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Virgin berths: Creating a cruise line for Virgin Group

One of the biggest startups in Florida history began in earnest five years ago, on a patio overlooking the golf course at the Doral Hotel & Country Club in Miami- Dade County.

Seated at a table was Nirmal Saverimuttu, a Zambian-born, Australian- raised investment banker then in his mid-30s. Since 2006, he had been helping lead North American development efforts for the Virgin Group, the collection of companies and brands founded by British entrepreneur Richard Branson.

The company and Saverimuttu, who had helped launch both an airline and hotel chain for Virgin, were ready to move on to their next target: The cruise industry.

Across from him was Tom McAlpin, a Miami native and Florida State University alum who, at 52, had spent more than two decades near the top of some of the world’s most successful cruise companies. Only a handful of people on the planet were better prepared to build a cruise business. An accountant who once ran the planning department at Royal Caribbean, McAlpin was part of the founding team behind the last major cruise launch in North America — Disney Cruise Line.

Over beers on a hot, sunny day, the two sketched details of how Virgin might break into the cruise business by combining its brand with luxury ships promising unique experiences and high-end Customer service. The pair left the meeting believing they could create a cruise line unlike anything the industry had seen before — and make a lot of money in the process.

After the meeting, McAlpin, who had left Disney in 2009, returned to his job running The World, a condo cruise ship based in Fort Lauderdale. Saverimuttu set out to search for investors. But the pair continued to confer, referring to each other as “Red Sea 1” and “Red Sea 2,” after the code name Virgin had given to the secret project.

“We had a joint passion to see if we could create something,” Saverimuttu says today.

Few industries entail higher barriers to entry than cruising.New ships cost between $500 million and $1 billion and usually take at least three years to build. The cruise business requires an elaborate infrastructure — reservations, inventory management, safety and security, menu development and more. All those systems must be operational before the boats can begin sailing and generating revenue.

The industry is dominated by three giant competitors that control more than 90% of the North American cruise market, according to research by UBS Securities: Carnival (46%), Royal Caribbean (31%) and Norwegian (15%). Disney, at No. 4, has 3% of the cruise market.

Joining that club meant raising lots of money. Within two years after the beers with McAlpin in Doral, Saverimuttu was on the upper floors of the John Hancock Tower in Boston, delivering a presentation to representatives from Bain Capital, the $75-billion investment firm co-founded by 2012 Republican presidential nominee Mitt Romney.

Bain had been researching cruise possibilities for years, says Ryan Cotton, a managing director at Bain’s private equity division who focuses on the consumer and retail segments.Bain was interested in two options. One was river cruising. The other was traditional ocean cruising — but Bain wanted only a built-from-scratch cruise line with new, higher-margin ships.(New ships can be designed with a higher percentage of balcony staterooms, which bring higher rates than other cabins, and more space devoted to revenue-producing areas such as shops and casinos.)

Bain felt that the new line would only make sense if paired with a well-established brand that consumers already trusted. As it happened, that’s just what Virgin was offering.

After the initial meeting, Virgin and Bain began to do more targeted research. Bain, Cotton says, loved what it saw.

Generally speaking, the U.S. market breaks down like this: 40% of U.S. travelers have been on a cruise in the past five years and intend to go on another sometime in the next five; 40% have never been on a cruise but would be willing to try; 20% say they will never cruise.

Bain’s research found that 25% of existing cruisers were willing to try a Virgin cruise. More important, 26% of the potential cruisers also said they would try a Virgin cruise.Potential cruisers skew younger — 60% are between 21 and 45 — making them prime targets for the Virgin brand.

The researchers also asked consumers to choose from five cruise ships — identical in every way except for their brands — and express a preference. Cotton says more respondents chose the Virgin-logoed ship than the ones branded for Carnival, Royal Caribbean, Norwegian or Disney.

“There’s a huge shadow market for millennials, gen-Xers and gen- Yers who say, ‘I understand why people go on cruises.’ And that’s where Virgin comes in,” Cotton says. “Virgin has created a very consistent set of brand values — fun, hip, sexy, cool, adventurous and glamorous. When you ask a customer, ‘would you be interested in a Virgin cruise?’ they don’t need to see the deck plans of the ship, they don’t need to see a lot of photos, they don’t need to ask what the itinerary is. They know what Virgin is and stands for.”

Bain signed on as the lead investor and was soon followed by a mix of institutional and family investors including the government of Abu Dhabi, an asset management fund overseen by the Princely House of Liechtenstein, and the American architect Graham Gund.Altogether, Virgin Cruises raised $700 million. The company is believed to have borrowed between $1 billion and $1.5 billion more.

With financing in place, Virgin Cruises formally launched in December 2014. Bain got three of the six seats on the board of directors, one of which went to Cotton.

As part of Virgin Cruises’ unveiling, Virgin announced the company would be based in the Miami or Fort Lauderdale area and would start with two ships. But it said almost nothing else — not even when the ships might begin sailing.

Little wonder. About that time, the company consisted of exactly three employees — McAlpin, named CEO; Saverimuttu, who had moved over from Virgin Management to become Virgin Cruises’ chief commercial officer; and Chief Marketing Officer Nathan Rosenberg.While a fourth hire, former Virgin Atlantic exec Dee Cooper, was under contract at the time, Virgin Cruises’ first order of business was clear: Build a bigger team [“All Aboard,” page 72].

As for the actual ships, all the company had was what’s known as a “general arrangement plan,” or a GAP — a document outlining how space will be allocated on a ship for areas such as cabins, restaurants, entertainment venues and crew quarters. Cruise lines have to complete a GAP in order to negotiate a construction price with a shipyard — an important variable when raising capital.

It didn’t take long for the Virgin team to sail into its first storm.

The company’s original plans called for the line to begin with two ships that could carry about 4,200 passengers each. But as Virgin conducted more detailed market research in late 2014 and early 2015, company executives realized that its potential customers were leery of so-called “mega-ships.”

The company organized focus groups in Chicago, New York and Florida, asking consumers what they wanted a Virgin cruise ship to be like and what experiences they wanted on board. Rosenberg says the overwhelming majority expressed a preference for ships that were big enough to have plenty to do but not so large that passengers would be surrounded by crowds everywhere they went.

At the same time, the existing mass-market cruise lines were already building ever-larger 4,000- and 5,000-passenger ships, which are cheaper to build and more profitable to sail on a per-berth basis. Last spring, Carnival announced an order for nine ships, at least four of which will have an industry-record capacity of 6,600 passengers each.

The data led Virgin to make what McAlpin now calls “a course correction.” The company decided to shrink the size of its ships by a third and increase its fleet by a third. In- The U.S. Market: Perspectives on Cruising 40% — Adults who have been on a cruise in the past five years and who intend to go on another in the next five 40% — Adults who have never been on a cruise but would be willing to try 20% — Adults who say they will never cruise stead of a pair of 4,200-passenger ships, Virgin would build a trio of 2,800-passenger vessels.

That meant Virgin and its Italian shipyard, Fincantieri, had to start over. Working frequently from the Hotel Savoia in Trieste, Italy, near Fincantieri’s offices, Virgin execs and the shipyard raced to rewrite the GAP. The work was time-sensitive: Virgin had to get a construction timeframe settled in order to secure coveted weekend departure spots at PortMiami before another cruise line claimed them.

The new GAP was done in six weeks — “record time,” McAlpin says. A few weeks later, Virgin announced that its first ship would set sail in early 2020, leaving every Sunday from Miami on seven-night Caribbean voyages. The second and third ships will follow in 2021 and 2022.

McAlpin says shifting to a fleet of three smaller vessels offers several advantages. Virgin ships will be able to sail places mega-ships can’t; the line can offer a wider range of voyages; and there’s less financial risk if an itinerary underperforms.

Not a factor in its decision to switch to smaller ships, Virgin insists, is a lawsuit filed in early 2015 by former Norwegian Cruise Line CEO Colin Veitch. Veitch says he approached Virgin in 2012 with a plan to start a new cruise line with a pair of 4,200-passenger “ultra ships.” Veitch and Virgin negotiated a framework for a deal and worked together for more than a year until Veitch says Virgin suddenly walked away. Virgin, which denies stealing Veitch’s plan, negotiated a confidential settlement with Veitch earlier this year. Once the business was established, Virgin says, decisions about ship size and design were entirely “customer-led.”

Virgin won’t say how much its ships will cost. But other cruise lines have paid about $250,000 per berth for similar sized ships, according to UBS research — putting the cost of Virgin’s ships somewhere around $700 million each.

Details of what Virgin’s cruise ships will look like or what they will feature onboard remain a closely protected secret. Cruise lines don’t typically start booking until about 18 months before ships depart, and Virgin is determined to save as much publicity ammunition as it can until it actually has a product to sell.

Among the few hints from McAlpin is that Virgin intends to work with architects from outside of the cruise industry to craft unique designs for the company’s ships.

Some clues to the company’s thinking can also be found in records filed as part of the lawsuit brought by Veitch, the former Norwegian CEO. According to one presentation prepared for potential investors, dated January 2012, Virgin and Veitch planned to target a core market of young, affluent couples in the North America and the United Kingdom — couples in their 30s and 40s with household incomes of about $100,000 per year. Secondary markets were to include older “young at heart” travelers, singles and groups of friends, and younger couples on a budget.

Live music was a core entertainment feature, and the ships were to be technologically “wired” in all areas. Unique architecture would be a point of emphasis, with small, intimate spaces mixed in with “some spectacular features.” The company expected to begin by sailing in the Caribbean and the Mediterranean and eventually add Middle Eastern itineraries.

The presentation also indicated that Virgin expected to carve out a position as a premium product within the mass-market space, much like Disney Cruise Line, which earlier this year announced orders to add a fifth and sixth ship to its fleet.

Virgin executives make it clear they hope to emulate parts of Disney’s strategy. “We see that there is a business model that works very well, which is all about using a brand and creating a differentiated product specifically created for Virgin customers,” McAlpin says.

“We’re not looking to be 30 ships. We’re happy to be more than three, obviously,” he adds. “But we’re also happy to focus on our product and creating a differentiated experience and getting a premium for that.”

Virgin says it expects to spend the rest of this year working on ship design before the shipyard cuts the first piece of steel sometime in 2017.“And then it’s pencils down,” McAlpin says. “At that point, changes become very expensive.”

In the meantime, Virgin Cruises is trying to foster a startup culture inside its temporary headquarters in Plantation, on the third floor of a suburban office building overlooking I-595. One wall of the company’s lobby has been covered with a bright mural of a blonde wearing a captain’s hat, sunglasses and red lipstick. The other has a Sex Pistols poster and an oversized television where the slyly self-aware phrase “This ain’t some Mickey Mouse cruise ship” flashes at visitors — a welcome joke for McAlpin. There is exactly one landline telephone, just in case security needs to call.

Everybody wears multiple hats. Andy Schwalb, the chief technology officer, has been doubling as the IT guy, helping colleagues install software on their computers and phones. Employees recently found McAlpin on his back in the break room, plugging in a new office dishwasher. McAlpin, a Seminoles football fan, says he looks for the best “athletes” who can do multiple jobs when adding to the company.

“Every day there are new challenges we face,” Saverimuttu says.“But I think ultimately it’s about everybody being focused on the prize. And the prize is creating the right kind of business, the right kind of culture and, ultimately, creating a Virgin Cruises brand that we’re all proud of and customers love.”

All Aboard

To fill its executive ranks, Virgin Cruises wanted a mix of people well-steeped in the Virgin brand; those who were experienced cruise industry veterans; and some from outside both silos who could bring a fresh perspective. The initial team:

» Tom McAlpin, president and CEO, was the CFO at Disney Cruise Line when it launched in the mid-1990s — the last time a major cruise line was established in North America — and later rose to company president. He left Disney in 2009 after 15 years with the company and became CEO of The World, a luxury condo cruise ship based in Fort Lauderdale. That’s where he was when Virgin came calling.

» Nirmal Saverimuttu, chief commercial officer, was a principal with Virgin Management, the arm of Richard Branson’s Virgin Group responsible for North American investments. He guided the launch of the Virgin America airline and Virgin Hotels. After Saverimuttu recruited Tom McAlpin to run the Virgin’s new cruise line, McAlpin turned around and persuaded Saverimuttu to come aboard.

» Dee Cooper, senior vice president for design and customer experience, is a former Virgin Atlantic executive who led award-winning redesigns of the airline’s upper-class cabin and its terminal at Heathrow Airport. She had struck out on her own as a consultant, with a client list that included the 2012 Summer Olympics in London.

» Stuart Hawkins, a senior vice president, will oversee ship construction. Hawkins worked with McAlpin on the launch of Disney Cruise Line and had been a senior vice president at Carnival’s Princess Cruises division.

» Nathan Rosenberg, chief marketing officer, is a dual Australian and Canadian citizen who had previously overseen the launch of Virgin Mobile in Canada. In a timing quirk, Rosenberg was technically the first Virgin Cruises employee. “They wanted to test the payroll system,” he quips.

» Andy Schwalb, chief technology officer, was the former head of technology for Walt Disney Co., part of a team of five executives who conceived and designed Walt Disney World’s sweeping “MyMagic+” project. The more than $1-billion program included an advance reservation system allowing visitors to book ride times weeks in advance; microchip-embedded wristbands that function as credit cards, room keys and park tickets; and a suite of data-gathering and analytics technology. Schwalb’s job is to rethink the cruise experience — from when customers load the website to book a trip to the moment they step back onto shore. “We’re looking for where the pinch points are and saying, ‘how can we improve that?’ ” Schwalb says.

» Frank Weber, vice president of operations, had been at Norwegian, where he designed food-and-beverage concepts ranging from a craft-beer hall to the Jimmy Buffett-branded “Margaritaville at Sea.”