2014 was a good year for Royal Caribbean(NYSE:RCL), the second largest cruise operator in the world. The company reported record adjusted earnings per share of $3.39, was added to the S&P 500 index, and ended the year with its best bookings outlook to date.
In July, Royal Caribbean announced a goal to double its earnings per share and raise its ROI to double digits by 2017, and the 2014 results indicate that the "double double" program is on track. Royal Caribbean CFO Jason Liberty spoke with The Motley Fool about where the growth in cruising now lies.
Smooth sailing in Europe
Liberty said the company expects yields on European cruises, which rose by double digits in 2014, to be up mid-single digits this year. Two ships should drive a lot of that growth. The new Anthem of the Seas, the massive sister ship to the Quantum of the Seas, will sail out of Southampton, England starting in April. Destinations will include Paris, the Canary Islands, and Mediterranean ports.
The Allure of the Seas is another new entry to the European market. Allure will head out of its Caribbean neighborhood in April for a series of western Mediterranean cruises all summer and into early fall. Expectations for performance there are high. "The ship is a cash machine," Liberty said, noting that Allure's Mediterranean vacation comes at a cost to the Caribbean market.
"We're taking the highest yielding ship from the Caribbean out of the average, so we expect Caribbean yields to be up low single digits in 2015," Liberty said. Given the fact that Caribbean bookings were "stubbornly challenging" in 2014, according to CEO Richard Fain, it makes sense to move a star performer to a more lucrative market, if only for part of the year.
The Caribbean market is a victim of its own popularity. There is so much capacity in the region that cruise lines have to promote heavily and offer discounts in order to book guests, something watchers of Richard Branson's planned Virgin Cruises, set to debut in the Caribbean in the next couple years, should keep in mind.
China's fair winds
The really hot market for cruise lines is China. "Today, China is our third largest market in terms of sourcing. My guess is that in the next year or two, it will be our second largest market," Liberty said. With a booming middle class, China has drawn the interest of not only Royal Caribbean, but Carnival Corporation (NYSE:CCL), which has been signing memorandums of understanding at a rapid clip for joint ventures with the government, in-country shipyards, and Fincantieri, the Italian shipbuilder.
Royal Caribbean, which has had smaller ships in China for a few years now, is making a splash with Quantum of the Seas, its newest vessel. In May, after sailings from New York to the Caribbean, Quantum will homeport in Shanghai, where it has 41 sailings booked between June and February 2016, mostly to ports in South Korea and Japan, as well as Hong Kong. Quantum is designed to appeal to "the aspirational Chinese consumer who likes luxury goods and things that are more international," Liberty said.
Royal Caribbean plans to appeal to customers who prefer more familiar surroundings, too. Its new SkySea Cruises, a joint venture with Chinese company Ctrip, will launch a revamped Celebrity Century this summer for the more "nationalistic" Chinese traveler. Like Quantum, the ship will sail from Shanghai, but "SkySea will be completely Chinese. The restaurants, all the elements inside the staterooms, and the guest experiences will be fully Chinese," Liberty said. "There's definitely a differentiation in preference. But there are more people in the Chinese middle class than in the entire U.S. population, so there's plenty of segmentation to be done."
The best cruise guests spend like Americans
Besides the sheer size of the Chinese middle class, overall spending habits for the segment are what make it stand out. "In some markets, guests spend a little on a ticket and a lot on board, or vice versa," Liberty said. "China is a high-yielding market, similar to the U.S., in that people pay a lot for tickets and buy a lot on board."
In terms of the "double-double" goals, China is "definitely a contributor to the equation." For investors, the travel forecast is clear: The Caribbean is a great place to get a deal on a cruise vacation, but Europe and China are the places to find growth.