Five years ago, Royal Caribbean Cruises made history by launching the world’s largest cruise ship, the 5,400-passenger Oasis of the Seas.
These days, the Miami-based company is making waves for a new set of reasons that are less splashy but still bold: introducing a new technology-rich class of ship, sending it to China after a brief stint in New York, starting a new cruise line for Chinese passengers with partners there, and announcing a plan to double earnings by 2017.
Taken together, the moves lay out a clear course for the world’s second-largest cruise ship company — which includes six global brands and 42 ships — as years of economic weakness and high-profile industry mishaps give way to smoother sailing. Already struggling to recover after the recession ended, the industry took hits from the Costa Concordia shipwreck in 2012, the disabling Carnival Triumph fire in 2013 and, to a lesser extent, Royal Caribbean’s own fire aboard Grandeur of the Seas last year and a large norovirus outbreak on Explorer of the Seas earlier this year.
“Basically we saw the tourism business had some pressure over the last few years, and the result is, returns have been low,” said Richard D. Fain, chairman and CEO of Royal Caribbean Cruises. “We saw an opportunity to get that up: new ships, new itineraries, we saw just the recovery is driving that ... Our belief is that if you want to get somewhere, it’s important that everybody try to understand what you’re trying to accomplish.”
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To that end, Fain announced the “Double-Double” program in July, an initiative to increase the company’s return on invested capital to double digits and double its earnings per share by 2017.
The market has responded well: Since the program was announced, the company’s stock price has soared 39 percent, although analyst Matthew Jacob, director at ITG Investment Research, pointed out that other factors such as lower fuel prices and the easing of concerns over Ebola have also had an impact. Since the beginning of the year, the share price has increased more than 69 percent, and the stock was added to the S&P 500 after markets closed Thursday.
“There’s a lot of things that are moving in the right direction for this industry and Royal Caribbean,” Jacob said. “I think investors are going to want to see continued improvement. If Royal Caribbean can continue to beat expectations and ratchet guidance up, that’s going to ultimately be the big driver of where the stock goes as opposed to these proclamations of projections.”
Jason Liberty, chief financial officer and senior vice president, said the goal of the efforts is to position Royal Caribbean as a “global cruise line leader” and to show investors a commitment to continued financial improvement. Ultimately, the company has a goal of reaching investment grade status, but in the meantime, the double-double announcement was intended to outline the forces that will guide behavior for the next few years.
“It’s aggressive but quite achievable through cost discipline, capital discipline, and then having nice yield growth over that period of time,” he said.
Capital discipline is easy, Liberty said: The company has already placed orders for new ships through 2017. Including the $1 billion Quantum of the Seas, which launched last month, Royal Caribbean Cruises is expecting a total of four new ships for its main Royal Caribbean International brand in that time period. Anthem of the Seas and Ovation of the Seas, Quantum sisters, are due in 2015 and 2016 respectively, and the third Oasis-class ship will also be delivered in 2016.
Liberty said the company has been able to keep costs in check in recent years, but some expenses are out of its control, such as inflation and insurance, which increased after the fatal Costa Concordia shipwreck.
And finding new ways to keep expenses down has become a company-wide quest, executives said.
“The double-double is like an Energizer bunny; it’s the big battery that everybody’s looking at,” said Larry Pimentel, president and CEO of tiny Azamara Club Cruises. “Let’s just say this company is charged, excited, positive, moving forward at a pace and speed that is delightful to see, and I think the double-double has gotten everybody to be more innovative in thinking about how to make more money.”
On his own brand, which includes two 686-passenger ships, Pimentel gave one example of a tweak inspired by the program. Azamara includes a standard pour of wine at lunch and dinner in the cost of its cruise fare, but not every guest finishes the glass. Instead of over-pouring on the front end, the company is giving passengers a special coaster that will allow them to ask for more wine if their amount isn’t sufficient.
Over the course of a year, Pimentel expects savings of “hundreds of thousands of dollars on each ship.”
The upscale brand is also moving the revenue needle — a key part of the double-double program.
When Pimentel arrived at the company in 2009, passengers were paying an average of $247 per person per day for an average veranda stateroom on Azamara ships. In 2014, that daily rate has ballooned to $476 per person.
He has found success among veteran cruisers and newcomers — about 22 percent of passengers have never taken a cruise before — by positioning the brand as destination-focused, with overnight stays and immersive experiences on land.
“In order for us to get a foothold, I think outside the ship,” said Pimentel, who also holds the title of the parent company’s chief destination experience officer. “I think that’s something that the corporation has allowed me to contribute not only with respect to the brand but also as someone who runs the global tour operation for the corporation.”
Royal Caribbean Cruises has confirmed it will roll out a subsidiary called TourTrek that will create land-based tours around the world, but the company is not yet releasing details.
Even before that launches, some of Azamara’s focus on land is trickling to other parts of the business. Pimentel said inside-access programs are being introduced for suite passengers on other brands, and the upscale Celebrity Cruises is offering guests the opportunity to attend cultural events.
That 11-ship line, which describes itself as a “modern luxury” product, has placed a greater emphasis on destination-rich itineraries and activities (including one or two nights spent in port) over the past few years, CEO Michael Bayley said.
In addition to destinations, Celebrity has been focusing on appealing to affluent customers with the design of its ships — especially the five-ship Solstice class, which rolled out between 2008 and 2012 — as well as food and wine.
“Our brand has started to perform well from a financial perspective, and I think that’s a consequence or an output of the focus we put behind understanding our customers, segmenting the marketplace of our customers, really figuring out the delivery of this experience that people are more than happy to pay for,” Bayley said.
To add a more exclusive luxury element, Celebrity is introducing a “suite class” experience in April, featuring a private restaurant, complimentary drinks, VIP lounge and butler service. And just last week, the line announced that it had ordered two new 2,900-passenger ships, due for delivery in 2018 and 2020.
“We think the timing is absolutely perfect, specifically as it relates to our target market in the USA,” Bayley said. “We see affluence in the American market increasing.”
Namesake brand Royal Caribbean International is also working to make its image more upscale with Quantum, which boasts high-end retail and classy public spaces that many cruisers have compared to Celebrity’s Solstice ships.
“The days when you could rest on your laurels are long gone; success does breed success, but it also breeds an expectation for further success, so we have to be our own biggest competition,” Fain said during an interview aboard the ship. “I think the objective is to raise the image of the Royal Caribbean International brand, and it’s clearly successful in that regard.”
In addition to raising the image of the brand, the Quantum-class ships are built to make more money, with more balcony staterooms and suites and even virtual balconies inside that allow for higher fares, Liberty said. The ships also have more venues that can generate revenue on board (many of which Royal Caribbean has rolled back to older ships in the fleet).
“I think this helps establish the leading positioning of the brand in the marketplace, and while this ship is getting the very high premiums today, some of that rubs off on the rest of the fleet,” Fain said.
Within the last 18 to 24 months, Liberty said, Royal Caribbean has put better systems in place to help the company manage pricing and decisions about which customers globally it should target.
One particular part of the globe the company is targeting in a big way is Asia, specifically China. While deployment in China next year will represent only 6 percent of the company’s capacity, executives see a big upside for now and huge future potential — as well as significant challenges.
Royal Caribbean International started sailing from China in 2008 with one of its smaller ships; by this year, it was sailing two 3,114-passenger Voyager-class vessels there seasonally. So far, nearly a million Chinese travelers have sailed on the line, mostly out of China, said Royal Caribbean Cruises president and chief operating officer Adam Goldstein.
Earlier this year, the operator announced a stunning new plan: Just six months after launching in the New York area, the new $1 billion Quantum of the Seas would head to its new home port of Shanghai.
“I think what they’re showing is they’re confident and committed to this market that is ultimately going to revolutionize the industry,” said Carolyn Spencer Brown, editor in chief of the site CruiseCritic.com. “They’ve been in China for awhile now, and sending the brand-new ship to China was the biggest wow moment of the year.”
Royal Caribbean’s competitors are also in China, but none with new ships.
“We’re bringing the very best right to them. One of the things that’s crucial to understanding the emergence of the Chinese travelers is their very strong sense that they should have access to the best of everything,” Goldstein said. “They come very quickly to know who has the best ships, and why aren’t they in China?”
Morningstar equity analyst Jaime Katz said the deployment of Quantum essentially “makes them the first mover in the market whether or not they were the first mover in the market.”
“They’re willing to say, ‘We’re putting the best technology in the market,’” Katz said. “It could be genius, and it could be a total bomb.”
Liberty, the CFO, said the company’s goal is to “own” the market. From a profitability perspective, he said, the strategy is doing “exceptionally well.”
“The Chinese consumer spends quite a bit for the ticket, but they also spend a lot on board,” he said. While port costs are higher and sales and marketing efforts are not as efficient as in North America, Liberty said the company believes Quantum will do “at least as well” out of Shanghai as it would sailing from New Jersey.
Goldstein pointed out that “enormous” challenges still lie ahead: increasing awareness among consumers and travel agents, growing agent distribution and developing infrastructure at ports of call, especially in Southeast Asian destinations such as Malaysia, Thailand, Indonesia and the Philippines.
Still, Royal Caribbean recently announced yet another foray into the market: a joint venture with Chinese travel company Ctrip and other partners to form SkySea Cruises, a product created specifically for the local market that Fain has described as “a national cruise line for China.”
Royal Caribbean will own 35 percent of the company, as will Ctrip; the rest will be owned by SkySea management and a private equity fund. Sailings will start in mid-2015 with one ship, the former Celebrity Century, which Royal Caribbean sold to Ctrip earlier this year.
“There’s a market or segment for nationalistic Chinese cruising versus a segment that wants to go on cruises but has a western international flair,” Liberty said, comparing the venture to the company’s other market-specific brands such as TUI Cruises, a joint venture in Germany, and CDF Croisières de France. “It’s a different market, it’s growing the pie.”
Even as the cruise operator is making major moves externally, it is undergoing some internal changes.
Goldstein, who left his previous job as president and CEO of Royal Caribbean International in August when he was named to the parent company position, has still not been replaced at the brand.
“It’s obviously a key position,” Fain said. “The good news is that we’re not forced to rush ... He had a very strong team and so we’re fortunate enough not to feel the pressure that we should act before we’re ready.”
Also vacant are positions for the global chief human resources officer and vice president of customer intelligence.
Fain, 67, who started working at Royal Caribbean in 1988, joked that he’s entertained notions of retiring “for 25 years.”
“But right now I’m still learning, and as long as I’m still learning and enjoying myself, and as long as the board is happy, I’m still doing it,” he said. “Now at some stage I won’t feel I’m learning as much or having as good a time or the board might not be as happy, but I don’t know when that happens.”
Fain said his biggest challenge today is the same it was five years ago: “Convincing the people who have never tried to cruise or teaching them all that cruising has to offer. And that’s a constant battle, but it’s one that we’re winning slowly. I just wish we were winning it less slowly.”
Spencer Brown of CruiseCritic.com said that’s an area where the Royal Caribbean International brand excels: attracting those who have never cruised before. She said their success comes through establishing partnerships with well-known brands that any vacationer can identify with and through “innovative and inventive” ships.
“I don’t know how many people on each cruise are going to go on bumper cars,” she said, referring to a new feature on Quantum of the Seas. “But boy, visually you get the feeling that it’s not grandma’s cruise ship company.”
The “bells and whistles” that Royal Caribbean is known for including — they pioneered rock climbing walls and surfing machines and, with Quantum, a skydiving simulator and capsule ride that extends 300 feet above sea level — make the ships destinations unto themselves, said Derek Brent, president of travel agent franchise company Travel Network/Vacation Central.
“The bumper cars, roller skating, the Xbox — even that little hot dog stand,” he said of the activities in Quantum’s new enclosed SeaPlex activity area. “When you look at it, you say, ‘My God, they think of everything.’”
Royal Caribbean Cruises
Brands: Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur, CDF Croisières de France, TUI Cruises (50 percent joint venture).
Employees: 63,494 globally, including 57,368 shipboard, 5,532 full time on shore and 594 part time on shore.
Employees in South Florida: 3,367.
Passengers carried: 4,884,763 in 2013.
Stock price: $78.66.
Market cap: $17.52 billion.