Wells Fargo expects another strong year for the cruise industry and has reaffirmed the “gain” ratings of the industry's two largest operators, Carnival Cruises (CCL.US) and Royal Caribbean Cruises (RCL.US).

With the addition of new ships, new islands, and strong booking trends, Wells Fargo analyst Daniel Politzer believes 2025 will be another “higher than expected” year and raised earnings expectations for Carnival Cruises and Royal Caribbean.

Politzer said in the report, “Although there is no uniform algorithm in the cruise industry, most operators aim to achieve an annual yield increase of 2-4%, adjust cruise cost growth by 1-2% per year, and achieve a certain degree of capacity growth according to the different operators. Both fiscal year 2023 and fiscal year 2024 are higher than previous years, and we think 2025 may also be higher than previous years, reflecting strong consumer demand/early booking metrics in 2025, combined with slowing cost growth.”

For Fiesta, Politzer believes “everything is moving in the right direction.” This cruise operator has maintained bookings at or above the high end of all of its typical ranges, and trends are good in all markets, particularly in Alaska. In conversations with CEO Josh Weinstein and IR Senior Vice President Beth Roberts, private islands remain the company's focus, and Celebration Key will open in July 2025. The Carnival can host up to 2.2 million passengers each year, and plans to use Celebration Key and Half Moon Cay (Half Moon Cay) as “compelling” consumer services. The company will further promote the Caribbean region and nearly double the number of private visitors to private islands to 9 million to 10 million.

Fiesta's balance sheet is under the greatest pressure on its share price. The company admits that its optimal leverage ratio is probably 3-3.5 times (still higher than about 2 times before the COVID-19 pandemic). Fiesta believes that the industry is highly leveraged, but considering geopolitical risks and fuel price fluctuations, combined with lower interest expenses, the company believes that an investment-grade balance sheet is the most appropriate.

Wells Fargo raised Fiesta's 2025 revenue and earnings per share forecasts by 1.0% and 10.9%, respectively, to US$25.9 billion and US$141 million. In contrast, Wall Street's prevailing expectations are $25.9 billion and $1.42 billion, respectively.

For Royal Caribbean, the second-largest cruise operator, Politzer expects its share price to reach $200 per share, based on moderately high yields and share buyback potential, which is equivalent to earnings of $14 per share in 2025 and $17 per share in 2026.

In talks with Royal Caribbean Chief Financial Officer Naftali Holtz and IR Vice President Michael McCarthy, Politzer found that the company was optimistic about its ability to implement a long-term strategy of low single-digit revenue growth and 5-6% capacity growth. Royal Caribbean has excellent cruise bookings in Europe, Alaska, and China, and demand is still strong even though China's cruise supply is much lower than in 2019.

The company is also adding its short-haul cruises, which mainly depart from Orlando, Florida. The Orlando/Port Canaveral itinerary starts with a 3-4 night stay at Disney World and then a 3-night stay aboard the Royal Caribbean boat. This strategy targets Orlando resort holidaymakers and new cruise customers, and helps shorten the time between cruises.

Wells Fargo raised Royal Caribbean's 2025 revenue and earnings per share forecasts by 1.2% and 4.8%, respectively, to US$17.9 billion and US$12.60, while the general market expectations were US$17.7 billion and US$12.70, respectively.