Fain: Cruise Industry Has Features That Make It Recession Resistant

Navigator of the Seas

Royal Caribbean Cruises is well-prepared to adapt to a changing marketplace, according to Chairman and CEO Richard Fain, speaking on the company’s second-quarter earnings call.

“When circumstances change, we are prepared to adapt. While no one is recession-proof, looking forward, I think the industry has features that make it recession-resistant,” he said. “The growing appeal of our product, the relative price attractiveness, the fixed cost component, the portability of our assets, et cetera; all of these things make us better able to do well even in bad times.

“A good example of that would be China, where Spectrum of the Seas started operating just a few weeks ago,” Fain continued. “Conventional wisdom suggests that bringing a new ship into a market whose economy is weakening ain’t such a good idea. But Spectrum and our other ships there are doing very well, despite the softer economy.”

CFO Jason Liberty said that the company had plans and scenarios it would consider if the economy slowed down.

Liberty said the multi-brand cruise corporation operates a worldwide business that can source guests globally.

“We also have itineraries that go to a thousand different places,” Liberty said. “So what’s available to our guest is much more.

“We also have a much stronger balance sheet and a much stronger liquidity position,” he continued. “And I think we would evaluate our plans in case there was a change in the winds.”

That being said, Liberty said the company was not seeing any of those changes whether it’s booking levels, even daily, or onboard performance.

Looking back to the last recession, Liberty said there was regret that the company pulled back on its growth.

“We would all be talking about higher earnings numbers today, better return profile today, if we hadn’t slowed down our growth or our investment efforts in expanding our global footprint, investing in different projects that would have put us in an even stronger position than we are today.”

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Royal Caribbean and Celebrity Focused on Target Markets

Oasis of the Seas

Working for both the Royal Caribbean International and Celebrity Cruises brands, Chris Allen, vice president of deployment and itinerary planning, said that itineraries are designed to fit the target audience and guest demographics of each brand, supporting their (brand) pillars.

“We work very closely with the leadership groups of Royal Caribbean and Celebrity to ensure that the itineraries fit with their brand. It is a very collaborative approach,” he added.

“We also look at the revenue potential – tickets, onboard and shore excursions – and balance that against key costs. Fuel continues to be the largest expense. Ultimately we look at what the guest experience will be.

“If guests have a great time if they want to come back, and if they tell their friends, then we have been successful.”

“We are looking as far as 10 years out,” he continued. “Before we even order a ship, we have an idea where that ship will be deployed.”

The planning function ranges from minute details to the big picture. “Our team can go from the granular level, like should we depart St. Thomas at 5:00 or 5:30 pm and should we go to St. Maarten or St. Kitts. We go from that level of details, making $10,000 adjustments, to a billion dollar chessboard where we move Oasis-class ships around, and where we are going to place our future new buildings,” he explained. “We are looking at the broad, strategic decisions as well as the micro decisions.”

Among new developments, this spring, Royal Caribbean will be launching Alaska service with the Ovation of the Seas, which will be dividing her time seasonally between Alaska and Australia.

Later this spring, Royal Caribbean will be introducing the Perfect Day at Cococay, after a $200 million transformation of its private island destination in the Bahamas.

“We expect to have 14 ships calling and 2 million guests at CoCoCay for the 2020-2021 season,” Allen said. “We are leveraging Perfect Day throughout the Caribbean for our entire portfolio of itineraries, whether ships are sailing from Southeast Florida, Tampa, Port Canaveral, Galveston, Baltimore or Cape Liberty. All those ships will have the opportunity to call at Cococay.”

Perfect Day at CoCoCay

Royal Caribbean is also upping its game in the short cruise market, with the Mariner from Port Canaveral and the Navigator from Miami, as well as the Independence seasonally from Port Everglades.

For Celebrity in 2020, the new Apex will first sail a brief season out of Southampton before spending the summer in the Mediterranean on mostly seven-night cruises, alongside the Edge, which will have a core program of 10- and 11-night sailings.

“We are expanding the choices and variety of cruises for Celebrity,” Allen said. “Also in the Mediterranean will be the Infinity and the Constellation, and this means one more incremental ship for Celebrity in Europe in 2020.

“Because the Constellation and Infinity are smaller, a lot of their itineraries are concentrated around Venice given the capacity limits there preventing larger ships from calling.”

In Northern Europe, Celebrity will sail the Reflection and Silhouette for the summer.

This fall will see Royal Caribbean returning to the Eastern Mediterranean, calling in Kusadasi, Haifa and Ashdod, and both brands are slated to be back with more calls in 2020.

On the other side of the globe, the new Spectrum of the Seas is being based year-round in Shanghai, while the Quantum moves to Tianjin for the summer season and to Singapore for the winter. “Having these ships in China reinforces our position in the market and region as other brands have vacillated on their position,” Allen said.

“We have also experimented with expanding our itineraries out of China. When we first started up the average cruise length was a little more than four nights. Over time we have added seven- and eight-night cruises, reaching the east coast of Japan and also Vladivostok. By opening up more ports, we are broadening the appeal of our itineraries in the region both for first-timers and repeat cruisers.”

Celebrity is also building up its capacity in Australia for 2020-2021 with the Eclipse to be based out of Melbourne and the Solstice from Sydney.

“The itineraries speak to the different target markets for each brand,” Allen noted.

Royal Caribbean Cuts Steel on Fifth Oasis Class Ship

Royal, Caribbean, ship
PHOTO: Royal Caribbean steel cutting of a fifth Oasis Class ship. (photo via Royal Caribbean International