Why Royal Caribbean Is Sending Its Coolest Ship to China

CEO Richard Fain talked to The Motley Fool about why his company is pulling out all the stops for Chinese cruisers.

Aug 12, 2014 at 10:24AM

When Royal Caribbean's new top-of-the-line ship, Quantum of the Seas, arrives at its home port of Shanghai in May 2015, it will be the first time a Western cruise line has sent its newest ship to a Chinese city. The splashiest new vessels typically ply North American and European waters, catering to what have traditionally been the biggest markets for leisure cruises. But Royal Caribbean International (NYSE:RCL) Chairman and CEO Richard Fain said his company believes the Chinese cruise market -- already the fastest-growing in the world -- is positioned for unprecedented continuing growth.

Quantum Side View

Quantum of the Seas. Royal Caribbean International

Fain spoke to The Motley Fool about Royal Caribbean's plans for China, starting with the deployment of Quantum after a winter run of Caribbean cruises from New York City. Quantum is a huge boat laden with over-the-top features such as indoor skydiving and 18 restaurants. "We've had our newer and larger ships out there [to China]," Fain said, "but this is the first time anybody's even contemplated bringing a new ship, never mind a new ship as exciting and innovative as Quantum."

It's not that the North American market is fading. In fact, it's doing well, which is why Royal Caribbean plans to send other new boats to New York after Quantum ships out. But China is in a class by itself, due to the confluence of population, economics, and location.

"The middle class in China is simply exploding. Everybody knows that intellectually, but when you really see what an impact that makes, it's very powerful," Fain said. The company already has two ships successfully home-ported in Shanghai. "We've been growing in China at 40-plus percent per annum recently. We're fortunate that not only is the middle class growing, but almost all that growth is happening along the coast line, where the big cities are. We couldn't have a better demographic transformation to work in."

Perhaps the best analogy for the market potential of China's new middle class is the late 20th-century heyday of the 76-million-strong Baby Boomer generation here in the U.S. -- except that the scale of China's new consumer culture is much larger. "A lot of companies in the United States got tremendous benefits from the Baby Boomer demographic transformation. The transformation of the middle class in China makes the Baby Boomer generation pale," Fain said.

Within the next 10 years, economists project 630 million mostly urban middle-class Chinese, more than eight times the number of American Baby Boomers. According to McKinsey & Company, by 2022 the middle class will make up 75% of China's urban population, compared to 4% in 2000.

Because middle-class spending power is relatively new in China, its markets aren't saturated or suffering from consumer ennui. Like young American Boomers before them, today's middle-class Chinese have an appetite for designer goods and new, upscale experiences—like indoor skydiving on a luxury cruise to Korea or Japan.

Quantum Skydiving

Quantum's RipCord by iFly skydiving feature. Royal Caribbean International.

"You have a market that is hungry for this sort of thing," Fain said. To that end, Royal Caribbean is pulling out all the stops. "We're not going to put surplus capacity there. We're going to put our biggest and our best. Typically you don't want to devote your biggest and your best to a new market, but the Chinese are willing to pay for that."

Royal Caribbean is not the only cruise line adding capacity in Shanghai. Carnival's (NYSE:CCL) Sapphire Princess is in the middle of a four-month season there, and in the spring the company will home port its Greco-Roman-themed Costa Serena, which features a huge Turkish spa and a Grand Prix racing simulator, in Shanghai as well. That move will give Carnival a total of four ships based in China.

Fain said Royal Caribbean hasn't detailed what comes next in China, but "we think [Quantum] will do extremely well. We expect to continue to grow." It's clear that if China's middle-class growth stays on track, the rising tide could lift a lot of boats.

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Casey Kelly Barton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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