Royal Caribbean's Advantage

In a shaky economy, cruise lines don't get a lot of love from Wall Street. Our 180,000-member CAPS community doesn't seem to favor them either, with both Royal Caribbean (NYSE: RCL  ) and Carnival (NYSE: CCL  ) earning only two out of five stars.

However, China's emerging middle class could provide amazing growth potential through a new generation of travelers with a taste for Western luxury. And while both of the companies above have been setting up ports along China's coast for the last few years, Royal Caribbean has also focused on building meaningful relationships with the local government and businesses.

Cruises in China
Royal Caribbean is currently the top cruise line in China, competing with Carnival's Europe-based Costa brand as well as China's own growing domestic cruise industry. Both of the U.S.-based companies have a solid head start, though, since opening a cruise line is very capital intensive and reliant on brand strength to win over the competition.

Usually, foreign companies encounter major roadblocks with the Chinese government when trying to enter the market. The cruise industry, though, has been met with open arms in the hopes of increasing revenue through domestic tourism. In August, the Ministry of Transport and the Ministry of Commerce adopted a policy allowing foreign cruise operations to set up foreign-owned operation agencies in China.

This allows companies like Royal Caribbean and Carnival to deal directly with consumers in China, rather than with domestic partners, which is great for the companies as they work to build their brands and customer bases.

The Royal advantage
Carnival dominates the global cruise industry with a massive 49% market share, while Royal Caribbean sits at a meek 23% in comparison. But that could change.

In September, Royal Caribbean announced a relationship with the Xiamen Municipal Government and China World Cruises, or CWC. The deal involves two things:

  1. CWC will charter one of Royal Caribbean's ships for four months, while Royal Caribbean operates and markets the 21 sailings.
  2. Royal Caribbean and CWC will work with the government to develop the Xiamen waterfront area and harbor district with a theme park, retail units, luxury hotels, condos, and a new cruise terminal.

What does that mean for Royal Caribbean? Well, I think George Buge Zhang, the president of China World Cruises, summed it up quite nicely in the press release: "We believe Royal Caribbean International is the right cruise brand to work with in developing the cruise industry in China. In just a few years, they've established themselves as the market leader and proven they understand local market conditions and Chinese guests' needs and preferences."

It really doesn't get more promising than that.

The cruise industry needs to grow in order to survive, and with Western consumers still reluctant to part with their reduced discretionary funds, China's the place to be. Cruises leaving from Chinese ports grew 18.8% year over year in 2010, further proving the potential. Royal Caribbean has carved out a comfortable advantage in this market, and I think it (and its investors!) stand to benefit from that.

Click here to add Royal Caribbean to your Watchlist and keep an eye on how the company does from here.

Fool contributor Amanda Buchanan holds no position in any company mentioned. Click here to see her holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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