cruise holidays sold through Airtours' Going Places chain is pounds 1,500. The group is selling its own cruises, including flights to either Palma or Tenerife, where the ship will be based, for pounds 399 per person for seven days. Alternatively, holidaymakers can opt for one week in a hotel and a week at sea for just pounds 100 more than the cost of two weeks in a hotel and with all food on board included in the price.

Unsurprisingly, demand for the cruises is strong. The first sailings are not until March 1995, yet when sales began three weeks ago, 10 per cent of capacity sold in the first week, and there are hints that sales have continued at that rate. If all berths are sold as expected, it will generate revenue in the order of pounds 18m in a full year, with profit margins expected to be significantly better than the 8.5 per cent achieved last year on the package operation.

It must be odds-on that the group will soon be looking to buy another and, perhaps, larger ship. Indeed, my guess is that a period of explosive growth could lie ahead for Airtours' cruise line operations if this first venture lives up to the early indications.

Even without the cruising holiday potential, the shares look cheap, given the low p/e and the phenomenal earnings growth that has been achieved since the 1987 flotation. Add to that the tremendous scope for growth from a new and potentially vast division, and the best of the Airtours share price performance could be still to come.

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