Here are my takeaways from Royal Caribbeans recent earnings calls covering its 2017 financial year.
Royal Caribbean committed itself to double its Earnings Per Share and its Return on Invested Capital. It did accomplish this goal through its ‘double-double’ program. Earnings Per Share has doubled to $7.53 and Return on Invested Capital has doubled to 10.5%. Interestingly, Norwegian, in its own most recent earnings call, talked about a similar program and was also able to double Earnings Per Share and Return on Invested Capital. Both companies feel good about the industry’s future.
Richard Fain Chairman and Chief Executive Officer of Royal Caribbean summed up last year’s efforts as follows: “..in order to reach such inspirational goals, we had to raise our gain in many, many areas. We need to increase the preference of our brands earn in the market place. We needed to upgrade our already excellent revenue management systems. We needed to upgrade our on-board product, we needed to reduce our energy footprint and we needed to upgrade the caliber and engagement of the men and women who produce these results…”. As Royal Caribbean felt that this achievement would not have been possible without the passion and commitment of its people, it decided to give them a surprise reward. Every one of its 65,000 employees will receive a bonus equal to 5% of their salary. It is calling this a thank you-thank you bonus. It will be in the form of equity grants, investing over three years, thereby giving every employee a stake in the company’s future. The program also includes major upgrading of crew facilities and recreation areas. “Its people are what make the company’s business” said Fain. It wanted to show its appreciation in a tangible way and reach every employee regardless of level of the organization.
It is therefore no surprise that Royal Caribbean has been named – for the third year in a row – one of the most ethical companies in the world by the Ethisphere Institute in the Lodging, Leisure and Recreation industry. This is an organization that measures corporate ethical standards and promotes best practices in corporate ethics.
Challenges in 2017 included the need to redeploy its Korea sailings, the unprecedented impact from the 2017 Hurricane season, a stronger dollar and numerous geopolitical activities. Bookings were relatively soft for the six weeks following the hurricanes. Trends normalized in November and have been within its expectations since then.
Outlook for 2018 and beyond: The company believes it is heading into another record year. It is booked ahead of last year in terms of load factor and rate. The market is so strong that it may raise prices further as the year progresses. Whe wave Season is off to a good start with booking trends above the same time last year. The demand strength has been particularly evident in North America, with bookings up nicely for sailing on both sides of the Atlantic. First quarter Caribbean sailings were on a very strong book position before the storms, recovered relatively quickly afterwards and are ahead. Asia Pacific itineraries have also been trending well. Demand for both Mediterranean and Northers Europe sailings has consistently surpassed the company’s expectations. Symphony of the Seas is garnering significant premiums.
Royal Caribbean is pursuing innovations that will make the whole cruise vacation as friction-less as possible. This mostly digital innovation touches every aspect of its business and focuses on the overall guest experience. The company has been shifting marketing investment, marketing, organization and expertise gradually more towards the digital channel. Project Excalibur will accelerate the integration of the organization and its product into the digital universe. Beyond the guest experience, Royal Caribbean is making its ships more energy efficient, enhances ship management and puts connectivity in the hand of its crew members.
Experience v. things:
Fain stated that today’s consumers buy experiences, not things. The company is creating vacations which are rich in made-to-order and memory-making moments. It is also enhancing its product offerings by increasing experientially focused itineraries: The Celebrity Flora will operate around the Galapagos Islands starting in 2019.
New Ships/new destinations/Upgrading programs/ Capacity:
The Symphony of the Seas- the world’s largest cruise ship with an array of dining and entertainment option – just debuted in the Mediterranean and will relocate to Miami in October. The Celebrity Edge will debut in the fall. According to the company, this new ship has generated an extraordinary level of interest. Azamara Club Cruises – another Royal Caribbean brand – will introduce the Azamara Pursuit in the summer. Royal Caribbean now sails two ships to Cuba – the Majesty in the Seas and the Empress of the Seas. With Mariner transitioning back to North America to make way for Specturm of the Seas arrival in China in 2019, Royal Caribbean’s Asia Pacific capacity is decreasing year–over-year and will account for 17% of its inventory. The company is building on a very successful 2017 European season with 17% of its capacity in this region in 2018. Symphony of the Seas will spend her inaugural summer season in Europe replacing Freedom of the seas in Barcelona. Azamara Pursuit will debut in Europe towards the end of the summer. The company has the benefit of a global footprint and this global capacity will be spread across its brands, markets and most importantly across segment where the company focuses on new to cruise travelers. Full-year Capacity will increase by 3.9%. Caribbean itineraries will account for just over half of its full-year capacity. Mariner of the Seas will move permanently to South Florida mid-way through the year after she re-positions from Singapore and undergoes a significant modernization during a six-week dry-dock.
Questions from investors:
Asked whether Royal Caribbean is concerned about softness in the Caribbean market, it stated that it feels good about this region. The softness in the market after the hurricanes was overcome within four to six to seven weeks. Royal Caribbean feels fortunate, as it has Symphony of the Seas coming into the Caribbean towards the end of the year; it also has got celebrity edge. Royal Caribbean is also introducing Mariner of the Seas to South Florida after an extensive modernization and revitalization, and this product will be put in the short market, meaning it will sail shorter cruises. Another investor who conducted a channel check also noted a lull or softness in the Caribbean market. The company stated the company may have decided to reduce volumes in some channels as this particular channel may not offer was it was looking fill. In addition, competitors, when a new product enters into the market, may have some challenges which may cause them to offer fairly aggressive pricing. Royal Caribbean does not think that the project Excalibur will have an immediate impact on on-board spending. The company has seen an acceleration of new to cruise travelers coming to its brands
Royal Caribbean’s price integrity program has been a big success for the company and it will be continued. A non-refundable deposit pricing program for the Royal brand has also proven to be very successful. In terms of asset disposal, Royal Caribbean expects to dispose of a ship per year. Given the emission requirements further tightening in 2020, Royal Caribbean’s ships may be more valuable in the future as its ships already fulfill may of these eco-regulations.