Why are You Picking on Royal Caribbean?
Written by: Paul Motter
I have seen and heard more negative comments about Royal Caribbean than any other cruise line lately, and frankly I just don’t get it. Royal Caribbean has been getting knocked by stock market analysts, the cruise media, message board posters and even loyal cruisers. Just two days ago our own Kuki blasted them for some of their recent policy changes. As a result of this and the economy, their stock price has dropped almost 85% in the last two years. Are we really seeing missteps coming from RCL management, or are we missing the big picture?
Before I start this editorial I want to give full disclosure; I am currently a shareholder of Royal Caribbean stock and the editor of this web site where Royal Caribbean is a sponsor. However, I do not work for Royal Caribbean and I bought the stock with my own money – it was not given to me as a perk. This is not a recommendation to buy any stock *, it is just a personal opinion of recent events.
My esteemed colleague (giving him all the deference he would receive in British Parliament), Kuki, wrote a piece on Wednesday in which he points out all the recent policy changes Royal Caribbean has made, which in the context of the current economy he contends are boneheaded and damaging to the company’s reputation.
I love a cruise enthusiast, and so does the cruise industry, these days most ships are filled by at least 60% repeat cruisers. But I have a different view and I contend only an avid cruise enthusiast like Kuki, or a Wall Street analyst, would put Royal Caribbean under the microscope as he has done. I congratulate Kuki for being a very discriminating shopper, but I want to address Royal Caribbean’s recent moves one at a time.
Kuki’s list of recent Royal Caribbean missteps appears as a tempest in a teapot to me. I believe these transgressions will go largely unnoticed except by the most avid cruise line watchers. Meanwhile, the story of Royal Caribbean running the newest, most innovative and exciting cruise ships in the world is about to ferociously dominate the cruise news cycle – as soon as Oasis of the Seas is unleashed on the travel world.
But let’s look at the current state of Royal Caribbean. The main thread of recent announcements is that RCL is charging more for some things, and reducing what it gives away for free. Why is Royal Caribbean now taking things back? In its first years, in assessing the almost miraculous success of Carnival Cruise Lines, RCL noticed Carnival didn’t supply its customers with much beyond towels, sheets and perhaps a bar of soap. So, RCL decided to become the cruise line that gave more.
Early customers received a full basket of cosmetic products, fruit bowls, ice buckets, fresh flowers and gifts at bedtime. For many years, RCL successfully tagged Carnival as “The K-Mart of Cruise Lines,” by making their passengers feel more special on Royal Caribbean ships.
But time moves on.
Today, Carnival has cunningly figured out a way to give each guest a “starter kit” of bathroom amenities in a basket of free samples supplied to them by the soap and notions makers. They installed body wash and shampoo dispensers in the showers. The is a great example of how cunning Carnival can be as a competitor.
Meanwhile, Royal Caribbean realized what it was giving away was costing them more than necessary, so over the years it has scaled back, but not as much.
As we learned from the Peter Greenberg CNBC special, onboard revenue is the differential that puts a cruise into profit-making territory. Every cruise line lives by onboard revenue. The Royal Caribbean moves are meant to increase onboard revenue, hopefully without hurting the sensibility of its customer base.
Here are Kuki’s complaints – and why they don’t matter to me:
Richard Fain’s proclamation of no deep discounting.
CEO Richard Fain recently made a statement that he would prefer not to lower Royal Caribbean’s cruise prices because it takes so long to get them back up again. I agree with him, but I don’t actually believe he means it. I have seen Royal Caribbean discounting. Perhaps not as much as other lines’ deep discounts, but in those cases it is possible that they don’t need to discount as much.
In normal practice, every cruise line lowers its rates as much as it takes to fill its ships. But watching the daily strategy of cruise line CEOs can be very entertaining. Quite possibly, Fain’s comments were nothing more than a head fake to the other cruise lines.
Carnival has been discounting, and its last quarter’s earnings surprised to the upside by a large amount, at $.33 per share vs. $30 last year; beating analyst expectations of $.19 per share. In a regular market that might be considered a blowout quarter, far better than expected. However, Carnival and Royal Caribbean both lowered earnings estimates going forward, something many companies have done lately. In truth, no one knows where this economy is going and it is always better to surprise to the upside than the downside.
The cruise industry is amazingly homogenous, rarely do you see one cruise line doing remarkably well while the competition is struggling. This is because every line keeps close tabs on the competition – adjusting pricing and special offers accordingly.
When Royal Caribbean announced they would prefer not to lower cruise fares it meant three things:
1) They still would drop them, they just weren’t happy about it.
2) They would not drop them as much as their competitors (Princess and NCL are under $380 in Alaska) possibly because they do not have to. I do not believe the part about not caring if they fill their ships. Every cruise line still needs to fill its ships.
3) Travel agents, who sell 90% of cruises, stand to make more selling the average Royal Caribbean cruise as long as the fares remain higher than the competition, giving them an edge in the important sales channel.
– the cessation of dividends paid to shareholders.
Obviously, this only affects shareholders. OK, it was bad for value shareholders, but anyone looking for dividends isn’t in leisure stocks. It was a good move if you are looking for higher earnings. It was amazing how much this move hurt both stocks, as if the dividend was ever a reason to buy them.
The stock price of RCL has dropped from its high of over $50/share two years ago to about $9/share today. I am not an analyst, but I can tell you the “opinions” by analysts as to how Royal Caribbean will do this quarter and in 2009 are all over the place. Some have said their stock is going to $1, some have said it will go higher than the current level.
Kuki notes Royal Caribbean “Reducing shareholder benefits” when those owning a minimum of 100 shares were able to receive a shipboard credit, they are still able to, but it is no longer combinable with other onboard credit offers, general loyalty offers, “dollars off” promotions and savings certificates. Guests have the option to choose between the shareholder benefit or the other offer.”
This is a “remains to be seen situation,” since the conditions are vague, but this is not enough to disenfranchise the average cruiser and it does not change the onboard experience. The credit is still there for those who care, they just have to be more careful when shopping. I chalk this up to the media. I recommended people should try this, and it looks like they did.
Kuki cites $3.95 Room service fees for room service orders after Midnight.
I agree this is a bad PR move. Like the others it is meant to make a difference in “yield” – the amount of profit per passenger per day. But this makes them look cheap and “nickel and diming” is a bad reputation for a cruise line. I doubt it will change anyone’s mind about a Royal Caribbean cruise, but they could have found a less controversial way to deal with wee-hour room service issues.
Kuki notes “a price increase for Johnny Rockets Diners onboard – to $4.95 per guest”
So it now costs a dollar more than it did. The line to get in was snaking down the deck. Who would have ever guessed Johnny Rockets would be such a hit on a cruise ship? Good for them, they are able to raise the price. I wasn’t even aware of this one.
$14.95 for a “better quality” steak in the Dining Room
I have no idea how this is working out, but I guess it adds a few hundred dollars per cruise. Was it worth the public relations tarnishing? No, it makes the regular steaks look bad by comparison. Carnival offers a delicious flat iron steak on the menu nightly. Still, only the most rabid cruise fans are going to notice this and no one is required to pay the $14.95.
Kuki cites, “A $7.95 charge for a children’s lunch and play program for those ages 3-11.” I have no comment here because I don’t have kids and don’t know how this compares. I can tell you this, kids LOVE Royal Caribbean ships. It’s the only cruise line that rates as high as Disney for children’s programs and fun factor.
Kuki notes that many of the recent announcements involve changed amenities for people in its loyalty program, the Crown & Anchor Society. First is “no longer offering complimentary cocktails at the Crown & Anchor repeaters party” This affects the “Crown & Anchor Society” members who cruise repeatedly to earn these loyalty points. However, as a shareholder I am thinking, “if they have so many loyal cruisers they feel they can cut this amenity without losing (m)any of them, they are very confident in their loyalty cruiser base.”
Another reduction of benefits to the most loyal members is no longer allowing “Diamond members” of the program (those with more than 9 cruises) access to their Concierge Lounges.
Free drinks in the Concierge lounge will continue for Diamond+ members, suite guests and upon the Freedom and Oasis-class ships. Loyalty-club members now have a reason to prefer the newest, biggest and most exciting Royal Caribbean ships. They also have a new reason to try for the next level in the program.
Kuki notes RCL now “reserves sun-loungers by the main pool for Suite guests only, as well as seats in the theatres and Studio B for ice shows (where applicable)- which naturally means restricting access for those who are not Suite guests.”
In fact, RCL is one of the first cruise lines to do this and it is one of the most commonly mentioned perks that suite passengers and loyalty cruisers want, but most cruise lines do not give to them. I think it is perfectly acceptable. If they choose not to use them the ship can give the seats to other guests.
Yes, I hear the shouts of “it’s not democratic”, but in fact it compels people to spend more to get more. That is good business.
Any cruise line that has so many loyal customers they must cut back on what they give away has more loyal customers than they know what do with. This suggests Royal Caribbean is in pretty good shape when it comes to loyalty.
What choices does the RCL current loyalty program cruiser have? They could go to a different cruise line and start from scratch, but this is still a good program for the mainstream market. Other cruise lines have also cut back, so starting from zero anywhere else is probably a worse idea than working for the next level in the Royal Caribbean program.
The Bottom Line
Kuki is correct that Royal Caribbean has recently made a series of announcements that some cruisers have chracterized as “bone-headed.” But I believe these announcements are going unnoticed by the vast majority of cruisers. Only the most loyal will notice these small changes and they aren’t enough to compel them to leave.
For Royal Caribbean to announce things like this in such a competitive environment and before Oasis debuts tells me two things: 1) Royal Caribbean is smartly getting all the bad news out of the way while the economy and their stock is down anyway. 2) They wouldn’t be doing this if their bottom line was not healthy enough to take these self-inflicted blows.
This current economic climate has certain companies being cast as corporate villians. In the cruise industry this year, it appears to be Royal Caribbean. Why? I truly don’t know. Perhaps it is jealousy or just the penchant of certain people to indulge their skepticism. Royal Caribbean is investing heavily in the future during tough economic times. Some people just don’t understand how they can do that.
In fact, history shows slow economic times have spawned some of the world’s most successful companies. The disasterous 1970s, which were worse than current times (high inflation, interest rates at 20%, 10% unemployment and a flat stock market for ten years) created Microsoft, Southwest Airlines, Fedex, Apple Computers, Genentech and Oracle.
The one aspect for which I give Royal Caribbean the most credit is “having the long view.” The opposite of short-sightedness which is so common now. Yes, we are living in uncertain times, but there are still people who believe in the future and are invested in it. I respect that.
Oasis of the Seas will pierce the public psyche in a way that has never happened before. I believe Oasis and Allure will do for cruising what Disneyland did for amusement parks, what the Superbowl did for football. The image of cruising is about to change forever and Royal Caribbean is the reason.
There is already a group of cruisers who say the upcoming Oasis-class ships are “too big” and will never sail on them. But Oasis is not just a regular cruise ships on steroids. It is a revolutionary ship design that can easily accomodate its 5400-passenger load and offer a world of innovation at the same time.
I would bet every single one of the Oasis naysayers takes a cruise on her within the next five years. Some things feel too big when they’re new, especially to curmudgeons, but some things actually get better when they get bigger. I have had a 65-inch TV and HDTV for six years now. At first people said “wow” when they walked into my living room. Today it is common.
One thing you will never hear about the new Royal Caribbean ships is “the ship was boring.” Oasis of the Seas and her sister ship, Allure, will break the mold for cruise ships. The Freedom-class will become the new standard for good cruise ships. By comparison, the smaller Voyager-class and mega-ships from competing cruise lines are going to become average. The cruise experience will still be in demand on all ships, but the definition of a cruise ship is about to change.
Naturally, I am referring to the mainstream cruise market. I fully recognize mainly people prefer small ships and leisurely days at sea with no distractions. But that is not the sweet spot of selling cruises. When it comes to redefining the cruise experience, Royal Caribbean is the line taking the lead.
* One final note: this is not a recommendation to buy Royal Caribbean stock. This is still an uncertain market and one new ship is not enough to guarantee anything. This is just one person’s opinion and I buy and sell stocks frequently. Investing and trading should be done with care, and while I disclosed that I currently own these shares it does not mean I will announce when I sell them.
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