Can Discount Prices Save Carnival Cruise Lines?

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Just a few years ago, the buying public would have been wowed by the price. A week on one of the world's most popular cruise ships for only $38 a night! Better yet, the cruise takes passengers to the Caribbean.

Carnival (NYSE: CCL) posted the offer on its website recently--four days in the Caribbean for only $149 per person--which breaks down to $37.25 a night. For a cruise line that continues to be plagued by problems, it's surprising that the stock has dropped only slightly so far in 2013.

The problems for Carnival began in early 2012, when its Costa Concordia sunk near the Italian coast. Thirty-two passengers died in that accident, resulting in an immediate 14% drop in the stock. Still, Carnival made a $1.5 billion profit in 2012, which was down only slightly from $1.9 billion in 2011.

For Carnival, 2013 has begun with another public relations nightmare when one of its ships was stranded for several days, leaving passengers without access to toilets and with limited access to food.

The company's first-quarter earnings were inline with year-ago results, thanks in part to reduced fuel costs and consumption. But Carnival announced that bookings for the remainder of 2013 are down and began preparing shareholders for a potential loss in the second quarter.

Then came more problems. The company, which denies skimping on maintenance, had three cruise ship breakdowns in one week in early March. In early April, the Carnival Fascination, which holds more than 2,000 passengers, failed its health food inspection. None of these events were part of the cruise line's caution to investors that Q2 earnings would decline due to a company-wide upgrade of its ships to help safeguard against future failures.

Cruise industry suffers

Carnival isn't the only victim of its own problems. Industry-wide, cruise lines are experiencing the after effects of Carnival's bad press. Shares of Royal Caribbean (NYSE: RCL), Carnival's top competitor, experienced a slight drop after the Carnival mishap, followed by another drop when more than 100 passengers fell ill during a March trip on the company's "Vision of the Seas" ship.

Norwegian Cruise Line's (NASDAQ: NCLH) stock has held its own, however, avoiding bad press and suffering only a slight drop. Norwegian shares continue to remain high, but many analysts are warning against second-quarter fallout from Carnival's problems.

Recent Harris Polls show customer confidence in cruise lines has dropped, with both Norwegian and Royal Caribbean facing a lower number of customers who intend to purchase a cruise in the near future. But none of this spells gloom and doom for either of these other two cruise lines.

Royal Caribbean and Norwegian have, after all, done nothing wrong. Royal Caribbean is putting millions of dollars into launching an ad campaign for its new ship, Quantum of the Seas, calling on big-name celebs like Kristen Chenoweth. Trading is up slightly for the cruise line, with analysts hopeful the star-studded ad campaigns will pay off.

Meanwhile, Norwegian has only a 7.6% market share, but with the recent release of new ships, the company is booking lots of guests. While the value of Norwegian stock has dropped since the Carnival incident, the drop was a negligible one--certainly not enough for investors to become alarmed.

Hoping specials will increase bookings, Royal Caribbean recently announced a reduction in fares for children by 50% planned for the last quarter of the year. Norwegian recently announced children under 17 years of age will cruise for free as long as they stay in the same cabin as two parents who pay full fare.

Still, while customers tend to forget bad press fairly quickly, spring and summer may be too soon. Investors may be wise to stay away from the cruise industry until Carnival has had at least one solid year of mishap-free cruises. More cautious travelers will likely still feel shaky about stepping onto a ship until confidence rises, especially on a ship with that trademark red, white, and blue whale's tail jutting out of the top.


Stephanie Faris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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