Royal Caribbean Cruises Ltd.: Innovation At A Cost?

Abstract

With 39 ships fewer than five separate brands sailing in and out of dozens of ports worldwide, Royal Caribbean Cruise Lines, Ltd. is one of the world's premier cruise providers. They have been growing this fleet with new additions, such as Oasis of Seas and Allure of Seas. By launching these new ships in the middle of the current recession, how will it differentiate in the market? Going forward, what should be their growth strategies amid the gloomy economic forecasts? Keywords: Strategic Management; Travel Industry; Service Operations Management CURRENT SITUATION n the 2 nd Quarter 2010 investor earnings teleconference, Royal Caribbean Cruises Ltd. (RCL) CEO, Richard Fain, announced a profit, recovering from a loss the previous year. RCL increased earnings by 10 cents per share, mostly by cost control strategies. Fain also mentioned that cruise bookings were up from last year and stabilizing even though the economic conditions remained uncertain. The company reported a profit of $60.5 million, or 28 cents per share, compared with a loss of $35.1 million, or 16 cents per share a year earlier. The previous year included costs of 5 cents per share related to the H1N1 virus and 11 cents per share due to currency adjustments. Net yields rose 5.4% compared to a 14% drop in the previous year, which is an important measure of profitability for the cruise industry. Net cruise costs fell 2.8%, but excluding fuel costs, actually declined 4.4%. Fain has remained optimistic that the company will continue to make strides in innovation by making each ship better than the previous one. (Investor Relations Overview, 2010) RCL also reported that with the exception of currency exchange rates, the current revenue environment has remained stable. Additionally, booked load factors and average per diems continue to run ahead of same time last year for the back half of the year. Third quarter 2010 Net Yields are expected to improve approximately 7% on a Constant Currency basis, or 4% on an as-reported basis. Full Year 2010 Net Yields are expected to improve approximately 4%-5% on a Constant Currency basis and 3%-4% on an as-reported basis. NCC are forecasted to be down 1% for the third quarter and down 1%-2% for the full year of 2010. On a Constant Currency basis, NCC are forecasted to be flat to up slightly for the third quarter and down 1% for the full year of 2010. "Demand for our cruises remains on track with our earlier projections," said Brian J. Rice, Executive Vice President and Chief Financial Officer. Rice continued, "The strengthening of the US Dollar will clearly result in a reduction of our reported yields, but it also provides a corresponding reduction in expenses. Most importantly, our continued focus on cost controls and efficiency is driving improved earnings." (Investor Relations Overview, 2010) The current economic state of both the United States and the world is not exactly ideal. With unemployment near 10% in the Unites States alone, the cruise and vacation industry faces tough challenges. This industry heavily depends upon household discretionary income which tends to decline during a recession. With that said, this market segment still likes to take vacations. As evidenced in late 2009, when Royal Caribbean announced the newest and largest cruise ship in the industry, the Oasis of the Seas, cruise customers remained willing to spend their dollars on luxury vacations. The statistics indicate that customers are not only paying higher ticket prices to get on this ship, but once on board, they are spending more as well. With a guest capacity of 5,400 passengers, 2,700 staterooms, 16 decks, and a weight of 222,900 gross tons, the ship has surprised both the passengers and the RCL executives.