Activist Investor Responsible for Southwest Airlines Changes Targets Norwegian Cruise Line Holdings

Less than a week after Norwegian Cruise Line Holdings, Inc. suddenly ousted Harry Sommer as president and CEO and named long-time Board Director John W. Chidsey as his replacement, Elliott Investment Management, a well-known activist investor that has built up more than a 10% stake in the company, is demanding significant change.

In a letter sent to the NCLH board, as well as the media, Elliott , which most recently was responsible for several controversial changes at Southwest Airlines, listed a number of grievances it has with the cruise operator.

“Norwegian’s margins have deteriorated from best-in-class to among the lowest in the industry after a decade of runaway cost increases, strategic errors, and poor execution,” the investment company wrote in its presentation, adding the NCLH stock has “underperformed peers by 230% over the last three years.”

Poor Leadership Selection & Mismanagement

Additionally, the investment company said that NCLH has suffered a “complete loss of investor confidence in leadership following years of missteps and poor execution,” and accused the Board of taking no action for more than 10 years “as Norwegian’s leadership pursued the wrong strategy, promoted a culture of wasteful spending, and failed to execute.”

This lack of confidence was further compounded by the abrupt appointment of Chidsey, who Elliott Investment called out for having no experience in the cruise industry.

“The rushed appointment of an insider without a comprehensive process has only further eroded investor confidence,” the investment company wrote.

This action is symptomatic of a continued failure by the Board, which “has repeatedly failed in its most important responsibility – selecting a capable CEO.”

Elliott also called out the Board and executive leadership for a culture of wasteful spending citing the grand launch of the Prima Class in Iceland as a waste of money, as well as a “misplaced focus on fine art curation [that] led to tens of millions of dollars in wasteful spending…”

Strong Potential

The investment company, which listed many more grievances with the Board, reiterated that its complaints are not with the brands themselves, but with leadership. It’s the same strategy Elliott used with Southwest, which eventually led to a complete facelift at that airline.

“We have strong conviction in Norwegian’s assets, its talented front-line employees and its differentiated guest experience,” the company wrote.  “With improved strategy, execution and credibility, we see a clear path for Norwegian’s stock to reach $56 per share, or 159% higher than current levels.”

Call for Change

As a result of this decade’s worth of missteps, Elliott is pushing for “significant changes,” including comprehensive Board changes and the appointment of “new, truly independent directors with relevant industry and operational expertise empowered to drive change and hold management accountable.”

In a report by the Wall Street Journal cited by cruise industry analyst Patrick Scholes at Truist Securities, Elliott has been working with Adam Goldstein, the former president and COO of Royal Caribbean, as a potential board nominee.

Elliott also pushing for the review and possibly replacement of executive leadership across the company, following which a new business plan should be implemented that prioritizes “profitability and return on invested capital.”

Elliott Investment further issued a threat to the current Board if it doesn’t play ball.

“We are ready to meet with the Board to discuss these issues in greater detail and align on a path forward. While our preference is to reach a constructive resolution, we are prepared to take our case directly to shareholders at the upcoming annual meeting.”

Cruise Industry Equity Analysts Respond

Cruise industry analysts were quick to respond to Elliott’s letter to the Board, its grievances, and its demands.

“We see the biggest challenge for an activist or the new CEO being that of ‘a quick fix’ as many of the issues that have plagued NCLH cannot be corrected overnight and are a result of multi-years of planning (or lack thereof)…” wrote Scholes.

Scholes specifically called out NCLH’s lack of a built-up private island – and the delays in getting Great Stirrup Cay up to speed – as a significant reason the cruise company’s stock prices have lagged behind the rest of the industry. He also said that NCLH’s mainstream brand Norwegian Cruise Line does not have the megaship to compete with Royal Caribbean’s Icon class ships.

He added that designing and launching a megaship capable of competing with Royal Caribbean’s Icon and Oasis Class ships “would be at least a four-year process, so no overnight fix with this.”

NP Paribas Equity Research senior analyst Xian Siew took a similar stance at Scholes.

“We do think there could be room for improvement at NCLH. That said change could take some time to take hold as new ships/islands take time to develop or be redeployed.”