On a night in late April, Norwegian Cruise Line President and CEO Kevin Sheehan celebrated the delivery of his company’s new 4,028-passenger ship in Germany with a low-key, stress-free cocktail party.
What a difference three years had made.
During an inaugural cruise last month aboard the Manhattan-based Norwegian Breakaway, Sheehan recalled the much different scene in 2010 as the cruise line’s previous ship, Epic, was getting ready to debut in France.
“The night before I took delivery of the Epic, I was chasing a thousand Frenchmen all over the ship trying to get them to work,” he said.
The contrasting experiences are symbolic of the transition Norwegian Cruise Line — previously referred to as NCL — has undergone in the past few years. Since taking the helm in 2008, Sheehan has resolved long-standing problems, instituted a new corporate climate, placed a fresh focus on travel agent ties, taken the company public and launched a new class of ships that he hopes will further elevate the line’s reputation. After this year’s Breakaway, sister ship Getaway will arrive in Miami in January.
His tenure has coincided with the economic recession, which pummeled travel-related companies, and more recently a stretch of bad publicity for the cruise industry that started with the fatal Costa Concordia shipwreck last January in Italy and continued this year with fires aboard competitors’ cruise ships.
“There’s been obviously some negative press about the industry, but Norwegian, pun intended, seems to be sailing right through,” said Brad Tolkin, co-chairman/CEO of cruise distributor World Travel Holdings.
Norwegian went public in January with shares priced at $19, but the stock price hit $30 by mid-February and has generally hovered between $30 and $32 ever since. Competitors Carnival Corp. and Royal Caribbean Cruises, by contrast, have seen their stock prices drop by more than 11 percent and more than 7 percent respectively since mid-January. Carnival was trading at $33.84 when markets closed Friday; Royal Caribbean was at $33.98.
“It’s significantly outperformed its peer group, not only since the IPO but also year to date,” said Harry Curtis, senior leisure analyst at Nomura Equity Research.
DOING IT ALL
And Norwegian — a tiny player in a market dominated by giants Carnival Corp. and Royal Caribbean Cruises — has done it all while posting increased adjusted earnings before interest, taxes, depreciation and amortization for 19 quarters in a row and consistently improving customer satisfaction surveys for the last 40 months.
Five years ago, Sheehan could have predicted as much.
With a professional background that includes stints in leadership at companies as diverse as Telemundo and Cendant Corp. Vehicle Services Division and a couple years as a professor at Adelphi University, the New York native said “the joke was my longest cruise was on the Staten Island Ferry.” He came to Norwegian as chief financial officer in 2007, shortly before private equity firm Apollo Management invested $1 billion to become controlling shareholder in the company that had been wholly owned since 2000 by Genting Hong Kong. He moved into the CEO job the following year when his predecessor, Colin Veitch, departed.
Sheehan gathered his team on the Norwegian Sky for a weekend in 2008, integrating ship- and shore-based leaders for the first time. He kept them working from early in the morning until evening hours as an example of the new corporate culture and then unveiled his five-year plan.
“He said he’d never missed his numbers,” recalled Andy Stuart, a Norwegian employee for nearly 25 years who now holds the title of executive vice president/global sales and passenger services. “Truthfully, we were an organization that had missed quite a number of numbers.”
People were dubious, Stuart said, but no one doubted the new CEO, at least, believed it was possible. Sheehan introduced the book that would become the company’s guide, Jim Collins’ Good to Great, a treatise on what makes companies successful. Five years later, he and staffers still reference it in conversation.” Now there’s this culture where we cannot miss,” Stuart said. “I think you’d see the same raised eyebrows if we missed our numbers now as you did see raised eyebrows at the idea of meeting our numbers every quarter.”
The early years of Sheehan’s tenure were complicated by decisions made before his time: Norwegian was taking a serious financial hit from its operations in Hawaii, where three U.S.-flagged ships with American crews were earning a reputation for poor service and leaving passengers and travel agents with a bad impression. The company had already redeployed two of the ships when Sheehan took the CEO job, but he had an image problem to clean up and the existing ship to improve.
The line was also embroiled in a costly dispute with STX Europe ASA, the shipyard in France that built the Epic and was under contract to build a second giant ship in the same mold. Sheehan canceled the order for the second ship and moved on — right into the recession in 2009.
“That first year was complete fixing and getting everything teed up,” Sheehan said. “The second year was the economic thing. ...It didn’t get to be really where we started to get all of the stuff going until probably 2010.”
That was the year the $1.2 billion Norwegian Epic debuted with a host of popular new features, restaurants, activities and entertainment — a continuation of the “freestyle” model the line had pioneered years earlier that allowed passengers to pick when and with whom they wanted to dine.
But there were also flops, including the boxy exterior and the puzzling staterooms, which featured divided bathrooms and sinks in the main room.
“I don’t think I’m too harsh in saying it’s probably the ugliest ship that’s been built in my time in the industry,” said Rod McLeod, a former Norwegian Cruise Line CEO who will retire as a cruise consultant this year. “And he had nothing to do with that....It’s a wonderful testimony to what Sheehan inherited.”
Ships of the line
Later that year, the company announced the order of two new ships that would eventually be named the Breakaway and Getaway for a total of about $1.7 billion. It also unveiled plans — which would be put on hold for two years until the market improved — to go public.
“It’s been a dynamic period with very strong leaders and an enormous increase in the size and sophistication of the ships,” said Miamian Walter Revell, a longtime member of the company’s board of directors. “I think it’s been exemplary. This is an intense business; Kevin is an intense guy. So we have a great match.”
Unlike planning for Epic, which Sheehan said involved just a handful of people, the new ships were the result of brainstorming from every department.
“This is a ship that’s been built for people to have a ball — but it’s also a ship built to be very profitable,” Sheehan said.
Curtis, the Nomura analyst, said berths for the new capacity are priced on average 30-40 percent higher than the rest of the fleet. After Breakaway and Getaway, Norwegian is expecting at least one more ship in late 2015, in the slightly larger “Breakaway Plus” class. Announced last year, the approximately $930 million order included the option for a second 4,200-passenger ship, which expires next month. (Norwegian is widely expected to move forward with the second ship, which would be delivered in 2017.)
With the new ship, Norwegian has done away with the unpopular Epic elements (bathrooms on Breakaway are normal) and added new features including The Waterfront, an area of outdoor seating for restaurants and bars, and 678 Ocean Place, the ship’s hub on decks six through eight. Venues were placed to create the best flow, and passengers can check restaurant and entertainment availability on touch screens throughout the ship — and make reservations right there.
While refashioning the onboard experience, Sheehan and his team have also worked to communicate the company’s core goals to all of its nearly 20,000 employees: travel agent advocacy, guest experience, brand communication and employee engagement.
To inspire a winning attitude, Sheehan even renovated the company’s Doral offices.
“It was a dump,” he quipped. He also orchestrated a $5 million donation on behalf of the company to Camillus House, a Miami homeless shelter; Sheehan said employees continue to support the organization with their own money and time.
And to make the food quality more of a priority, the company installed a test kitchen in its building that allows staffers to test out new products and recipes anytime — as opposed to only when a ship was in port.
Since 2011, one of the company priorities has been repairing relationships with the travel agent community after years of distrust — a crucial step for a cruise line that makes up just 10 percent of the industry and needs all the ambassadors it can get. Agents had been soured by customers’ poor experiences, especially in Hawaii, and were wary that Norwegian was trying to undermine them by marketing directly to consumers.
Called Partners First and spearheaded by Stuart, the effort proved Norwegian was serious by improving training for travel agents, increasing the spend on marketing support and communicating better, said Mike Driscoll, editor of the weekly trade publication Cruise Week.
“Andy Stuart’s done a spectacular job with the trade in terms of turning around the company that was in the toilet six years ago with trade relations,” Driscoll said.
Tolkin, co-owner of the cruise distribution company, said the change is evident internally as well.
“When Kevin came in with the Partners First program, you saw a more inspired management team,” he said. “It was just a different feel around corporate headquarters — and we deal with them every day. Now on top of a successful IPO, that inspiration I feel like is on steroids. There’s an extra spring in their step.”
The improvements go far beyond better relationships. The product is far better, too, say experts. “They’re building something you can actually sell with credibility as opposed to being the price leader,” Driscoll said. “It’s becoming a real cruise line — a real major cruise line.”
Thanks to the Partners First efforts and Norwegian’s new ships, CruiseOne travel agency franchisee Ralph Santisteban is sold.
“From a perspective of the entire product, hardware and software combined — not just the look and feel but how it works — I think that more than any other cruise line right now, Norwegian has got it right,” said Santisteban, of Kendall. “The changes for Norwegian have been huge steps, not baby steps.”
Freedom at sea
But, he cautioned, the product can be intimidating to an experienced cruiser who is unfamiliar with Norwegian’s “freedom and flexibility” model.
“They’re used to being herded,” he said. “You can have your freedom but you have to know how to deal with that freedom.”
And Norwegian is no longer alone in offering that freedom; its competitors also boast plentiful dining options at a range of quality and price levels.
“When Norwegian started freestyle, nobody did it,” said Carolyn Spencer Brown, editor in chief of the website CruiseCritic.com. “Now everybody does it. It needed something else to attract new travelers — new to Norwegian, new to cruise.”
The line has excelled at entertainment as well as creating “a really dynamic, vibrant ambiance onboard,” Brown said. Epic features performances from Blue Man Group and a cirque-style dinner show; Breakaway features three shows with links to Broadway, including Rock of Ages and Burn the Floor.
That’s why the cruise line is the first choice for Miami resident Cristo Farias, 45, who tries to take at least one cruise a year. Although he’ll sail on other lines, he said he prefers Norwegian’s food, entertainment, decor and vibe.
“I think NCL has a little more excitement in the pool areas, the deck areas, things going on,” said Farias, who has sailed on the Epic and already has a Getaway voyage booked.
But no one is resting on recent successes. Sheehan’s latest long-term plan is a tall order: to lead the higher-priced “premium” category that includes Holland America Line and Celebrity Cruises rather than the mainstream, which is dominated by Carnival Cruise Lines and Royal Caribbean International.
“As we’re growing our business, we’re trying to upscale it,” Sheehan said.
Stuart said that with the launch of the newest ship, the rest of the team is on board with the plan.
“If you look at the brands that we spend our time really looking at — Royal Caribbean, Celebrity, Princess, Holland — no one in our leadership today who has been on Breakaway has any doubt that we should be leading that category, however you want to define it,” he said.
Part of the job is getting those potential passengers, who might have been turned off by earlier Norwegian experiences, to try the line again.
“Of course, we’re trying to be out in front of the market a lot, so somebody from a Holland or Princess might say, ‘I keep hearing about this Norwegian Cruise Line, let me try it,’” Sheehan said. “They may like us. Bringing them in; it’s a journey.”
That journey includes efforts such as Sheehan’s humbling appearance on Undercover Boss, which has drawn huge publicity for the brand, and the company’s $7.5 million purchase of music cruise production company Sixthman Productions last year. That company packs ships for concerts with well-known acts in slower seasons, which ideally draws music fans who might not have cruised before.
The company must also decide if and when it will venture farther than its current route map, which includes the Caribbean, Bahamas, Mediterranean, Baltic, Mexican Riviera, Pacific Coast, Panama Canal, Alaska, Bermuda, Hawaii, New England and Canada. Unlike its larger competitors, Norwegian has not yet tested the waters in Asia and Australia — though they have drawn up sample itineraries and considered whether the move would make sense in the future. Majority shareholder Genting HK owns Star Cruises in Asia, which would lend some instant on-site expertise in the market.
McLeod, the consultant, said Norwegian could have easily tried to follow the pack and deployed ships quickly to those far-flung markets. But he said he thought they were wise to bide their time.
“It would look nice in a presentation perhaps, but they’re taking it slow,” McLeod said. “They’re saying, ‘We’re going to make our statement based upon what we can do well and truly compete in the markets that we choose to compete in.’ And I think that’s a strategy that’s going to serve them well.”
Whatever the plan, one thing is certain: Sheehan will be around to see it through. Earlier this month, he extended his contract (with a nearly 30 percent raise to earn a base salary of $1.55 million) for at least another three years with the option to stretch to five.
“I would like to see this through,” Sheehan said. “As long as I’m having fun.”