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Following another impressive earnings report in which Royal Caribbean (RCL) cruised past Q4 EPS estimates and issued upside EPS guidance for Q1, shares are sailing to record highs and are now up by an astounding 110% on a yr/yr basis. Similar to the airline industry, cruise line operators like RCL are experiencing robust demand while benefitting from stronger pricing and moderate capacity growth. These bullish factors were on display when competitor Carnival (CCL) posted a Q4 earnings beat on December 20 that also featured record revenue and accelerating onboard spending levels.

In addition to following in the wake of CCL and delivering its own strong Q4 results, RCL also made a major announcement this morning, stating that it plans to enter the river cruise market in 2027 with an initial fleet of ten ships under its Celebrity River Cruises banner. This news has created some choppiness for shares of Viking Holdings (VIK) today, which has operated in the river cruise space with fairly limited competition since its founding in 1997. However, since VIK caters to a wealthier customer base with one of its key selling points being that its smaller ships offer a more intimate experience, the impact from RCL entering the space in two years should manageable.

• In the meantime, the more traditional cruise line industry is flourishing and is expected to be very healthy again in 2025. Thanks to the bullish industry-wide trends and RCL's effective strategy of maintaining modest capacity growth while keeping a lid on costs, gross margin yields jumped by 13.8% yr/yr. The primary catalyst for the improvement was higher pricing across all products and stronger onboard revenue as guest spending continues to exceed prior years.
• Adjusted EBITDA is another metric that's particularly useful for the cruise line industry since it strips out depreciation -- a substantial non-cash expense for cruise liners. In Q4, adjusted EBITDA came in at $1.1 bln, beating RCL's estimate of $1.05 bln, again reflecting stronger pricing and healthy close-in demand.
• Despite the macroeconomic headwinds, including stubbornly high interest rates, there is no sign of a slowdown in demand for RCL. In fact, the company experienced the best five booking weeks in its history since the end of last quarter. Additionally, RCL stated that "WAVE season" -- a period that typically runs from January through March -- is off to a record start with booked load factors matching prior years, but at higher rates. Accordingly, RCL issued a better-than-expected outlook for 1Q25, forecasting EPS of $2.43-$2.53 and a net yield increase of 4.75-5.25% in constant currency.

It's smooth sailing for RCL as the shift in consumer spending towards experiences carries on and as the company's strategy of restraining capacity while improving the on-board experience continues to pay dividends. Investors are also celebrating the company's decision to enter the river cruise industry, which has been a very lucrative market for VIK.