Tweet (6:45 p.m. EDT) -- This winter, a Caribbean crowded with the world's biggest cruise ships may mean softer fares -- even as Oasis of the Seas' mega-twin (the soon-to-launch 225,282-ton, 5,400-passenger Allure of the Seas) commands premium prices. That was the word on Tuesday morning during Royal Caribbean Cruises Ltd.'s earnings call for Q3 -- the three-month summer period driven by sunny skies and school holidays -- that's traditionally been the industry's most profitable.
And, true to form, it was mostly high-fives and wide grins at the call, during which executives boasted about a smashingly successful Q3. "The fact that we're doing this well against such headwinds augers particularly well for the future," said Richard Fain, the company's chairman and CEO. Fain also added that, based on early signs, 2011 could be the most positive year ever for RCCL, parent company of Royal Caribbean, Celebrity Cruises and Azamara Club Cruises.
Deals or No Deals?
"Virtually all of our product showed solid improvement [in Q3], especially Alaska and the Caribbean," noted RCCL's CFO Brian Rice. And, moving forward, the company has been able to adjust fares upward nearly across the board.
But, there may be some softer spots amid all the firmness. The capacity in the Caribbean this winter will be unprecedented, with Royal Caribbean's 5,400-passenger Oasis-class twins, monolithic 4,100-passenger Norwegian Epic and 3,646-passenger Carnival Dream all cruising from Florida. During Carnival Corp.'s Q3 earnings call, Howard Frank, the company's vice chairman and COO, noted that there was a 15 percent capacity increase industrywide, which could only mean decent deals for consumers. Adam Goldstein, Royal Caribbean's president and CEO, put his own spin on it. "The Caribbean has been in a state of high competitiveness for a while now. We expect a competitive marketplace over the next few quarters ... and our newer ships are very powerful ships in the Caribbean, even in a very competitive environment."
One of those newer ships is Allure of the Seas, which executives noted is still commanding top dollar. RCCL's top brass never expected the two Oasis-class ships to do as well as Oasis of Seas did by itself, but a quick look at RCI's Web site shows that balcony prices for most of Allure's 2011 sailings remain above $1,000 per person. "[The Oasis-class vessels] are clearly the foremost competitive cruise ships in the Caribbean sector," said Goldstein. "There's no cruise ship existing or under construction that can rival their features, and so we expect them to be formidable for the near future." And that means premium fares, too.
Both Royal Caribbean and Celebrity also mentioned that big capacity increases are in store for Europe next year, which may make prices more competitive -- but it's probably too early to tell. "Forward booking patterns give us a fairly high degree of confidence that Europe will be able to absorb that amount of capacity," noted Fain cautiously.
Do the Math
Onto the financials, RCCL posted a net profit of $356.8 million on $2.1 billion in revenue during Q3 of 2010. Income surged up 55 percent from the $230.4 million (on $1.8 billion in revenue) posted in the same period last year.
"The bulk of improvement comes from benefits of our new ships [Oasis of the Seas, the Freedom-class trio, the Solstice-class trio] ... and better management of existing ships," said Fain.
Executives offered additional specifics. Fuel consumption costs improved by 2.2 percent (the newer vessels are fuel efficient), third-quarter close-in bookings were stronger than expected, cost-cutting initiatives continued, and net ticket revenue increased by an impressive 7.4 percent over the same period last year. The company spent approximately $165 million on fuel for the quarter, which came in at about $5 million lower than expectations.
There's still room to grow, too. CFO Brian Rice noted that yields for the quarter were still 12 percent below the peak levels experienced in Q3 2008. Clearly there is still quite a bit of opportunity, especially for the summer months (the most profitable period of the year for lines).
Future Tense: New Cruise Ships, New-Build Philosophy
New Cruise Ships. Allure of the Seas, the second and final Oasis-class vessel, and the 22nd ship in Royal Caribbean's fleet, will be delivered on Thursday. On Friday, it'll depart from Turku before arriving in its Port Everglades homeport on November 11. With the launch of Allure, Oasis- or Freedom-class ships will make up roughly 33 percent of Royal Caribbean's fleet. Two more Solstice-class ships will launch over the next two years: Celebrity Silhouette (2011) and Celebrity Reflection (2012). Dan Hanrahan, Celebrity's president and CEO, hinted that the fourth and fifth Solstice-class ships would have a few unique touches that "would further enhance profitability." Exactly what those new options are will be revealed at a later date.
New-Build Philosophy. With the quarterly earnings call comes the quarterly question on new-build philosophy in an industry where ship orders have slowed dramatically. Fain's response was typically measured, with one grammatical aside. "I can't give much more info than we have in the past .... We're cautious, and we really don't announce new-buildings until we have a deal. It is our intention, as we said previously, that we don't expect to do any more Oasis-class ships. We've also made it clear that we don't expect to stagnate and not to have future growth. We do think that the rate of growth of new capacity has slown ... slowed -- sorry I have to get my verb right there -- and will be slower than we've seen historically."
Fain added that the company doesn't see the possibility of building something new that would deliver before late 2013 at the earliest or (more likely) early 2014.
Millennium-class Upgrades. The company will also continue with its strategy of making its older ships look more like its newer, more successful fleetmates. Case in point: Celebrity is spending some $200 million on a multiyear renovation project of its four Millennium-class ships. Celebrity Constellation has already been "Solsticized" -- the term used to denote the additions of the most popular features from Celebrity's Solstice-class ships (creperie, wine bar, Italian steakhouse). Celebrity Infinity will head into dry dock in fall of 2011, Summit in Q1 2012 and Millennium thereafter. Royal Caribbean is, likewise, "Oasis-izing" its Freedom-class ships (adding a cupcake shop, outdoor movie screen, Broadway show).
One Interesting Moment
In the oddest exchange of the call, Adam Goldstein had some choice words when turning it over to Celebrity's Hanrahan. "I'm going to pass the microphone to Dan," said Goldstein in his signature business-like tone. "It might not sound like Dan, but it really is him. Management believes he sounds sexier, but you can be the judge of that." Assuming Hanrahan had a cold, we awaited a husky voice -- but when Hanrahan spoke, his voice seemed to be lacking the whiskey-soaked character that Goldstein had prepared us for. According to sources, Hanrahan has only a minor cold.
In Case You Missed It
Celebrity named its fifth and final Solstice-class ship Celebrity Reflection; it will debut in fall 2012.
--by Dan Askin, Associate Editor
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Will Massive Cruise Ships in the Caribbean Equal Lower Winter Fares?
October 27, 2010