Business Monday

Royal Caribbean’s chief on cruising, customers and the company’s growth

Royal Caribbean International CEO Michael Bayley on board his newest cruise ship Harmony of the Seas as it prepared for a cruise on Nov. 20, 2016.
Royal Caribbean International CEO Michael Bayley on board his newest cruise ship Harmony of the Seas as it prepared for a cruise on Nov. 20, 2016.

During the Great Recession, the cruise industry canceled or postponed building and introducing new cruise liners. It conserved cash as passenger traffic was hurt by the sour economy. Now, new ships are entering the oceans and many of them have South Florida ports of call.

Royal Caribbean International’s Harmony of the Seas is the biggest of the new fleet. It docks at Terminal 18 at Port Everglades. Holland America Line’s biggest and newest ship, the MS Koningsdam, also will call Port Everglades home. The Vista from Carnival Cruise Line and Regent Seven Seas’ Explorer dock at PortMiami. It is a lot of activity for what already are the world’s leading cruise ports.

The Harmony of the Seas cost Royal Caribbean more than $1 billion. It sailed into South Florida in early November. Royal Caribbean International CEO Michael Bayley described business as “great” as he sat inside his company’s biggest bet yet on the American cruise market.

It sets sail as the American economy prepares for a new president, the Latin American economy has seen tough times and the Chinese economy, an important new market for cruise operators, is uncertain.

He spoke with WLRN’s Tom Hudson recently. Here are excerpts from the conversation.

Q: Where are the pockets of growth internationally, and how do you see the Latin American market changing?

A: All markets are cyclical, including the U.S. If you look into Latin America several years ago, Brazil, which is a huge market, was vibrant and strong and was going to keep on growing. Of course Brazil has fallen on tough times. The economy went into a decline and that bled into a lot of the Latin markets. But this year we’re seeing an upswing from the Latin markets. And bookings for 2017 from our Latin markets are quite promising. Finding a balance in the portfolio of the allocation of assets is really part of our responsibility for our shareholders.

Q: Are you seeing the worst is over when it comes to Latin American business?

A: Who knows? I couldn’t say. I don’t have a crystal ball. The signs that we see are quite promising.

Q: Has the dropping stopped?

A: Yes. We’re seeing better bookings coming from a lot of markets. Now, of course, recently after the election results and the Mexican market, for example, where its currency has dropped [against the U.S. dollar] — there’s always an ebb and flow of events that occur literally every single day around the world.

Q: On your third-quarter conference call, you said Europe was looking quite good for 2017. What is adding to that optimism in Europe?

A: It’s similar. Our European business is a fairly significant percentage of our overall business. Europe plays a critical role for two reasons. One, it’s an iconic major global destination. Second, is the demand that comes from those markets. We see it being quite good this year and looks like it will be quite good for next year.

Q: Another place that you’ve seen significant growth is China. The Chinese economy has gone through some real twists and turns this year. President-elect Donald Trump has made strong comments regarding U.S.-China trade. Does that give you any cause for concern about your Chinese business?

A: I think everybody will have to wait and see what really occurs. We have a good business in China. We’ve been in China for nearly a decade. We’re quite committed to the market. Our hope is that we’ll continue on that path.

Q: Nine percent of Royal Caribbean’s capacity is in China. Do you anticipate that to grow?

A: Everything is relative. We’ve just introduced Harmony of the Seas. In 2018, the sister ship of Harmony of the Seas will be launched in Europe and will come to the U.S. In 2019 we have Quantum Plus. In 2020, [we will have a fifth] Quantum [ship]. And we just announced in 2021 and beyond a new class of ship called Icon class. As we bring on new capacity those ships typically are allocated to our most profitable markets and the markets where we have the most customers. Normally, that’s the U.S., and recently it’s been China.

Q: In the third quarter, an increase in passenger ticket prices helped increase revenue. Do you anticipate that trend to continue?

A: It’s a complex picture behind one single number. Our focus for our shareholders is ensuring that we can drive our revenues upwards. It’s also important so we can reinvest in the product and build these types of ships that people really enjoy.

Q: But that passenger revenue is the largest source of revenue for the company in terms of the ticket charge as opposed to the onboard spending.

A: That’s right. The ticket is the significant portion percentage of the revenue.

Q: So back to the ticket price increases you’ve successfully introduced. Is that a trend, do you think, that the U.S. market can continue to sustain?

A: It’s really about the relationship between supply and demand. During the summertime when everybody wants to go on vacation, sometimes certain destinations become very popular. We’ve seen that this year, for example, in the Caribbean. We see Alaska has been very popular, and we hope to see that continue.

I think everything’s really connected to a larger macroeconomic picture. If the economy’s doing OK, if people feel good about how they’re doing at work, then they’re more likely to say, ‘Hey, come on, let’s go take a cruise, and maybe let’s book a suite instead of a balcony.’ When the economy’s good, business is typically good.

Q: What do your price trends and your ticket demand for 2017 tell you about the U.S. economy compared to the other international economies?

A: It’s early for next year to make any predictions or statements. I think what we said on earnings call was that the volume of business and our rate of business is up against 2016 same time last year.

Q: Is that across the board on the locations: U.S., China, Europe and Latin America?

A: It’s across the board. The early indications are that people are thinking about their vacations next year and then booking their cruise vacations.

Q: On the cost side of operating these vessels, how have you addressed the cost containment even with the growth strategy?

A: It is a relentless journey. It’s about trying to create a culture of common sense cost management to make sure that we get the best prices for whatever work or whatever goods we’re buying.

Q: Have you done that by combining the purchasing power of the cruise companies that are under the Royal Caribbean brand, a strategy that Carnival Corp. has used over the past several years?

A: Absolutely. We have multiple brands, and we have joint ventures, and we consolidate everything under one supply chain logistics organization. Their focus is to get the best prices that we can.

Q: What about energy prices?

A: This ship — the Harmony of the Seas — is 20 percent more energy efficient than its sister. That is material over a period of a number of years. Energy conservation for all of our ships is very much a focus of ours — redesigning hulls, the air bubble system that we have under the hulls that could use friction, and then retrofitting our existing ships with energy management is key. To answer your question specifically, I can tell you we we engage all of the analytical capabilities that are available, and I don’t think I’ve ever seen it go anywhere but up.

Q: Any Zika impact on business?

A: In our call centers, we track the reasons for calls that come in from customers and travel partners. We saw a minimal spike in the calls that came in for Zika during that period where there was a lot of coverage. Subsequently, we’ve seen nothing significant. We saw a few cancellations. I mean really a handful of cancellations, but, no, really no impact.

Q: Describe the investment that Harmony of the Seas represents for Royal Caribbean.

A: You can look at it in two ways. One, is the financial investment allocated to this ship. More importantly, it’s the human capital that’s invested — the creativity, the innovation, the ingenuity and the experience that comes from the team that helps create the experience. You can’t quantify that kind of capital.

Q: The company borrowed almost $1 billion to build this ship. What is the business inspiration for making this kind of financial investment?

A: It’s about delivering a great vacation to our customers. How can we build something that is the next generation of innovation? We create something. We try to innovate and then we start working backwards through the math of it all to see exactly what that’s going to cost. And then we have to work through the economic model to make sure it’s going to provide the kind of returns to our shareholders that they expect.

Q: An investment like this, at a time like this, shows great confidence in the ability of your customers to have the discretionary income it takes to be able to afford to get onboard.

A: That’s right. This business is not really a short-term business. I think everybody understands that there are economic cycles and everybody is subject to them, but you can’t really plan your business based upon these economic cycles. This kind of business is capital-intensive. Building one of these ships or building a class of ships is a multi-year project. You really have to think about the future more long-term.

Q: The Harmony of the Seas has a 10-story dual water slide. This is the largest cruise ship in the world. Are you at capacity of modern engineering and modern marketplace capacity to be able to afford the ticket price?

A: I don’t think we think that way. In the past, we’ve seen ships get bigger and bigger as more innovation arises. I think that’s almost inevitable. I wouldn’t want to say that we’ve reached the limits.

Q: What about the marketplace? There are more than two dozen new vessels that have hit the cruising market globally this year.

A: I think it speaks to the quality of the experience and the value of the experience. We couldn’t invest in these types of ships if there wasn’t a demand. We see that across all of the markets around the world.

Q: Who is the Royal Caribbean cruiser, then?

A: It’s America.

Q: Where are you finding the new sources of American cruisers?

A: We have a term for that: new-to-cruise. That’s a category that we’re particularly interested in. Of course, everybody’s incredibly excited by millennials, and that is the market that everybody needs to go to.

Q: Are they coming onboard?

A: They often come with their mom and dad because millennials are quite a broad category. They are teenagers to the mid-30s. We started to see an uptick in what we call the new-to-cruise category. This year was a very good year for us in terms of new-to-cruise.

Q: Industries have seen wholesale changes in a very short period of time. For instance, the retail industry and the shopping mall industry, where there have been large capital investments over the course of multiple decades, have struggled because of how fast the retailing industry has changed and the customer has changed his or her expectation. Is cruising looking at something like that?

A: I think this ship, Harmony of the Seas, really articulates the cutting edge of the industry. We’re very conscious of the fact that things can change quite quickly. We’re very attuned to trying to understand where our customers are and what they’re going to seek in the future. Of course, nobody knows.

But I think one thing is true that I’ve seen over my 35-year career with Royal Caribbean: The fundamentals of what people are looking for on a vacation have really not changed. People want to relax. They want to create memories. They want to spend time with their loved ones and their families. They want to get great service. They want to have a nice meal. They want to laugh. It’s fundamentally the same.

Tom Hudson is vice president of news and special correspondent for WLRN. He hosts and produces the Sunshine Economy and anchors the Florida Roundup. Listen to excerpts from this interview at wlrn.org.

Michael Bayley

Job title: President and chief executive officer, Royal Caribbean International

Experience: Bayley began his career with Royal Caribbean in 1981, working in a variety of shipboard and shoreside positions with increasing management responsibility. He also was vice president for Caesars Palace Hotel and Casino, one of the world’s largest premium gaming resorts, in Las Vegas, and then chairman and managing director of Island Cruises, a joint venture cruise line and tour operator between RCL and British tour operator First Choice Holidays. He has since held a number of senior positions with Royal Caribbean, overseeing international strategic development, commercial development and hotel, marine and land operations before being named president and CEO of Celebrity Cruises. He has been the head of Royal Caribbean International, the world’s largest cruise brand, since December 2014.

Education: Has a degree in business administration from the University of Bournemouth in England. Attended management programs at Harvard Business School and Ross School of Business at the University of Michigan.

About RCL: Royal Caribbean Cruises Ltd. (NYSE: RCL) is a global cruise vacation company that owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises — and owns joint venture interest in the German brand TUI Cruises and the Spanish brand Pullmantur. Together, these brands operate a combined total of 49 ships with an additional 13 on order.

Website: www.royalcaribbean.com

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