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Morningstar | Norwegian Pushes Toward Full Speed Ahead 2020 Goals Thanks to Solid Demand for Its Offerings

Norwegian Cruise Line's capacity has risen to more than 54,000 berths from around 30,000 prior to the acquisition of Prestige, making it an increasingly relevant competitor in the cruise industry. Capitalizing on decades of consumer analytics and best practices across brands, the firm can nimbly cater to changing trends, in our view. Additionally, we view Norwegian's freestyle cruising as a differentiated product, catering well to an older demographic, who may want to take their families on holiday, and millennials, who want increasing options. While the experience differs from traditional cruising, the lack of switching costs among cruise brands restrains the economic moat, rendering Norwegian a narrow-moat. With the inclusion of Prestige's brands and global diversification, we think the firm has fortified its moat through increasing brand awareness and scaling costs.Our long-term thesis continues to evolve as Norwegian reallocates its hardware (Joy) from China to West Coast markets (Los Angeles and Seattle) in order to capitalize on better economics. This builds upon the firm's focus on itinerary scarcity (redeploying capacity to new markets and diversifying duration of itineraries) and optimization, which should help prevent Norwegian's products from becoming commodified. We already viewed Norwegian’s capacity as scarce relative to its peers, as the Norwegian brand will have only 17 ships in operation by the end of 2020, and the differentiated product (freestyle cruising), along with Prestige’s tilt to high-net-worth consumers, carves out a wide base of consumer demand the firm can continue to penetrate.Commentary across industry operators has been focused on maintaining firm pricing globally and improving returns on invested capital overall, which could help generate better profit results for Norwegian. However, peers could discount during periods of economic duress, forcing Norwegian to follow suit, which could be tempered by the differentiated product. Prestige's brands provide some insulation from broad-based discounting, as its luxury products are offered to consumers who tend to be less affected by economic cycles, leading to less close-in discounting.