Arrowpoint Advisory's Jamie Hutton assesses investing in travel and takes a closer look at the UK cruise market.
Although there is no black or white formula when arriving at a definitive travel investment thesis, there is a preference towards businesses with strong, scalable technology platforms, defensible niches and that have the capability and potential to internationalise. In the UK one of the travel sub-sectors which meets these criteria, attracts ongoing interest from investors and has shown consistent market growth for over a decade with no signs of abating is online cruise.
The cruise market , positive macro-factors driving future growth
The global cruise market has an impressive 4.5% eight year compound annual growth rate in passengers, with 25.3 million people expected to cruise in 2017. Each year there has been growth in the market, despite the high profile tragedy of the Costa Concordia in 2012.
Continued and growing demand is being driven by key evolving trends in the industry:
- The younger generation, including Millenials and Generation X, are starting to choose to cruise, with the average age of cruisers falling from 58.2 in 2014 to 55.2 in 2015;
- The introduction and rapid growth of river cruising, a market which has grown by 32% in the last five years in the UK (Source: Mintel);
- Product development and innovation is creating new experiential and expedition cruises which are driving higher new and repeat customers (i.e. Arctic cruising); and
- Agents continuing to play a structurally important role in the industry by driving high volumes and filling cabins. With increased capacity it is unlikely that suppliers will run the risk of losing the agency distribution channel by cutting commissions, as per Carnival in 2011.
This ongoing demand, which has increased 62% in the last ten years, is being fuelled by greater capacity. In 2017 $6.8bn is forecast to be invested in new ocean vessels with a total of 26 new ships scheduled for delivery in 2017 globally (13 ocean and 13 river). In total, 97 ships (80 ocean and 17 river) have been ordered to be delivered in the next ten years, generating new capacity of 230,788.
Private Equity investment in cruise in the UK
In the UK the two largest cruise agents have been under PE ownership for a number of years:
Iglu.com Mobeus (Matrix at time of ownership) first invested in 2009 when Iglu.com was the UK's largest online ski agent with a rapidly growing cruise division. Growth in cruise was the driving force for significantly increased profits and ultimately successful exits for both Mobeus and subsequently Growth Capital Partners. Iglu.com received its most recent investment from LDC in June 2015.
Cruise.co.uk Risk Capital Partners invested in the business in 2013 and have subsequently made a successful exit, selling to BDC in August 2016 for £52m.
These two companies have grown significantly ahead of the market through:
- Developing leading digital strategies and focusing purely on the growing online segment of the market;
- Investing in IT infrastructure to support and enhance growth;
- Identifying and engaging the customer to drive market-leading repeat rates;
- Consolidating and growing long-term relationships with suppliers; and
- Product development and innovation.
The barriers to entry created arguably present an insurmountable challenge to other UK competitors but with a clear strategic plan and a willing financial partner, there is surely room for more cruise agents of scale in the UK.
What next for the UK cruise companies and their financial partners?
The UK cruise market is forecast to grow from £2.6bn to £3.0bn over the next five years (Source: Mintel) and Iglu.com and Cruise.co.uk are in prime position to capitalise and deliver successful exits for LDC and BDC in due course. Whether the exits will be further PE management buy-outs remains to be seen. The attributes of the businesses with their online focus and significant benefits from suppliers for greater scale provide a compelling rationale for consolidation in the industry , similar to that which is occurring at present in the online hotel B2C and B2B agent space. Therefore, it would not be a surprise if one of the larger OTA's, such as Priceline or Expedia, are involved in a UK cruise agent sale process next time round.