Keynote: Suite success and a virtuous circle for RCCL

Although quarterly results are just one way of measuring the success of publicly listed cruise lines vis a vis their competitors, they are eagerly awaited by press and pundits and by the cruise operators’ financial professionals – and are picked apart with great attention to detail when released. The 2015 second quarter results for Royal Caribbean Cruises Ltd., released in July, did not disappoint. The company reported a 26% increase in second quarter earnings and said it expected full year earnings to be almost 40% above last year.

Net yields were up 4.2% thanks to strong performance in the Caribbean and China, both of which regions are predicted to continue to impress. Other key drivers of growth in recent months are factors outside of the company’s control – foreign exchange and fuel rates – but they added to the beneficial effects nonetheless. Gratifying bookings levels led the company to predict another record year of earnings, with positive trends extending into the first quarter of 2016 and bookings for that quarter setting higher prices.

Royal Caribbean hailed “another solid step towards the Double-Double” as earnings per share continued to edge upwards. The company’s Double-Double programme, launched in July 2014, set ambitious targets to double Royal Caribbean’s per-share earnings by 2017 over 2014 levels as well as to raise its return on invested capital by double digits.

The healthy trends reflected in the results affirm the business decisions that the company has taken, says Richard Fain. “They show that our strategy is working. As we have ensured that our brands perform at peak levels, guest satisfaction statistics have reached record levels and that’s driving some very powerful figures. As the image of the brand rises, along with the price we can command, we are generating increased profits. In turn this justifies building new and better ships. We are in the middle of a virtuous circle at the moment.”

He comments: “I think so far economies around the world are doing significantly better, helping drive markets. Clearly we have become a more global company, so we obviously see our business impacted by more global activities. Whereas years ago we had to focus on the US economy, now anything anywhere in the world impact us, but right now it is working well for us.” Growth in capacity to meet the surge in demand from new markets is continuing apace, following a period of some years of slower expansion. Indeed, two of the six brands that operate under the auspices of the world’s second largest cruise company are currently contributing to a capacity boom in the industry. Royal Caribbean International launched Anthem of the Seas in the spring and will welcome both the new Oasis-class ship Harmony of the Seas (from STX France) and Quantum-class Ovation of the Seas (Meyer Werft) in spring 2016.

Then there is TUI Cruises, which brought Mein Schiff 4 to market in May, and in June undertook the keel laying for Mein Schiff 5 (due next year) and the start of production on Mein Schiff 6 (set for 2017 delivery). Two further options have been confirmed for the subsequent two years.

Despite all the positive indicators for the business, international markets have hardly been stable recently. Indeed, when I spoke to Fain, the Chinese Yuan had undergone a second devaluation in a week and ongoing concern about China’s stalled growth was worrying investors worldwide. Given the growing importance of China to Royal Caribbean’s current and future deployments, the economic slump in the region has to be of some concern.

“China is a very important market for us, and one where our brands have done particularly well,” says Fain. He admits, however: “It is an expensive market to operate in and we will need to continue to watch it very closely.”

Despite the realism inherent in that last statement, his outlook remains optimistic given the company’s success to date in the region. “The reception of Quantum of the Seas was incredibly successful, and it’s clear the market values the fact that we are bringing new ships to China, and appreciates all their features.

“The bigger news is that we’re taking Ovation of the Seas to China. It’s a huge commitment on our part as we believe we have a very strong competitive edge in that market despite some of the high fixed costs of operating there. We are growing in that market.”

Of course, the company has established a foothold in other areas of business in China, enhancing its options further. Royal Caribbean’s partnership with Chinese travel agency giant Ctrip through SkySea Cruises was a bold step for the company when it was announced in November last year. Looking at progress since that early revelation of intentions, Fain remarks: “We are very happy with our partnership with Ctrip. They are clearly the leading online travel agency and are very knowledgeable about the Chinese market.

“Our relationship with them is very strong and very powerful and we look forward to ways to enhance that to another level. Having just started this brand new operation, we are very happy with the partnership. The ship recently started operating and we are optimistic it’s going to be successful for both parties.”

Fain is known for saying that he would like cruising to offer rather less ‘value for money’ than it has in recent years. One strategic move towards ensuring that ticket prices deliver better revenue and profit for the company took place earlier this year when Royal Caribbean stopped offering last-minute discounting.

“I think we’ve been very open and transparent in terms of wanting to make sure we offer the best product,” says Fain. “We have taken a number of steps to enhance the product, and we’ve also taken steps to reduce some of the very dramatic last-minute discounting that so many of our guests find inappropriate. Many of our travel agents support this change. This will help us have a more consistent price policy going forward.”

In July, Royal Caribbean International announced the introduction of the Royal Suite Class to its accommodation and onboard experience options. The programme, which the company says is “designed to focus on a distinctive and personalised service and touch every aspect of the guests’ experience” will allow for innovations to be introduced in the new ships and is likely to keep the revitalisation teams busy retrofitting luxury improvements to some of the older ships. Some of its features will be achieved through added and enhanced services to guests, such as ‘Royal Genies’, trained and certified by the British Butler Institute, who will serve as 24-hour personal assistants.

The Royal Suite Class will present many opportunities for added revenue by boosting the level of luxury in several classes of cabin. “In some cases there will be physical changes, in other cases, it is more on the software side,” says Fain, “the most important of which are the personal services extended by the crew members. Royal Suite Class is just a way of making the time onboard better if you have bought into it. This will include private dining rooms; complimentary fastest internet at sea; complimentary access to different parts of the ship; butler service; and general upgrades. It’s all part of our continuous improvement philosophy.”

Fain says that deepening the level of service available is part of the long-term plan for the brand: “Royal Caribbean International has expanded into a truly global brand which has been very successful for us. We keep upping our game with respect to our ships and the offer on board, as with the Royal Suite Class concept. There will be an even higher level of service in suites, in keeping with our strategy of having a breadth of activities and choices in place.”

He expects the two newbuilds, Harmony of the Seas and Ovation of the Seas, to further embody the best aspects of their respective classes. “The Quantum and Oasis series are two of the most successful ship categories ever released and we are simply refining that,” he remarks. Both of the series of ships are incredibly innovative. I don’t think the intention was to do something fundamentally different with the new ships. Every time we design a new ship, we ask: what can we do better? Frankly we didn’t see a lot that we would do differently.”

He is pleased with progress at the other brands within his remit. “Celebrity Cruises, with its modern luxury concept and its itineraries, guests and food offerings, remains at the top end of a competitive market.

“Azamara Club Cruises’ destination intensification has set a trend for the whole industry; we are seeing more and more people adopting that philosophy. Clearly our guests like it. Azamara was first with the concept and again that is leading to record levels of satisfaction.”

It has been some months since the RCCL board confirmed that it had agreed to look into the potential for new ships for two-vessel operator Azamara. Fain says: “Our policy is never to comment until we have made a formal commitment, but given our continued strong performance it’s clearly something we are looking at.”

The current fortunes of the joint concern with fast-growing German brand TUI Cruises understandably win Fain’s approval. “TUI Cruises continues to excel and to appeal to a very clear market segment. It is consistent and careful to continue to operate to its strengths. In any market, good operators should not try to be all things to all people, but to satisfy their guests. That’s what TUI Cruises does.”

Not as consistent (except perhaps in scaring shareholders in recent years) is Spanish-language cruise line Pullmantur, which has seen its star decline further lately, not least due to ongoing problems in the once-promising Latin American market. Croisieres de France is also under scrutiny in the French-speaking markets it serves. “Pullmantur is developing its offering to react to the changes in the market it services – as is Croisieres de France,” says Fain.

“In particular, Latin America has been in a difficult economic environment. But the beauty of our strategy is that we can move around and deal with retirements as they occur. We are focusing on that today with Pullmantur, leading to a reduction in capacity in Latin America, and building up capacity in Spain and other markets.”

The global company’s new Espresso reservation system was set up in January with the intention of helping the brands’ travel agent partners to sell cruises more effectively. Fain says: “The bulk of our sales continue to be through our travel agency partners and we think it will continue to be the dominant force. History has shown how important the travel agent is to all our success, so it’s important that we work jointly to make them more successful. If they are more successful, we will be more successful. “Automation is of course today a key arrow in anybody’s quiver; you have to get that right. The focus of Espresso was to give the agents one more important tool to make it easier for them to sell our cruises. Reaction to it has been extraordinarily positive; it is an extremely useful tool and we will continue to build on that in future.”

Over the coming months, the company’s planned programme of revitalisation works will continue on selected ships across the brand’s fleets. “We will be enhancing our fleet revitalisations with upgrades, bringing features from the new ships to the older vessels,” says Fain. “There are many new ideas but they are just a continuation of our upgrade programming.”

One ship that will receive somewhat different refurbishment details than previously expected is Royal Caribbean International’s Majesty of the Seas, which was scheduled to be moved to Pullmantur in 2016 but which will now not be transferred for the time being. Fain explains: “We made the decision to not move it at this time – to delay the move – both because of the situation in the Latin American market and the needs in the Royal fleet.” Following refurbishment, the ship will stick to Royal itineraries for now. Two aspects of the rolling upgrades that are consuming plenty of Fain’s attention right now are the advanced wastewater purification and emissions purification systems that are being installed across parts of the fleet to enhance environmental compliance and trim running costs. He says they are “two of the most challenging and expensive areas – but they seem to be coming into play nicely and we are moving very positively there.”

Certainly the emissions measures will continue to help offset fuel costs which, even during an extended period of lower than usual oil prices, are not insignificant. Just to give an example, RCCL revealed in its quarterly results that bunker pricing net of hedging for the second quarter was US$599 per metric ton and consumption was 338,000 metric tons, amounting to a hefty sum annually on fuel alone. The company allowed for US$818 million of fuel expenses in its full year 2015 guidance.

For a man in charge of a business with so many moving parts, Fain always seems to project an affable, almost laid-back demeanour in conversation. Asked what he is currently enjoying most about his work, Fain says: “I have the best job in the world. I work with people who are passionate about what they do. It always amazes me they come up with new and better ways to do things. They are always striving. To be around people like that is really inspiring.” He adds: “To quote a well-known television series, I love it when a plan comes together. And it does seem that all the things we have worked so hard to develop over many years are coming together in a tremendous way.”