How Carnival Corporation Plans to Deal with Caribbean Competition

The cruise industry leader pushes for higher ticker prices, plans Australian expansion next year.

Jun 25, 2014 at 10:58AM

Carnival Corporation (NYSE:CCL) reported a better than expected second quarter performance, crediting higher ticket prices and lower fuel costs for much of the gains. Carnival, which operates a total of 10 cruise lines, had non-GAAP net income of $80 million for the quarter, compared to $57 million for the second quarter of last year.

Fewer bookings, but higher prices

Arnold Donald, Carnival president and CEO, told investors that although overall bookings since March are lower than the same time last year, passengers are paying more, part of the company's effort to "drive higher ticket prices." New ships like the Regal Princess, which debuted during the second quarter in Europe, are helping to raise passenger expectations—and how much they're willing to pay to have them met. That's a smart way to counter the lower net revenues that come along with cheaper Caribbean cruises on older ships.

Rp

Carnival Corporation's Regal Princess

The Italian-built 3,560-passenger vessel continues the trend toward wow-factors, with a glass-bottomed walkway 128 above the water on one side, a glass-bottomed bar on the other, an indoor golf driving range, and poolside movie nights. Most of Regal Princess' upcoming sailings will take it through the Caribbean, although itineraries to Scandinavia, Russia, and New England are on the books, too.

Sailing beyond the Caribbean

Despite the Caribbean's perennial popularity with American cruisegoers, Carnival is expanding outside the region, because the company expects increased competition to flatten or depress third-quarter net revenue yields. That competition isn't going to slow any time soon. Royal Caribbean (NYSE:RCL) is bringing two Quantum-class ships on voyages to Puerto Rico and other regional ports of call starting in December. Also later this year, Walt Disney's (NYSE:DIS) Disney Cruise Line will home-port a ship in San Juan for southern Caribbean itineraries.

With Caribbean waters getting more crowded, Carnival has its sights on two of the fastest-growing cruise markets in the world—China and Australia. Carnival has already staked its claim as the biggest vacation-cruise operator in China. Its Sapphire Princess began departures from Shanghai in May, and its Costa Serena will home-port there starting next year, totaling four Carnival-owned ships based in China.

China is currently the world's fastest-growing cruise market—expected to be the second-largest market overall within three years—and Australia's leisure-cruise market is growing at a rapid clip, too. Carnival announced in May that its P&O Cruises brand will add two ships to its Aussie fleet next year, transferred from its Holland America Line. In 2016, Carnival plans to deliver a new Pinnacle-class, 2,660-passenger ship to Australia as well, where it will replace two of the current, smaller P&O ships.

That's a smart move, as the total number of Australian cruise tourists is expected to jump from 2013's 800,000 to a million by 2016. (Australia's cruise market is currently larger than China's, but China's is expected to be twice as large as Australia's in a few years.) Itinerary plans for Carnival's expanded Australian fleet include short getaways, port calls in Papua New Guinea, more South Pacific tours, and trips to Asia.

The upshot

Just as airlines court first-class fliers for their higher profit margins, Carnival is looking to raise ticket prices to bring in more revenue per passenger. That strategy plus the company's plans to expand into booming cruise markets in Oceania and Asia, may help offset the fierce competition for American tourist dollars on Caribbean routes.

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