Royal Caribbean Cruises Inc.

Table of Contents

I. Executive Summary…………………………………………………………………...3

II. External Methods- Customer facing methods of capturing market share……………..4

III. Financial Health - Fundamentals for the Future………………………………………7

IV. Internal Factors- Improving operations to ultimately provide more value to the

customer……………………………………………………………………………….8

V. Conclusion…………………………………………………………………………...10

VI. Works Cited………………………………………………………………………….12

VII. Exhibit—Issue Tree………………………………………………………………….13

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Executive Summary

Royal Caribbean Cruises Ltd.(RCL) is a the world’s second largest cruise line behind

Carnival Corporation. Although the company has had success in the cruise industry, there are

several changes RCL can make to ensure seamless transitions or additions to strategy in the

future. The current state of the cruise industry has witnessed a large amount of growth combined

with low penetration, with the number of cruisers moving from 7.2 to 17.2 million passengers

from 2000 to 2012. Furthermore, the market that most cruise line companies are targeting is

estimated to be 132.9 million people in the United States alone, and so far, with a very low

amount of those people having gone on a cruise in 2011 or before.

Because of the growing, unsatisfied growth of potential customers, RCL’s attention

should be aimed towards capturing as much market share as possible to compete with Carnival

and Norwegian. In order to best capture as much of the growing market as possible, we have

outlined a couple of courses of action for RCL to take in order to ultimately answer the question,

“How can RCL leverage its current position in order to capture maximum market share in the

growing market?” It can do so through the following:

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  Focusing the company’s finances and cash flow toward paying down debt

 Expanding into new markets, especially in the Southern hemisphere

 Aggressively pursuing green technologies after the company has greater control over debt

 Shifting source of revenue away from travel agencies toward direct online sales

External Methods- Customer facing methods of capturing market share

RCL owns a fairly deep pool of six brands, each of which act independently from one

another and serve a different geographic market (with some overlap). RCL’s top competitor

Carnival owns a larger amount operating in a similar way. In such a market it is extremely

difficult to capture market share solely on the basis of service differentiation. The coverage of

brands and their respective competition are fairly comprehensive with the most popular areas

being serviced by multiple brands of the same company; this makes geographical differentiation

near impossible, at least for areas that are very popular for travelers. Trying to differentiate on

the ships themselves is equally difficult. The top three companies in the cruise line industry (the

third of which being Norwegian cruises) all publically state in their respective 10-K’s that their

main source of differentiation is their itineraries, products and services; all categories that are

difficult to differentiate.

RCL makes over half of its total revenue from the United States, with the majority of the

remaining revenue coming from Europe. Carnival leads the industry, and has already expanded

into markets including Europe, Asia, and Australia. RCL is continuing to push into new markets

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including Asia. By expanding more into the European and Asian markets, Royal Caribbean can

begin to expand more and take away from some of the smaller companies. Asia and Australia are

both expected to expand in the coming years, as both are underdeveloped in the cruise industry.

Latin America is also an underdeveloped market, and there is large potential there as one of the

concerns in expanding to Asia is that ports are spread further apart, making it harder to visit

multiple exotic locations in short periods of time. RCL is already pushing their Pullmantur brand

in Latin America, in hopes they can be the industry leaders and establish themselves in South

America, specifically Brazil. RCL’s revenues are seasonally based on demand, which is

strongest in the summer months in the Northern hemisphere. Expanding into Australia and South

America is crucial, as both are in the Southern hemisphere, which can offset the sharp decrease

in demand for cruises in the winter months in the Northern hemisphere. This way, demand and

thus revenue can be greater and more evenly balanced year round, as it is always a high season

somewhere around the world.

Because the industry requires expensive equipment, and has large depreciation costs each

year, especially as newer and faster ships enter the market, RCL should aim at expanding both

through first time customers to the cruise line industry as well as trying to take away market

share from some of the smaller companies. Carnival Cruise Lines is almost twice as large as

RCL (roughly 48% vs. RCL’s 23%), and as size matters in this industry, RCL should focus on

attracting new customers, trying to retain the ones that have already been on one of their cruises

before, and aim both of those towards taking away from the smaller cruise lines rather than

focusing on competing with Carnival directly for passengers. Even though RCL’s market share is

overshadowed by Carnival, the third largest player, Norwegian Cruise Lines, only has 7%,

giving RCL, comparatively, a lot more power over the smaller companies.

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 RCL currently invests heavily in travel agencies, and they rely strongly on the agencies

for a majority of their bookings. However, consumers, especially in the United States, where

over half of RCL’s revenue comes from, are moving away from travel agencies and towards

booking directly online. Cruise lines are partially responsible for this decline due to their

aggressive marketing and their strong approach to online sales. Traditional agencies delivered

62% of cruise passenger revenue in 2011, but that was down from 66% in 2010. Agents’ share of

cruise sales will decline further – to 57% – by 2014 according to reports from Travel Market, and

as such the largest cruise lines are going after online direct-to-consumer strategies.

Royal and other larger vacation brands are driving the trend towards online/direct sales.

By being able to reach consumers through their own, cruise lines are able to develop direct

relationships with consumers and able to more effectively target advertising to them. They can

send these consumers coupons, and other travel deals as well as many customer loyalty rewards

that are able to increase the likeliness of customer retention.

We recommend RCL to aggressively continue to pursue their online sales, while making

their site more user friendly by adding features such as the ability to look at the rooms with a 360

degree camera, as well as some of the amenities on each of their cruises as some competitors

have started to do this. Additionally, we recommend RCL implement a larger online advertising

presence in order to stay relevant and lead people towards their websites for direct bookings. It is

increasingly important for consumers to know that they can book their entire vacation online,

similar to other vacation options, so that they can continue to attract first time customers and be

less dependent on travel agencies which are decreasing in use in the United States.

It is important to note that even though this recommendation will decrease travel

agencies’ involvement, the goal is not to actively eliminate agencies from the operations of RCL.

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Though declining, a substantial amount of customers continue to book through agencies, and

relations must be kept with said agencies in order to avoid losing those customers to other cruise

lines (namely Carnival).

RCL also has many other options available to them in order to capture more of the

increasing target market. By lowering prices for cruises and on cruise products RCL can position

themselves to not only take some of the growing global market as defined by their old

positioning, but also take market share in a target market that is more price sensitive. This

alternative represents a less than ideal situation for RCL. RCL owns brands that already target

different customer segments based off of income level with Royal Caribbean International,

Pullmantur, and Croisières De France positioned at the contemporary level (less expensive) and

Celebrity Cruises positioned at the luxury level (most expensive). Lowering prices further will

serve to differentiate RCL off of price, however it will only be for the short term as Carnival will

be able to easily lower their own prices on some of their already more numerous brands; a price

war with Carnival is not a war that RCL can win. Additionally, pricing too low will dissuade

customers who see cruises as a high end luxury experience.

Financial Health - Fundamentals for the Future

To achieve a reputation highlighting the innovation and product quality of its vacation

products in the past 40 years, RCL found it necessary to leverage the firm. As a result, the firm is

among the most leveraged firms in the industry. In such a capital intensive business, it is natural

that RCL’s cap structure is very dependent on debt. Looking to the future, Royal must ensure

that financial decisions made today provide for ease of scale in the future, prevent new

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competitors from entering the market, and pave the way to become the top cruise line in the

industry.

Given the firm’s current situation, Royal Caribbean must turn attention toward the

company’s debt situation. The company’s debt levels are significantly higher than the rest of the

industry. RCL has a high .9 Debts/Equity Ratio, a very low current ratio of .21, and a .48

Debts/Total Capital Ratio resulted in a credit rating of BB-, indicating the potential of a liquidity

risk. By loading the company with debt, RCL has negatively impacted its cash flows and

vulnerability to unfavorable economic and industry condition. While the company is not in dire

need to resolve financial issues today, the amount of debt taken on implies RCL will have

difficulty accessing favorable financing terms to expand its business with this rating. RCL must

rely less on external financing over the next few years to pay off debt, increase firm liquidity,

and have a capital structure that allows for a flexible strategy.

Currently, RCL has 5 ships on order expected to arrive in 2015 costing $4.7 billion. Thus,

RCL cannot purchase more ships and must focus attention on paying down debts for 3-5 years.

The purchased ships are expected to increase revenues and future cash flows for RCL. Because

the cruise line market is very competitive, concentrated and price pressured, RCL needs access to

capital with favorable terms to maintain market share and customer base. Thus, future cash flows

will not be enough to pay down debt. RCL’s 10-K states that the firm would consider the sale of

ships to purchase new ships. Considering the 5-year projected CAGR of 6.8% is lower than the

firm’s historical 3 year CAGR, selling off 2-3 old ships to gain capital to pay down the principal

and reduce interest payments makes sense.

Assuming revenues and future cash flows increase, there are no additions to the current

debt schedule, and debt is not refinanced, RCL will have access to capital to pay down debt.

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Although unattractive, it is in RCL’s best interests to use large portions of cash flows from

operations and to sell off older ships that are inefficient. By allocating and creating capital to

alleviate debt, the firm will find itself with access to favorable financing terms to expand at a

healthy rate. Though this strategy is not directly related to capturing market share, it will allow

RCL to progress unimpeded in the future.

Internal Factors- Improving operations to ultimately provide more value to the customer

Capturing market share can also be handled by a more internally focused route which will

ultimately serve to increase the stability of the company and provide a consistent experience to

the customer (IE avoiding a Costa Concordia incident). Currently, the company is anticipating

rising costs in fuel due to rules and regulations underway that aim towards limiting greenhouse

gas emissions. Fuel costs represent a major expense for RCL as it is one cost that increases

significantly from year to year: fuel costs rose by about 19% from 2011 to 2012. The European

Union has recently reached in agreement to improve the environment by reducing sulfur content

of fuel to 0.5% by January 1, 2020. Additionally, the result of having to adhere to environmental

rules and regulations may be the incurrence of expenses related to the purchase of new

equipment and technology.

To account for the risk of rising fuel costs and government regulation, it is in RCL’s best

interest to aggressively implement green technology. As already stated, it takes several years to

finally receive a ship after having ordered it, and governmental regulations and fuel costs can

change daily. Green technology will not only be a forward facing marketing objective, but will

also heavily mitigate uncontrollable risk. Green tech will lower fuel cost per ship and will protect

RCL from needing to retrofit their vessels in order to adhere to new governmental regulation; a

very costly and time consuming process. To RCL’s credit they already implement a hull design

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to their ships that has an ecological coating that reduces water resistance. The lower water

resistance result in an advanced energy management system that uses less fuel and conserves

power usage; modern hull designs can result in up to 15% in energy savings and ecological hull

coatings up to 5%. Though substantial, investing even more into green systems will allow for

RCL to have lower costs and less down time for retrofitting ships, both factors of which will

ultimately lead to a more consistent customer experience in allowing for consistent prices and

ship availability respectively. Though this is one of our core suggestions, it is worth noting that

settling debt is, at the moment, more important for RCL to handle, and that green implementation

should be handled second.

Another major risk that RCL may potentially face is unstable economic and political

conditions in countries. These conditions depend on the performance of government in countries,

whether they can handle war, pirates, terrorists, health, safety, contagious diseases, political and

economic instability, and other hostilities that may negatively impact the pricing of Royal

Caribbean’s cruise packages. Demand for cruise packages may decline, as well, as customers

will be less attracted to traveling to or near unstable countries. In addition to uncertainties in the

condition of countries on RCL’s itineraries, the company and industry as a whole must cope with

compliance costs. They must comply with industry safety standards, especially in light of the

Costa Concordia incident, changing tax laws in countries, foreign exchange currencies, and

different business environments that all may affect the company’s financials. Nonetheless, by

following compliance costs, the company can potentially increase demand for their cruise

vacations if customers can rely on the company’s performance. Though political instability is

potentially a crippling risk factor, RCL operates their brands in places that tend to be fairly safe.

RCL should always stay vigilant about its offerings near potentially unstable areas, though it is

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not a risk that is absolutely essential to handle in order to increase market penetration.

Conclusion

Although RCL is a moderately healthy company today, it is important to analyze the

company’s standpoint currently in respect to strategies potentially implemented in the future. In

order to do so, it is important to keep checks on current financial health, operational standing,

and market attractiveness.

Based on the above analysis and the current state of the company, we recommend that

Royal Caribbean first address their debt before purchasing new ships. RCL should avoid

purchasing more ships to increase the size of their fleet and focus on taking cash flows from

operations to pay down the debt service in the next few years. By strengthening the company’s

fundamentals financially, RCL will be in better position to receive a higher credit rating and as a

result, access to favorable terms when looking for outside financing to fund capital intensive

projects complementing the company’s long term strategy and goals.

RCL should continue to expand into new markets, especially underdeveloped cruise

markets such as Asia, Australia, and Latin America. Australia and Latin America are especially

important, because by expanding into the Southern hemisphere more, it will create a more

balanced and steady stream of revenue.

We also recommend that RCL increase their attention and reliance on direct bookings

from their website and decrease their reliance on travel agencies for ticket bookings and

advertising. Customers are increasingly booking their vacations online and in order to compete

with not only other cruise companies, but alternative vacations as well, RCL will need to build

up a better online presence.

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 Finally, we recommend RCL to aggressively invest into research and implementation of

green technology. Aside from being a marketable point of differentiation, doing so will also

lower fuel costs and will also protect RCL from any fluctuations in government/environmental

regulation in the future. Both fuel and retrofitting old vessels to adhere to new environmental

regulation are expensive, and lowering those costs will help capture more market share by

offering customers more up time on more vessels at a consistent cost.

Works Cited

Carnival Corporation. 2012 10-K. Carnival Corporation, 2012. Web. 1 December 2013

CLIA Market Research. 2013 Cruise Industry Updates. Web. 1 December 2013

http://www.cruising.org/pressroom-research/market-research

Cruise Market Watch. Market Share. Web. 1 December 2013.

http://www.cruisemarketwatch.com/market-share/

Katzanek, Jack. "INDUSTRY: Cruise Mishap Not Resonating at Travel Agencies."Breaking

News. PE Industry, 19 Feb. 2013. Web. 01 Dec. 2013.

Lenhart, Maria. "Study Sees Agents 'Stagnating' as Cruise Distribution Channel." Study Sees

Agents 'Stagnating' as Cruise Distribution Channel. Travel Market, 26 Nov. 2012. Web.

01 Dec. 2013.

Norwegian Cruise Line. 2012 Annual Report. Norwegian Cruise Line Holdings, 2012. Web. 1

December 2013

Royal Caribbean Cruises Ltd. 2012 10K Report. Capital IQ. Web. 1 December 2013.

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Satchell, Arlene. "Cruise Lines Keep Trying to Shrink Their Environmental Footprint."Sun

Sentinel. Sun Sentinel, 22 July 2011. Web. 01 Dec. 2013.

Satchel, Arienne. "Travel Agents Remain Vital Source for Cruise Sales." Sun Sentinel. Sun

Sentinel, 12 May 2012. Web. 01 Dec. 2013.

Issue Tree

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