Richard Fain envisions a golden future for cruising – one in which his firm, the industry’s second-largest multi-brand cruise line operator, enjoys new popularity and profit along with the rest of the industry.
True, recent adverse events in 2011 and 2012 bruised cruising’s reputation and reduced its bottom line. As of mid-2012, RCCL alone had suffered a double-digit drop in stock price, year over year.
RCCL operates a fleet that flies the flags of five discrete brands: Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur Cruises and CDF Crocieres de France. RCCL also has a 50 per cent joint venture interest in a sixth brand, TUI Cruises, with its other partner, TUI, the powerful German travel consortium. TUI Cruises is designed to tap into the growing and lucrative German market. In addition to cruise-only vacations, RCCL offers cruise tour vacations in Alaska, Asia, Australia, Canada, Europe, Latin/South America and New Zealand. The RCCL brands collectively will be taking delivery of at least three more ships by 2015.
In 2012, Europe’s financial crisis and the Costa Concordia’s sinking followed 2011’s Japanese tsunami and Fukushima nuclear accident, along with the turmoil in Libya, North Africa and the Middle East (during which Egypt, a highly popular cruising destination, was basically shut down as one). Fain concedes that those events were “very dramatic”—more extreme than the business had ever known.
The drama continued – in February, Princess Cruises’ Crown Princess and Ruby Princess were hit by norovirus outbreaks and in the same month, the Costa Allegra lost power and went adrift in piratical waters off Africa. And a group of Carnival Splendor’s shorex passengers were robbed in Puerto Vallarta, Mexico.
RCCL’s second quarter results, released in late July, featured a net loss of $3.6 million, or two cents per share (compared to a profit of $93.5 million, or 43 cents per share, in the same period last year). But the results also contained a forecast that, for the full year 2012, net yields will increase 2-3 per cent on a constant-currency basis and as much as 1 per cent on an as-reported basis. Earnings per share will be from $1.70 to $1.80. “There is no question that these events have been enormous actors in the market,” says Fain. “But we’ll have some yield increases this year, as in 2011.”
The second-quarter report also closely tracked the inevitable wavering of demand. For example, although demand remained solid in the Caribbean and Asia, for Europe, larger-than-anticipated discounting was required. “The steady drumbeat of negative news emanating out of Europe is certainly having an impact,” says Fain. “As a result, we are seeing pluses and minuses in the different geographical markets. North America is holding up reasonably well. Asia is a big plus; but Europe is a pretty consistent minus.”
Luckily, RCCL was able to offset more than half of the yield declines through additional spending reductions. “Overall we have seen about a 100 basis point drop in our yield projections, but we expect to offset over half of this decline with lower spending,” explains Fain. It was also lucky that the strengthening of the US dollar and decreases in fuel pricing in effect offset one another, according to the second-quarter report.
The results also portrayed the impact of the Costa Concordia tragedy as likely more significant in the second and third quarters than in the first or fourth. Still, the company reported that overall, booking trends continue to normalise and booking is now running at levels comparable to prior years’ activity.
“It is hard to distinguish how much of the pressure in Europe is connected to the Costa Concordia incident and how much is due to the economic roller coaster,” says Brian J. Rice, executive vice president and chief financial officer at RCCL. “Our sense is that the former is no longer having a major impact on our bookings, especially among experienced guests. However, the timing of the incident left a big gap during our peak booking period and filling that gap is disrupting our normal booking patterns.”
Fain echoes those sentiments. “To be sure, our yields were less than we had hoped. But, considering in both 2011 and 2012 the economy was lackluster, they held up.” For example, Royal Caribbean expected double-digit increases for its cruises out of China. It had to settle for more modest ones. But it was grateful for those and will be moving a second ship to China in 2012. Royal Caribbean will also be expanding its existing presence in Australia, another growth area.
Early bookings in other areas, such as the eastern Mediterranean, also implied very positive yield improvements. These, too, did not materialise as envisioned. But that was partly attributable to the industry’s previous capacity increases in the area, Fain asserts. After that market’s fall in 2011 (one of the biggest such falls in cruising’s history), a more diversified RCCL has enjoyed better overall results although it has taken a noticeable hit in bookings since the start of 2012.
“Still, for us, in this type of environment, to be looking at yield improvements for the whole year shows how strong we are. In this kind of situation, most businesses would be talking about how much worse things are. We’re actually saying things are getting better but not as fast as we expected,” says Fain.
He explains that part of the profit paucity also relates to RCCL’s known penchant for risk-taking in the market – for trying new things (itineraries, deployments, programmes, hardware) that don’t necessarily have an immediate or even mid-term payoff. For example, in 2011, it had reallocated capacity to certain itineraries and deployments in Europe – precisely those markets, it turned out, that were upended by adverse geopolitical events, over which it had absolutely no control.
“Fortunately the management and the board here are very focused on long-term performance,” he says, “so there is a willingness to try new things and to undertake activities that don’t necessarily pay off instantly. We think that’s true of some of our marketing programmes, our relationships with travel agents, and even our onboard programmes, which may take a while for people to appreciate, to get their arms around.”
Meantime, despite untimely and unforeseen hurdles, nautical or geopolitical, Fain and RCCL remain in the profits race and glam game, to put it mildly. They’re riding a wave of consumer excitement over their incessant newbuilding – which has lately comprised the ships of the Solstice class (for Celebrity, its premium-market brand), and of the gargantuan Oasis-class – Oasis of the Seas and Allure of the Seas (for its flagship unit, Royal Caribbean International, its contemporary-market brand).
During 2012, as in immediate prior years, RCCL has continued the extraordinary, proto-luxury Solstice buildout. The final Solstice sister, Celebrity Reflection, is due out in October. “We’ve put some very special things on her that take Solstice up to a whole new level,” says Fain. “In fact, we’ve made more changes on Reflection than we did on Silhouette (the previous Solstice iteration, which debuted for Celebrity in July, 2011). The earlier Solstice vessels were widely acclaimed; the Reflection equally and emphatically continues that tradition. But we’re hardly resting on our laurels. Our team has made the Reflection even better with new interiors, better artwork, the new Lawn Club (a clear homerun).” He predicts that, just as on Celebrity Silhouette, the new Hideaway will soon be packed day after day with many more guests than projected.
This is an abridged version of an article that appeared in the Autumn/ Winter 2012 edition of International Cruise & Ferry Review. To read the full article, you can subscribe to the magazine in printed or digital formats.