Royal Caribbean Cruises Ltd. plays the growth game

This article first appeared in the Spring/Summer 2015 issue of International Cruise & Ferry Review. To read the full article, you can subscribe to the magazine in printed or digital formats

Adam Goldstein is not the most extrovert of characters but there surely must be times when even he has to restrain himself from screaming out loud when he has to field certain questions from cruise industry financial analysts or consumer media reporters. Which is why – sitting onboard the newly delivered Quantum of the Seas – I admit to hesitating before deciding to play Devil’s Advocate with the Royal Caribbean Cruises Ltd. President and COO and pose what I suspect is his least favourite enquiry: why does the company keep on building new, ever more costly ships?

For as long as both of us can remember, every time Royal Caribbean or any other major cruise company places an order or takes delivery of a new ship, there is a chorus of disapproval from financial analysts about potential overcapacity and the consequent impact on yields (and therefore shareholder value).

Yet without the multibillion-dollar investments that have been made in new ships over the past 25 years, cruising would still be a niche vacation product barely registering on the public consciousness, let alone supporting major corporations and generating US$100bn of economic impact around the world.

But, just for the record, I ask Goldstein to make the case one more time. He says: “Why build any more ships at all? It is simply that we truly believe in the globalisation of this industry. As our ships sail full today, we have no way of handling the new customers which we know are out there in the emerging markets unless we have more capacity.

“With China coming on stream the way it is and the rest of Asia being interested in cruising, too, we feel there is a lot of opportunity going forward and we have to be in a position to take advantage of these markets otherwise someone else will – at our expense. And it is not just Asia as Latin America (albeit in fits and starts) is clearly interested in cruising and we also feel there are still new pockets of demand in the US that we can tap into while Europe – however grudgingly – is gradually recovering from its macro-economic travails.”

He points out that other trends are important to keep in mind: “We have consistently made clear that we are pursuing a more moderate growth path compared to what we have done in the recent past and we also point out that we now have a track record of moving ships from brand to brand or even out of the company altogether. As the ordering of new ships happens way in advance of the movement of older ships, the capacity growth is almost always lower than that which is projected when new orders are made. We have even said that in 2017 we will not introduce any new ships – and that doesn’t happen very often with this company.”

However, he is quick to add: “We have also been very clear with the financial community in our earnings calls and presentations that – not just for Royal Caribbean International but also for Celebrity Cruises – the classes of ships that we have been bringing out since 2005 (from Freedom- and Solstice-class onwards) are very significant profit drivers compared with previous classes.

“These newer ships are very strong performers and, although it is impossible to quantify exactly what the spin-off is for the brand as a whole, we are strong believers that bringing out new ships (which – like Oasis or Quantum – have features that attack the misconceptions about cruising) not only makes the ships themselves perform better but also says something about the brand that resonates throughout the fleet.

“Even if the older ships do not have all the features of the new ones – and we have shown that we can retrofit a lot of them on the older ships – it says something about the whole brand and what we are committed to. And that is clearly helpful to our sales and marketing.”

The company’s chairman Richard Fain has already intimated that one of the reasons for adding so many features and ‘wow factors’ on the newest ships is the potential this gives the brands for leveraging higher ticket prices out of consumers, who are influenced by the perceived higher value of the product on offer.

But does this really help raise the pricing throughout the fleet or can it, in fact, have the opposite effect with the appeal (and perceived value) of the older ships being reduced by the arrival of bigger and better new ones?

Goldstein says: “It is certainly not an exact spill-over but we do believe that Royal Caribbean International benefits from being known as the brand that produced Oasis- or Quantum-class cruising even if people are booking Vision- or Radiance-class ships. We have been able to put a lot of new features on those ships so that they are much better than they were when they first came out but we can’t turn them into Quantum of the Seas.

“Apart from anything else, one of the key reasons we have put so much extra on Quantum is because the ships are going to be doing longer itineraries (from UK, US and China) so we couldn’t stop at just having seven days’ worth of things to do, we needed at least 12 days’ worth.”

Another criticism of newbuilds has been that only the first in the series carries the potential to be sold at premium prices. “Would we expect exactly the same bounce that Quantum will give us from Anthem when it comes out is a good question and one that was very much on our minds when we brought out Allure of the Seas after Oasis of the Seas,” says Goldstein. “We were concerned to see if there was a real ‘second ship’ syndrome so we did add some new things to Allure and we were absolutely stunned by the amount of attention it received – as much as if not more than Oasis.” The option to do that was not there for Anthem of the Seas as the build was so close behind Quantum of the Seas but this time, he says, it is all a question of being new to a particular market.

“If we were bringing Anthem straight to New York as with Quantum, I think there would not be the same bounce and genuine hullabaloo as we are enjoying with the first ship. But the difference here is that we are bringing Anthem to the UK market so, although the ship features are not different, the sourcing and the destinations are. Just as when we brought Independence of the Seas to the UK – although it was not the first Freedom-class ship, it was still new to the UK market so it had a great impact. We expect that to happen with Anthem in the UK and also with Quantum when it goes to China.”

He also makes the point that the new ships have had an impact for the company that goes beyond simple dollars and cents on the ticket revenues. “The knock-on effect of the enhanced reputation they bring to us is not only useful to the agent and the consumer but also to governments around the world who have universally welcomed us. There has never been a place which has said ‘we don’t understand why you would come here’ as people want to be associated with the prestige of these kinds of ships and these kinds of brands. This has been key to our global development.”

As well as China, Royal Caribbean International is very committed to Singapore where it will have a year-round presence from 2015, says Goldstein, adding: “Australia is the natural complement to China in terms of seasonality although we remain limited by Australia’s infrastructure, which is a pity. There is no meaningful progress on the Sydney harbour issues for the larger ships. We have been upgrading to Voyager class there because if we can’t get more slots, at least we can maximise the capacity on the ones we have now. Even so, Asia and Australasia remain the main markets for us in the region.

“I would really like to see things happen in India but there is simply no cruise regime there. The Indians have asked if we would be willing to talk to them again and we will but there comes a point – when you see all that potential there and nothing ever happening – that you just become so frustrated. It is not just a question of broken promises on port infrastructure – important though that is – but it is the tax regime, pilotage, wharfage and dockage; how gambling licences are regulated and how that limits what we can do. Other places have sorted these things out but the Indians never do.”

He says: “I think we know where the do-able opportunities are and we will concentrate on those. But, in Asia, there is a lot of work to be done on ports of call. China (where the government has been very supportive) and some of the other places have done a good job in creating homeports but there need to be more places we can go on the cruises in South East Asia and Oceania.”

New opportunities of this nature will be especially important as the next Quantum- and Oasis-class ships will certainly not be the last new ships to be introduced by Royal Caribbean’s brands in the years to come.