Royal Caribbean's Forecast: Sunny Sailing

Chairman and CEO Richard Fain talks with The Motley Fool about what's on the horizon for the company, passengers, and the industry.

Aug 14, 2014 at 7:32AM

Royal Caribbean International (NYSE:RCL) is riding high this summer. In July the company publicly declared its intention to double earnings per share by 2017 and to push its return on invested capital to double digits during that same time. Between now and the end of 2018, Royal Caribbean has up to five new ships in the pipeline, including 5,400-passenger Oasis class vessels that are the largest in the world.

Richard Fain, Royal Caribbean's chairman and CEO, told The Motley Fool what he sees on the horizon for the company and the industry. It's a mix of economic recovery, willingness among cruisers to pay more for premium experiences, and cool new technology and features to get first-time passengers on board.

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Oasis of the Seas will launch high-speed onboard Internet later this year. Royal Caribbean International.

"We see better performance in a lot of our areas," Fain said. The company reported strong second-quarter earnings and revenue, which Fain said reflect improved outside factors more than a change in strategy for the business. "Business has always been quite good, but the headwinds of recent years have sort of camouflaged that. We now have the wind at our back, and the real strength of the business is showing through."

More vacationers are cruising, many for the first time
Those headwinds included the 2008 recession, followed by a string of high-profile incidents involving several cruise operators in 2013 and early 2014, such as stomach virus outbreaks and mechanical problems that garnered major media attention. Right now, though, it's clear sailing.

Trade group Cruise Lines International Association, or CLIA, projects that passenger volume among its 63 member cruise lines will grow by 400,000 this year compared to 2013. And despite earlier concerns that the industry's highly publicized mishaps would scare off first-time cruisers, CLIA says 87% of the agents it surveyed report steady or growing sales to cruise newbies.

That growth is reflected in Royal Caribbean's most recent quarterly results. Net yields rose, net cruise costs fell, and net income per share rose to $0.62 compared to $0.11 in 2013. Royal Caribbean forecasts a net yield increase of 2%-3% through the end of the year. Competitor Carnival Corporation (NYSE: CCL) reported net income and revenue growth in the second quarter as well.

"The U.S. economy, for consumers, seems to be modestly better. In Europe and in Asia, it seems to be significantly better," Fain said. Higher prices for European cruises this year contributed to the company's second-quarter growth, with double-digit yield gains there and in China. Fain said China has delivered 40% growth annually for the company -- a big reason Royal Caribbean will homeport its newest, fanciest ship, Quantum of the Seas, in Shanghai next year.

Travelers can and will pay more for upgrades
Even in the highly competitive Caribbean market, where travelers can usually book a cruise at a discount, the tide may be turning in favor of premium experiences. Fain said Royal Caribbean is working to sell cruisers on added-value options.

"We're still seeing some discounting, but so much less than we've seen in the past. We're focusing on how best to frame our pricing. Instead of saying we'll give you an X-percent discount if you book this cruise, we're saying, 'Look, for the same money, we can give you something else.' We've been very successful in upselling people to a better stateroom, a longer cruise, or more amenities. That really helps our value proposition, and people are coming to it."

A bigger on-board cool factor
That premium approach includes a billion dollars in recent fleet upgrades. Later this year, Australian guests on Voyager of the Seas can enjoy onboard surfing and big-screen "virtual balconies" that give interior staterooms a real-time digital view of what's outside.

In the Caribbean later this summer, new superfast Internet service will debut on Oasis of the Seas, allowing passengers to keep up with the world and share vacation pictures with their friends while at sea -- a crucial amenity for the 18-to-35-year-old Millennial demographic that now outspends other generations on travel.

More options in port?
Royal Caribbean is also putting together a new venture, TourTrek, which will coordinate land excursions for its passengers. (The company already offers shore excursions in 90 countries.) Fain said it's too early to say much about TourTrek, but it will "build off the expertise we've developed." The company hasn't announced a launch date yet.

If Royal Caribbean earns new and repeat business with its new features and services, and if the global economy continues to create favorable sailing conditions, the company could be the brand to beat by 2017. If competitors step up their game as well, travelers will have an ocean of available options.

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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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