The Clouds Part
Additionally, his company was increasing capacity by nearly a third. And Fain isn't even counting that his company was about to lose out to rival Carnival in the bidding for London-based P&O Princess Cruises, giving Carnival a global reach that Fain and Royal Caribbean can only envy.
Yet, the storm is past, and Royal Caribbean is decidedly buoyant. Net yields, revenue per cabin after certain expenses, fell only 1.3% last year. This year, revenue in the first quarter is up 20.6% to $1.1 billion. Profit is up 80% to $95.8 million.
Though the industry isn't back to the peak of 1999 and 2000, says U.K.-based analyst Tony Peisley, "Royal Caribbean, like Carnival, has done very well in the last couple years, all things considered."
The two Miami-based companies dominate the cruise industry, making it the rare business in which Florida companies lead the world. Royal Caribbean, with 29 ships sailing under its name brand and premium Celebrity brand, finished 2003 with a $281-million profit on nearly $3.8 billion in revenue. Carnival sails 76 ships under 12 brands and finished 2003 with a higher-margin $1.2-billion profit on $7.6 billion in revenue.
Cruising is an immature industry, leading to a paradoxical approach for its operators. Adding ships means more berths competing for customers, and that means lower yields. But ships must be added to increase the market. "It has to grow," says analyst Peisley of the fleet size. In one period in the 1980s, there was a dearth of new ships, and the industry, he says, "nearly died on its feet."
The industry will add 20 ships in North America by 2006, according to the Cruise Lines International Association.
Royal Caribbean has benefited from additional ships, especially its huge Voyager class vessels that carry 3,100 passengers. Last year, it inked a deal for an even larger 3,600-passenger, $800-million Ultra-Voyager scheduled for delivery in 2006 and took an option on another.
To go with fresh ships, Royal Caribbean, like the rest of the industry, is hunting fresh destinations. It's added a private island, CocoCay in the Bahamas. In January, the company's Celebrity brand launched trips to the Galapagos aboard a 100-berth ship as part of a series of upscale vacations that include a Formula One racing school and ice-breaker trips to the Arctic. In May, Royal Caribbean opened its Bayonne, N.J., port, dubbed Cape Liberty, as its New York-area home port, looking to capture the huge drive market there.
Rising tide
Ahead, increased fuel prices will drive costs up. Bargain hunters, aided by the internet, are holding off on committing to cruises until the lines slash rates as sailing dates near. But credit analyst Peggy Holloway of Moody's Investors Service says the industry has stabilized after the shocks of recent years. The economy is improving and, assuming no untoward events, the industry should do well.
Demography continues to be in the cruise lines' favor with aging Boomers having money to spend, she says.
"We were glad to see this year the companies are able to absorb the capacity and raise prices," says Holloway. She recently upgraded Royal Caribbean's outlook to positive from stable. Royal Caribbean's leverage ratio has peaked, and debt should be paid down as conditions improve.
Some industry watchers expect business to return to peak levels in 2005-06. Fain is forecasting a 5% to 7% increase in net yields this year.
Investors recognize the improving clime. While still far from the stock's $58.55 high in 1999, Royal Caribbean is off the post-9/11 floor of $7.75 per share. As of May 31, its shares were trading at just over $39. Carnival shares, trading for about $42, are just off their 52-week high.
Fain feels cruise companies have proved something to investors. "One of the questions that has dogged our industry as long as I've been in it was whether it was vulnerable to recession," says Fain, 56. "If you can withstand the perfect storm and maintain your prices at close to flat, it shows a resiliency of amazing proportions."