Time To For A Reality Check For Mr. Fain

[JohnSnowGOT]

So I get you're trying to backhandedly call me stupid, but you just made my whole point: if a CEO starts making calls out of their asses, they get sacked, fast. No shareholder will allow their investment to go to hell in a hand basket.

 

NO not really ... sorry dude....was being a little snarky....My apologies... I was just illustrating that CEOs are not Gods and don't always get it.

[The_Big_M]

Because they aren't allowed to...

 

Expression of opinions is something we take for granted as an inalienable right. But half a world away...

 

Oh, they can express opinions.

 

Just certain things can't be spoken of. But I can't see "cruise prices" falling into that category!

[RDC1]

So I get you're trying to backhandedly call me stupid, but you just made my whole point: if a CEO starts making calls out of their asses, they get sacked, fast. No shareholder will allow their investment to go to hell in a hand basket.

 

There are all kinds of examples of bad decisions by CEO's, especially with new products or changes (the Ford Edsel, new coke, etc). The key to surviving as a CEO is not necessarily avoiding bad decisions, but by limiting the damage of those that you do make and not having to spend too much of the goodwill you have built up by not making mistakes. Of course you also survive by making sure the board of directors is stacked and by making sure that you do not have to much stock concentrated in the hands of a small group of investors. As long as a CEO does not have a strong player go activist they can actually survive a lot of poor decision making.

 

The cruise industry is similar to the airline industry in that you have very large fixed costs, and very small variable costs once a cruise or flight takes place. The costs are pretty much the same if a cruise ship sails half full as it does full, just as with an airplane. That means that the key to success is to maximize the revenue which has meant getting as many bodies onto that ship as possible. Especially when one considers that a lot of the revenue comes from onboard sales.

 

Looking at the most recent 10Q. RCL's revenue is 1,306,779,000 (72%) from ticket sales and 508,820,000 (28%) with 9,214,643 passenger days and 105% occupancy number. This means that the average ticket price per day is 141.8 and the average on board spend is 55.2 per passenger per day (total $197).

 

Now for each percentage point that you reduce the occupancy number you eliminate 87,758 passenger days. At current per day revenue levels this would come to over $17 million in revenue per quarter. To make up for a 1 percent drop in occupancy rate the per day revenue would have to go up from 197 to 198.9. Basically the formula for the amount of per day increase would be new revenue per day = current revenue per day X (1+ (drop in occupancy rate/current occupancy rate)).

 

That looks pretty easy if they do not have to do much last minute discounting to fill ships. Of course if they have the pricing power then why haven't they taken advantage of it. Especially since their per day revenue in Q1 2014 was a higher $213, and an even higher $216 in 2013.

 

Now in his favor he did hedge a lot in what last minute discount meant.

 

"As a result in March we adopted a new policy that we would not do any last minute discounts on bookings in North America. Depending on the type of cruise, that last minute may be 10, 20 or 30 days out, but from that point on we will hold our price at the prior level."

 

Which could basically say that once the ship was full they would not have to discount anymore. So one could take this policy to really mean that they might start out with a more aggressive market plan so last minute discounts would not be necessary. It is one of those quotes that sounds like good CEO speak but may not really mean much in execution.

Edited April 24, 2015 by RDC1

[3dog]

There is a big difference though. The RCL lines have a much higher percentage of its capacity in the Caribbean, then CCL does. While Carnival cruise line might have a lot of its capacity there, the other CCL lines: Princess, HAL, Cunard, P&O, etc. are far more distributed. End result is less CCL reliance on the Caribbean market compared with RCL.

 

Can you back this up with hard data?

[3dog]

Keep in mind that the individual in the title of this Topic Richard Fain is the Chairman and Chief Executive Officer of the parent company, not just the individual line. Do you follow me?

 

The post you responded to was talking about RCL which is the stock symbol for the parent company. Do you follow me?

 

The financials are reported for the entire company, not for each individual line. Do you follow me? Since they do report in those fashion one really needs to look across all of the lines to look at the competitive aspect. RCCL is by far the largest share of RCL. Where as Carnival is not the largest share of CCL.

 

Just figure I would respond to your post in the same way your responded to mine. Do you follow me?

 

Generally speaking, you have this wrong. RCL is the stock symbol, but the parent company is RCCL (Royal Caribbean Cruises LTD). RCI is the brand known as Royal Caribbean International.

 

CCL is the stock symbol, CCL is also used for Carnival Cruise Lines, and is the brand name. Carnival Corporation & plc is the parent to which the stock is associated.

 

Do you follow me?

[RDC1]

Can you back this up with hard data?

 

Sure ran across the concentration numbers in an analyst report last year. Have to see if I can find it again. If not one can assemble the data by going to each cruise line and run the number of ships per region by month. Keep in mind that CCL is over twice the size of RCL.

 

From a 2014 Motley Fool article

 

Carnival and Royal Caribbean are the two largest cruise companies in the world. According to CruiseMarketWatch.com, Carnival has a 48% global passenger share and a 42% global revenue share. Royal Caribbean's market share is about half of Carnival's, with a 23% passenger share and a 22% revenue share.

 

As you'd expect, Carnival's fleet is more than twice the size of Royal Caribbean's. Carnival operates 101 cruise ships and Royal Caribbean operates 41 cruise ships.

 

 

Now let me go see if I can find the article on regional concentration.

[3dog]

Which could basically say that once the ship was full they would not have to discount anymore. So one could take this policy to really mean that they might start out with a more aggressive market plan so last minute discounts would not be necessary. It is one of those quotes that sounds like good CEO speak but may not really mean much in execution.

 

My speculation is that this is more of an accurate assessment. As spoken, he intends to strengthen the brand, and if successful means stronger earlier sales so (as you suggested) there is no need to discount. Some aspect of this is to take the chance by the enforcement of not discounting even though it would decrease earnings, as already suggested (they have lowered the future earning guidance).

 

And even though it has been announced to not discount, there are other ways to offer last-minute deals on available cabins to achieve a sold-out sailing.

[RDC1]

CCL has a nice table in their 10k that breaks down passenger capacity by region

 

Caribbean 34%

Med 15%

Europe Other 13%

Australia 9%

Alaska 5%

Asia 6%

Other 18%

 

The best I could find so far for RCL is a list of ships and the markets they serve. They do not provide a similar breakdown in their 10k. Which does not say what percentage of their time they spend in each region. Out of 34 ships from RCCL and Celebrity.

 

Caribbean 24

Alaska 5

Asia 4

Europe 6

Australia 5

South America 1

 

Over 2/3 of Celebrity and RCCL ships spend at least part of the year in the Caribbean, only 10 do not list the Caribbean in their service area.

 

Will continue to see if I can find that analysts report or something else that locks down a hard percentage by passenger days like the numbers for CCL.

Edited April 24, 2015 by RDC1

[3dog]

Over 2/3 of Celebrity and RCCL ships spend at least part of the year in the Caribbean, only 10 do not list the Caribbean in their service area.

 

Will continue to see if I can find that analysts report or something else that locks down a hard percentage by passenger days like the numbers for CCL.

 

It doesn't surprise me that 2/3rds of X and RCI ships spend some time in the Caribbean, as it is a common wintering or repositioning destination (it wouldn't surprise me if every cruise line has a ship there for some part of a year). But a recent RCI search of the summer and winter holiday seasons (most popular time for Caribbean cruises) wasn't suggesting even 34% (but I may go back and get more specific details).

 

 

Edit: I do have some agreement with an assessment of more destination diversity, but recent deployment schedules do seem to suggest this diversity is happening. Which would go along with the assertion of strengthening the brand and allowing stronger pricing and less need to discount.

Edited April 24, 2015 by 3dog

[GottaKnowWhen]

I am old. There is dirt younger than I am. This is the first time I have ever heard a sane person say they want to pay a higher price for a product ....

 

 

Really? I personally hate (not dislike, not find disagreeable, but hate) the obsession with price. In my ideal world people would obsess instead about value. If I can avoid it, I do not deal with retailers or service providers whose business model is based on "Discounts!" "Rebates" and other gimmicks. Tell me the price, I will decide if there is positive value in the transaction for me. If your price seems too low, I will look for a vendor I can trust.

[RDC1]

I did find the numbers by region for the overall cruise industry.

 

Caribbean 37.5%

Med 18.9 %

Europe Other 11.1%

Australia 5.9%

Alaska 4.5%

Asia 4.4%

Other 17.8%

 

Found the numbers for RCL in a little different breakdown. Found this in a 2014 presentation from John Tercek

Vice President of Commercial Development Royal Caribbean Cruises Ltd

 

RCL

 

Caribbean 49%

Europe 26%

Alaska 4%

Other 22% other in this case includes asia, australia, that are broken out in the other tables

 

 

You can see that RCL is over represented in the Caribbean compared to CCL and for the cruise industry as a whole. One thing to note was that in 2000 was 65% Caribbean so they are getting their Caribbean percentages down. But they are still heavily reliable on that market.

 

 

 

CCL has a nice table in their 10k that breaks down passenger capacity by region

 

Caribbean 34%

Med 15%

Europe Other 13%

Australia 9%

Alaska 5%

Asia 6%

Other 18%

 

So compared to industry percentages CCL is under represented in the Caribbean and Med, over represented in the other regions.

Edited April 24, 2015 by RDC1

[RDC1]

Generally speaking, you have this wrong. RCL is the stock symbol, but the parent company is RCCL (Royal Caribbean Cruises LTD). RCI is the brand known as Royal Caribbean International.

 

CCL is the stock symbol, CCL is also used for Carnival Cruise Lines, and is the brand name. Carnival Corporation & plc is the parent to which the stock is associated.

 

Do you follow me?

 

Probably. He used the nomenclature of RCCL representing the line not the company so I just stuck with it in my response. Did not bother to look it up at the time. I usually just use RCL as the stock symbol to represent the parent company and use the full name for the cruise line.

Edited April 24, 2015 by RDC1

[RDC1]

To clean it up and do an apples to apples.

 

RCL

 

Caribbean 49%

Europe 26%

Alaska 4%

Other 22%

 

CCL

 

Caribbean 34%

Europe 28%

Alaska 5%

Other 33%

 

Industry

 

Caribbean 37.5%

Med 30%

Alaska 4.5%

Other 28%

[Byron_1978]

I haven't read the whole 14 pages of this discussion, but I do want to weigh in on the debate price vs quantity of cabins sold.

 

http://www.mckinsey.com/insights/marketing_sales/the_power_of_pricing

 

McKinsey is widely known as THE expert in pricing. Quite a few large companies use McKisney for pricing or other issues.

 

The clearly state (see exhibit 1 in the link) that with stable volume, a price raise of 1% equals an 8% raise in operating profits.

 

I think that if they do less last minute discounts, they can generate more than an overall price raise of 1%. I also think that with less last minute discounts, the number of sold cabins will remain quite stable. They might lose a few cabins, but will still come out ahead.

[3dog]

To clean it up and do an apples to apples.

 

Don't totally agree with this assessment (but will agree that it is a reasonable comparison), as it skews with scale (the larger the sample, the more diverse it would be - right now, 100% of DCL ships are in the Caribbean, and even as some of these ships move around, they will be leaving 50% of their ships in that geographical region - but they have no inventory to really diverse farther).

 

Also question the age of data (a fair amount of capacity has not only been added since the report; a fair amount of the added capacity wound up being outside of the Caribbean), so it may be missing more recent relevant trends (you have already identified a trend to diversity). But a company shouldn't also abandon it's current strong markets just to diversify; even if that accounts for a larger percentage share than other competitors or the market on the whole (could be that they area share leader in that region, so better to diversify by adding to other regions, and not removing from strong regions).

 

Your assertion that RCCL needs to diversify outside of the Caribbean is reasonable, but maybe this plan was already underway when the announcement that sparked this thread.

 

But I guess the real (rhetorical) questions are if this really is part of the long-term plan and if this will really strengthen the company. Only time will tell.

[The_Big_M]

Great analyses RDC1.

 

Only thing I'd amend is

 

"As a result in March we adopted a new policy that we would not do any last minute discounts on bookings in North America. Depending on the type of cruise, that last minute may be 10, 20 or 30 days out, but from that point on we will hold our price at the prior level."

 

Which could basically say that once the ship was full they would not have to discount anymore.

 

Sort of, but it's not even that drastic. Not "anymore" but further, i.e. all they're saying is by 10 days out they won't discount further.

 

So e.g. the price may be lowered to $50/night 11 days out, and it will remain at that price until sold. And they'll still comply with the new policy. Even though I think that comment has given a very different impression to a fair number of posters.

[Cruiseathoning]

Two big problems Royal has in terms of marketing-for the seasoned cruiser, gimmicks and value are not synonymous and secondly, the American base is steadily growing downmarket with people who are much less discriminating about quality and more concerned about price.

 

Royal has built ships that necessarily position themselves upmarket because they can not afford to sail at $370 pp Voyager, $510 pp Freedom class, $700 Oasis and so on. But they can't seem to convince enough people to budge from that price point and abandon the NCLs and Carnivals of the world. Sure they sail full-at low prices. But like a shark waiting for the hull to breach, a whole bunch of low spending fishy are waiting to fall into Carnival's mouth the minute Royal tries to price itself as a luxury line.

 

In the end there is only one way to get me to fork out premium cash, and it is not flow riders, ziplines, or laser lights, it is service. Top notch, floor to ceiling start to finish service.

 

Royal is a good value to me, because they are pricing themselves roughly similar to Carnival, and obviously if you can choose between the two at the same price..duh.

 

But much higher I will move onto Celebrity or beyond to avoid children and get better food. Just my thoughts.

Edited April 24, 2015 by Cruiseathoning

[RDC1]

Don't totally agree with this assessment (but will agree that it is a reasonable comparison), as it skews with scale (the larger the sample, the more diverse it would be - right now, 100% of DCL ships are in the Caribbean, and even as some of these ships move around, they will be leaving 50% of their ships in that geographical region - but they have no inventory to really diverse farther).

 

Also question the age of data (a fair amount of capacity has not only been added since the report; a fair amount of the added capacity wound up being outside of the Caribbean), so it may be missing more recent relevant trends (you have already identified a trend to diversity). But a company shouldn't also abandon it's current strong markets just to diversify; even if that accounts for a larger percentage share than other competitors or the market on the whole (could be that they area share leader in that region, so better to diversify by adding to other regions, and not removing from strong regions).

 

Your assertion that RCCL needs to diversify outside of the Caribbean is reasonable, but maybe this plan was already underway when the announcement that sparked this thread.

 

But I guess the real (rhetorical) questions are if this really is part of the long-term plan and if this will really strengthen the company. Only time will tell.

 

I went back and checked. The presentation (which is annual data from the company) included the new build data (also a lot of info about the RCL owned private ports, makes sense since it was done by the vp business development). The only new capacity since the report and today were Anthem and Quantum with 8200 berth capacity. Those increase RCL capacity from 78650 berths to 86850 (according to the report)

 

It is only with the Quantum that you have word of a new build being sent fully out of the Caribbean market. The other relatively new build that does not touch the Caribbean is Solstice which serves Australia and Alaska. So while the new build capacity since the report would bring the Caribbean numbers down some, it would still be in the 40-45% range, higher then the industry average. They really need the 2016 capacity (another 9200 berths to be fully based outside of the Caribbean) before their numbers come down.

 

Again my comment that started this was only the observation that the heavier concentration in the over served market of the Caribbean made them more vulnerable to having to discount. The announcement that they were sending a new build to Asia clearly shows that they recognize the fact as well. Would be surprised if they didn't since it has been a major part of analyst reports on the stock for years when it came to growth analysis. I believe that Fain has even talked about it in previous analysts calls.

[Paul65]

Great analyses RDC1.

 

Only thing I'd amend is

 

 

 

Sort of, but it's not even that drastic. Not "anymore" but further, i.e. all they're saying is by 10 days out they won't discount further.

 

So e.g. the price may be lowered to $50/night 11 days out, and it will remain at that price until sold. And they'll still comply with the new policy. Even though I think that comment has given a very different impression to a fair number of posters.

 

That's pretty much how I interpreted the remarks, as well. It doesn't mean the end of discounts, but rather holding a line that, after a certain date, they will not discount any further. I'm sure they get some of the more flexible, bargain shopping cruisers who try to monitor how full a ship is and wait for a last-second super-sale. That works out well for the bargain shopper, but makes it harder for the cruise company to plan.

[Oppalopa]

Too funny.:D

 

Biker, who hopes the milenials take the time to research and find out about Gilligan's Island.

Great :)

[Big_G]

I went back and checked. The presentation (which is annual data from the company) included the new build data (also a lot of info about the RCL owned private ports, makes sense since it was done by the vp business development). The only new capacity since the report and today were Anthem and Quantum with 8200 berth capacity. Those increase RCL capacity from 78650 berths to 86850 (according to the report)

 

It is only with the Quantum that you have word of a new build being sent fully out of the Caribbean market. The other relatively new build that does not touch the Caribbean is Solstice which serves Australia and Alaska. So while the new build capacity since the report would bring the Caribbean numbers down some, it would still be in the 40-45% range, higher then the industry average. They really need the 2016 capacity (another 9200 berths to be fully based outside of the Caribbean) before their numbers come down.

 

Again my comment that started this was only the observation that the heavier concentration in the over served market of the Caribbean made them more vulnerable to having to discount. The announcement that they were sending a new build to Asia clearly shows that they recognize the fact as well. Would be surprised if they didn't since it has been a major part of analyst reports on the stock for years when it came to growth analysis. I believe that Fain has even talked about it in previous analysts calls.

 

Should it really be the goal to bring down capacity in the Caribbean or just expand capacity into new markets? If they were overserved in the Caribbean wouldn't that be reflected in pricing now? With Quantum and Ovation heading to China, Harmony heading to the Caribbean, and a fourth Oasis Class ship on order, it sounds like their plan is to expand into new markets without reducing capacity in the Caribbean.

[grandgeezer]

Two big problems Royal has in terms of marketing-for the seasoned cruiser, gimmicks and value are not synonymous and secondly, the American base is steadily growing downmarket with people who are much less discriminating about quality and more concerned about price.

 

Royal has built ships that necessarily position themselves upmarket because they can not afford to sail at $370 pp Voyager, $510 pp Freedom class, $700 Oasis and so on. But they can't seem to convince enough people to budge from that price point and abandon the NCLs and Carnivals of the world. Sure they sail full-at low prices. But like a shark waiting for the hull to breach, a whole bunch of low spending fishy are waiting to fall into Carnival's mouth the minute Royal tries to price itself as a luxury line.

 

In the end there is only one way to get me to fork out premium cash, and it is not flow riders, ziplines, or laser lights, it is service. Top notch, floor to ceiling start to finish service.

 

Royal is a good value to me, because they are pricing themselves roughly similar to Carnival, and obviously if you can choose between the two at the same price..duh.

 

But much higher I will move onto Celebrity or beyond to avoid children and get better food. Just my thoughts.

 

We left Celebrity because of pricing. I don't want to pay for other peoples free drinks as they have it as a "free" perk on all of their cruises. The food quality, and selection has dropped. We have 4 cruises booked on RCL and all of them are several hundred dollars, p.p. than a similar cruise on Celebrity. 11 of our last 12 cruises were with Celebrity but no more. When RCL catches up with Celebrity, then our cruising days will be over. Final total will be 39 cruises with 423 days at sea.

[Big_G]

We left Celebrity because of pricing. I don't want to pay for other peoples free drinks as they have it as a "free" perk on all of their cruises. The food quality, and selection has dropped. We have 4 cruises booked on RCL and all of them are several hundred dollars, p.p. than a similar cruise on Celebrity. 11 of our last 12 cruises were with Celebrity but no more. When RCL catches up with Celebrity, then our cruising days will be over. Final total will be 39 cruises with 423 days at sea.

 

Isn't it a choice of perks on Celebrity ...drink package, OBC, or gratuities?

[RDC1]

Should it really be the goal to bring down capacity in the Caribbean or just expand capacity into new markets? If they were overserved in the Caribbean wouldn't that be reflected in pricing now? With Quantum and Ovation heading to China, Harmony heading to the Caribbean, and a fourth Oasis Class ship on order, it sounds like their plan is to expand into new markets without reducing capacity in the Caribbean.

 

It is reflected in pricing today. If you look at the regions the prices in the Caribbean tend to be among the lowest per passenger day of any region when you look across the cruise lines.

 

Alaska is another market that has become subject to heavy discounting.

 

The key is the percentage of their passenger capacity that is in the market. They could, as you say, grow their way out of it by putting the new builds into other markets. Of course looking at some of the comments on CC people seemed upset that they made the decision to send Quantum to Asia, even though it makes great sense from a business perspective.

[GottaKnowWhen]

Isn't it a choice of perks on Celebrity ...drink package, OBC, or gratuities?

 

Sometimes. What seems to be typical is Veranda gets a choice of the three, sometimes for some cruises it is maybe two of the three. Concierge Class and higher get all three.

 

Those who don't drink or don't buy enough drinks to benefit from a drinks package (e.g., Elite status members who get free cocktails every evening in the lounge anyway) often object that the overall prices have gone up to counterbalance these freebies. And so they feel they are paying for other's drinks.

 

I do drink. I like the free Classic drinks package. However I never go to any of the shows. Should I object to the fact that my cruise fare is paying for all of this free entertainment that others seem to enjoy!?!? I don't think so. Pour me another margarita and I'll go over in the corner and think about it...:rolleyes: