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RCL AT A GLANCE

P/E ► 28.7 AVG EV/EBITDA ► 13.0 AVG ROA ► 2.9% AVG ROE ► 2.2% AVG Debt to Equity ► 1.31 AVG Current Ratio ► 0.369 LOW Interest Coverage Ratio ► 1.52 AVG

 

 

 

 

 

 

Royal Caribbean Cruises is the world's second largest cruise operator by number of ships, behind leader Carnival (CCL), which operates 88 ships.^[1] Royal Caribbean operates 38 ships and has 78,650 berths to over 425 destinations, while carrying over 17.2 million passengers in 2008.^[2] RCL operates its ships under the brand names Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France.^[2]

Surveys estimate that there are over 50 million people who have an interest in going on a cruise within the next three years in North America alone (defined as members of households with a minimum income threshold of $40,000, headed by a person at least 25 years old). Only about 17% of this captive market has ever taken a cruise; yet, the industry is rapidly expanding with 8.5% compounded annual growth rate. Further, over 60% of worldwide cruise passengers are over the age of 40.^[3] Despite the risks associated with terrorism, rising oil prices, H1N1 Influenza, and natural disasters, cruises have and may continue to become increasingly popular as Baby Boomers enter retirement.

Some of RCL's cruises can be a bit pricier than those of chief competitor Carnival (CCL), which can help it capture a more mature cruise-going clientele but also expose it to greater risk of falling discretionary income. The company also has fewer brands than Carnival. Both companies generally use a variety of brands to price-discriminate and achieve greater market penetration, and Carnival is leading the charge. That said, RCL has recently opened Azamara (a high-end North American brand) and Croisières de France (a brand targeting the French market), adding to its portfolio of ships while targeting quickly growing segments that it hadn't earlier. Still, though, RCL plays a bit of catch-up with Carnival, who has greater international presence, larger market share, and heftier margins.

Business Overview

Business & Financial Metrics

In 2008, Royal Caribbean Cruises increased the number of passengers carried by 2.87% to 4.017 million in 2008; however, occupancy declined from 105.7% to 104.5% as growth in available passenger cruise days outpaced that in passenger cruise days, at 4.00% and 5.20%, respectively.^[4] This resulted in $6.532 billion in revenue in 2008, which was a 6.23% increase from $6.149 billion in 2007.^[4] Operating expenses rose by 10.60% overall in 2008 to $4.403 billion, and were driven largely by fuel expense increases, which rose from 8.9% of revenue to 11.1% .^[4] As a result, net income fell by 4.92% to $573 million.

The impact of the global recession was more significant in the first quarter of 2009 than in fiscal year 2008. Revenue fell by 7.24% to $1.325 million, but operating income fell 67.83% and net income dropped by 147.9%, as RCL had a $36 million loss.^[5] This loss can be attributed to onboard and food expense increases of 6.00% and 9.41%, respectively, as well as an Amortization and Depreciation expense increase of 12.43%.^[5]

While RCL was able to post operating income of $55.1 million, the company once again a net income loss in 2Q09--a $35.1 million loss compared net income of $84.7 million in 2Q08.^[6] Despite a small increase in passenger cruise days of 1.8%, passengers carried fell by 5.3%, which led to a 14.8% fall in revenue for 2Q09.^[6] RCL was able to cut back on cruise operating expenses by 11.5%; however, this was not enough to compensate for the comparably larger fall in revenue.

Amid fears of H1N1 Influenza and a global recession, Royal Caribbean's net income fell by 44.1% to $230 million in 3Q09.^[7]

As seen in the table below, the company has modestly increased its number of passengers, as the number of ships increased over the previous three years. Passengers on average have also spent more money, as evidenced by the increased revenue per passenger.

Business Segments

Royal Caribbean International

The Royal Caribbean International segment offers cruise options that appeal to the widest market in RCL's brand portfolio, ranging from the contemporary to premium customer segments. With over 20 ships and 51,200 berths, the Royal Caribbean International segment offers various cruise lengths and destinations depending on the target segment.^[11]

Celebrity Cruises

Unlike the Royal Caribbean International segment, the Celebrity Cruises segment is geared only toward RCL's premium customers. This segment has 9 ships and 16,650 berths, and features options not offered in other segments, such as live grass.^[11]

Pullmantur

This segment exclusively services Latin American and Spanish markets, and with six ships and 8,650 berths, targets the contemporary customer segment.^[11]

Azamara Cruises

The Azamara Cruises segment features only 2 ships, and is intended to serve the luxury and premium customer base of RCL. The segment's first full year of operation was 2008, and it targets the North American, U.K., and German markets.^[11]

CDF Croisières de France

This segment specifically targets the French market and the contemporary customer base, and received its first ship, the Bleu de France, through a transfer from the Pullmantur segment.^[11]

TUI Cruises

The agreement to complete TUI Cruises, a joint venture with TUI AG in which RCL has a 51% stake, was reached in April 2008. The segment uses one ship, which it received from Celebrity Cruises, and will operate in the German contemporary and premium market.^[11] During 2008, Earnings Per Share (EPS) was $2.69; however, the company reported an EPS -$0.17 for 1Q09.^[5]

• Discretionary income and brand diversity. Cruise lines compete for the discretionary income of consumers. Cruises and vacations are discretionary purchases, luxury goods enjoyed only when income is available for spending after necessities are covered. Thus, the discretionary income levels of the company’s customer base can have a substantial effect on the company’s sales. Not surprisingly, the company operates in places like the United States and Western Europe, where the per capita discretionary income is on average higher than in many other countries. Royal Caribbean in particular offers somewhat more upscale cruises and may be even more exposed to luxury purchasers than competitor Carnival (CCL). Furthermore, RCL has fewer brands than Carnival (5 vs. CCL's 11). This provides fewer opportunities for price discrimination and demographic targeting, which could exacerbate the effect of changes in household incomes, economic activity, or consumer trends. Also, while the company continues to expand internationally, it has more modest international operations than Carnival (CCL), providing it with less exposure to some more rapidly growing markets. In short, RCL is less diversified than CCL.

• Aging baby boomers. As the baby boomers continue entering retirement, the company stands to benefit from the tailwinds of an increase in senior traffic, as it derives a large percentage of its income from passengers over 55. It is likely that seniors may continue to gravitate toward warmer-weather vacations. Coupled with the fact that retirement means more time to one’s self, and for many baby boomers, time to travel, the company has significant demographic tailwinds working in its favor.

• Terrorism and Geopolitical Risk. The company is at risk of declines in its business from terrorist attacks and geopolitical unrest, even if not targeted specifically to its ships. Cruise-goers may be frightened by the possibility of an attack on their ship, leading to declines in ticket sales. Generally, travel at large declines notably in the wake of a terrorist attack, and cruises are no exception. The market, of course, realizes this: in just days after September 11, 2001, the company’s shares lost around one third of their value.

• Rising oil prices and reliance on American business. Rising oil prices have important negative effects on the company. First, one of its largest inputs is fuels for its cruise liners, so unhedged increases that cannot be passed on to customers will have a negative impact on margins. Second, high oil prices lead to lower discretionary household income, which, as discussed previously, is an important driver for the company. The effects of rising oil prices may be worse for RCL than CCL because of the falling US dollar. RCL has fewer ships in Europe and does not have the same brand awareness and history of foreign operations market. Because the company relies more heavily on American passengers and because Americans have taken rising oil prices on the chin more than Europeans have, the company can feel the effects more than competitors.

• Hurricanes, natural disasters, and weather patterns. The company can be adversely affected by particularly bad hurricane seasons, natural disasters, and inclement weather patterns. Consumers are less likely to buy, for instance, a Caribbean cruise if a major hurricane is anticipated. Furthermore, the company depends upon the availability of ports, so coastal weather patterns can limit CCL’s ability to procure ports. If inclement weather or disasters hit port areas, the company can struggle to call on vital ports, which would adversely affect its business.

• Continued financial viability of travel agents. Most of the company's sales come from travel agents who arrange cruises on behalf of clients.^[12] The travel agency business is not necessarily what it used to be. Given the emergence of internet-based travel bookings and direct to consumer models of selling airline tickets, their business in general has declined. Because the company depends on a broad base of going-concern travel agents, any prolonged slump or major consolidation in the travel agency business could adversely impact the company. Furthermore, if travel agents force the company to increase commissions in order that they compete successfully, the company can see major pressures on margins. The approximate 10% commissions offered to travel agents as an industry standard is one of the company's largest variable costs.

Competition

The company competes against a number of smaller cruise line operators, and one significantly larger market leader, Carnival (CCL) who has a 44% market share. While it does not enjoy the same magnitude of economies of scale that Carnival does, with the second largest number of ships and capacity, the company spreads much of its corporate overhead over a larger cruise liner base and has respectable margins, since it can do things like leverage size for more favorable purchases of on-board equipment and supplies. The company also competes against smaller competitors including Star Cruises (which operates Star Cruise Line and Norwegian Cruises) and Mediterranean Shipping Company (which operates MSC Cruises and Disney Cruise Line).

The cruise industry has been growing rapidly over the previous five years, and currently around 15.7 million cruise passengers around the world board liners each year.

Below is a table of relevant competitive metrics for each of the two companies.^[13]

Footnotes

1. ↑ 2008 CCL 10-K, pg. 3
2. ↑ ^{2.0 2.1} RCL 2008 10-K, "Business," pg 12
3. ↑ American Association of Port Authorities. Cruise Industry.
4. ↑ ^{4.0 4.1 4.2} RCL 2008 10-K, Item 6, pg. 39
5. ↑ ^{5.0 5.1 5.2} 2009 RCL 1Q09 10-Q, pg. 1
6. ↑ ^{6.0 6.1} RCL 2Q09 10-Q
7. ↑ RCL 2009 3Q 10-Q
8. ↑ RCL January 2009 8-K pg. 8  
9. ↑ ^{9.0 9.1 9.2 9.3} RCL January 2009 8-K pg. 9  
10. ↑ RCL 2006 10-K, "Selected Financial Data," pg 33
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5} RCL 2008 10-K, pg. 2-3
12. ↑ RCL 2006 10-K, "Business," pg 9
13. ↑ All data compiled from companies' Annual Reports
14. ↑ Berths is a industry standard measure of capacity, which assumes that two persons can occupy each cabin. A berth, than is the number of cabins times 2
15. ↑ Calculated by dividing company data on passenger volume by industry passenger volume of 15.7 million passengers