success and failure in the cruise line industry

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To: Luke McElfreshDr. John L. KeiferNadège LevalletTom MarcheseCatherine Penrod

From: Team #7:

Bobby AbbettEvan LewisEric BartelKyle HausfeldCarlin Hillier

Date: February 16, 2015

Subject: Memo of Transmittal

As requested by the managers of Copeland Associates, our team has performed an analysis of the cruise line industry. The report contains the current and future outlook of the industry, key success factors, a company analysis between Carnival Cruise International and Royal Caribbean Ltd, followed by our recommendations for Carnival to improve their operations.

The key success factors our team has decided the industry must consider are:

-Extend Global Reach into Expanding Markets-Continuous Innovation in Amenities to Increase Onboard Spending-Effectively Market Your Brand to Reliable Segments

Our recommendations for Carnival include:-Create a fleet of ships matching or surpassing the quality of Quantum of the Seas-Change the capital structure to be more highly leveraged-Respond more appropriately and effectively to incidences

Our team would like to personally thank you for the opportunity to expand our knowledge and professional development in the business community. If there are any questions about the information we have researched or for any other reason please feel free to contact our project coordinator at [email protected] or 301-300-0107 (Bobby Abbett).

College of BusinessCopeland Hall, Ohio University

Athens, Ohio 45701

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Success and Failure in the Cruise Line Industry

Prepared for:Copeland Associates Managers

College of BusinessOhio University

Prepared by:Business Analysts of Copeland Associates

Mid 107 Team 7College of Business

Ohio University

February 9, 2015

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Key Success Factors:

• Our highest graded key success factor for a company within the cruise industry is to Extend Global Reach into Expanding Markets. Cruise lines have reached out to China, Cuba, and Europe, driving the competition within the industry in order to have their company be the first that these new markets see.

• Our next highest graded key success factor is for these companies to Continuous Innovation in Amenities to Increase Onboard Spending. Cruise lines have added innovative amenities to attract new customers to differentiate themselves from the competition within the industry.

• Effectively marketing their brand to potential segments was weighted the third highest. Companies looking to grow must reach out to new customers in their target market to expand their business. Finding the right customers and pleasing them with the experience they want will give cruise companies the benefit of vacation versus substitute vacations.

Carnival and Royal Caribbean AnalysisCarnival is the current leader in market share offering the most destinations, has the most ships, and operates with the most capital out of all the companies within the cruise industry. Royal Caribbean comes next with innovations, which they hope will surpass Carnival in a near future. We rank Royal Caribbean higher than Carnival in terms of future outlook after extensive research leading to the assumption of a higher efficiency rating.

Recommendations for Carnival

• Carnival needs to come out with a response to Royal’s Quantum of the Seas

• Carnival should buy back equity and issue out debt in order to keep more of their revenues as profit

• Carnival needs to better respond to incidences, in a timely and honest manor so that the public does not think poorly of their brand.

ConclusionCarnival and Royal Caribbean are undeniably the two top firms in the cruise line industry. Each company has proven to be a successful business while pleasing thousands of vacationers with their remarkable ships.

Executive SummaryMID 107 Team #7

Cruise Industry Description The cruise industry is a global business that promotes the ideal vacation that a typical family would enjoy. It costs hundreds of millions of dollars in order get passengers aboard your vessel to make a profit worth the investment.

Project ReviewWithin our report, you will find information about the current and future outlook of the industry as well as a comparison of the two top competitors within the industry, Carnival Cruise International and Royal Caribbean Ltd. We also include a breakdown of how these companies are doing based on our own grading criteria.

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Table of Contents

Introduction……………………………………………………………………………………………………...6Cruise Line Industry Overview…………………………………………………………………………………8Present…………………………………………………………………………………………………………..8Future…………………………………………………………………………………………………………….8KSF # 1: Extend Global Reach into Expanding Markets…………………......................................................9China………………………………........................................................................................................................9Malaysia..............................................................................................................................................................9Australia.................................................................................................................................................................10Europe....................................................................................................................................................................10KSF # 2: Continuous Innovation in Amenities to Increase Onboard Spending.............................................11KSF # 3: Effectively Market Your Brand to Reliable Segments….................................................................12Demographic…….......................................................................................................................................12Behavioral..............................................................................................................................................................13Company Analysis: Carnival Cruise Lines......................................................................................................14Carnival Trend Analysis........................................................................................................................................14Benchmark for Carnival........................................................................................................................................14Notable Key Ratios Analysis................................................................................................................................14Carnival Marketing Environment.........................................................................................................................15Carnival Company Segmentation.........................................................................................................................15Carnival Information Systems..............................................................................................................................15Carnival Key Success Factor Evaluation.........................................................................................................16Extend Global Reach into Expanding Markets......................................................................................................16Continuous Innovation in Amenities to Increase Onboard Spending……............................................................16Effectively Market Your Brand to Reliable Segments...........................................................................................17Company Analysis: Royal Caribbean LTD......................................................................................................18 Overview………………………..........................................................................................................................18Benchmark for Royal Caribbean............................................................................................................................18Notable Key Ratios Analysis................................................................................................................................18Royal Caribbean Marketing Environment............................................................................................................19Royal Caribbean Company Segmentation............................................................................................................19Royal Caribbean Information Systems.................................................................................................................19Royal Caribbean Key Success Factor Evaluation..........................................................................................20Extend Global Reach into Expanding Markets…..................................................................................................20Continuous Innovation in Amenities to Increase Onboard Spending………………………………………........20Effectively Market Your Brand to Reliable Segments...........................................................................................21Recommendations..............................................................................................................................................22Recommendation # 1: Carnival’s Response to Quantum of the Seas..................................................................22Recommendation # 2: Buy Back More Equity, Issue out More Debt.................................................................23Recommendation # 3: Responding to Incidences...............................................................................................24Conclusion..........................................................................................................................................................25References...........................................................................................................................................................26

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Table of Figures

Figure 1: Weighted Averages…………………………………………………………………………………….6Figure 2: Revenue of Industry……………..…………………………..…………………………………………7Figure 3: Passengers Carried………………..………………………………………………………………........7Figure 4: Market Share…………...………………………………………………………………………………8Figure 5: Passenger Percentage 2012…………...…..........……………………………………………........……9Figure 6: Passengers Percent 2020……………………………………………………………………………….9Figure 7: Penetration Rates………...........................................................................................................………10Figure 8: Onboard Payments………………………………………………………………………………........11Figure 9: Passengers by Age………………………………………………………………………………….…12Figure 10: Passengers by Income……………………………………………………………………………...12Figure 11: Passengers by Marital Status………………………………...………………………………………12Figure 12: Customer Satisfaction………………………………………………………………………………13Figure 13: Carnival Key Ratios 1……………………………………………………………………………….14Figure 14: Carnival Key Ratios 2…………………………………………………………………………….....14Figure 15: Carnival Valued Destination Variety/Reach…………………………………………………….......16Figure 16: Carnival Valued Expansion and Innovation………………………………………………................16 Figure 17: Carnival Valued Demographics and Incidents………………………………………………………17Figure 18: Royal Key Ratios 1………………………………………………………………………………….18Figure 19: Royal Key Ratios 2………………………………………………………………………………….18Figure 20: Royal Valued Destination Variety/Reach…………………………………………………………...20Figure 21: Royal Valued Expansion and Innovation……………………………………………………………20Figure 22: Royal Demographics and Incidences…………………………………………………………..........21Figure 23: Weighted Averages 2………………………………………………………………………………..25

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Purpose and Preview of Project and Findings

Introduction Overview Key Success Factors Company Analysis Recommendations Conclusion

For Part B of the Company Analysis, the Copeland Associates Managers asked us to research the two main competitors of the Cruise Line Industry. In this report, we examine the strategic position of each company and ultimately offer recommendations for Carnival to help improve its competitiveness and market share as we came to the conclusion that they were less favorably positioned.

Throughout the report we are going to touch on three key segments: each company’s current position relative to the marketplace, evaluation of each company’s performance against our key success factors, and recommend what Carnival can do in order to beat Royal Caribbean.

We will start by benchmarking the companies against their key competitors in the marketplace and evaluating their financial position and what information systems they use. From there, we have created Marketing Environments of the companies in relation to the industry as a whole, and then to each other. Lastly, we touch on how each company segments their targeting and positioning strategies to reach new opportunities for growth of new demographics.

After providing this information of each company’s strategic position, we explain our recommendations for Carnival to improve its operations. This will include a brief rationale as to how these recommendations will help Carnival in relation to the key success factors we have identified. Each of these recommendations will overview how the company should go about implementing them, what the financial impact will be of these recommendations, and what limitations they may face.

Our first key success factor is weighted at 50% because certain countries show high growth potential for the industry, such as China. Innovation in amenities is weighted at 30% since income from onboard expenditures make up around 25% of total revenue. Effective marketing is weighted at 20% because some segments have shown to be critical for companies to market to in order to get ahead.

Figure 1: Weighted Averages

Company(Weight)

Carnival Raw Weighted Royal Caribbean Raw

Weighted

Extending Global Reach(50%)

7.5 3.75 9 4.5

Amenities(30%)

7 2.1 9.5 2.85

Effective Marketing(20%)

8 1.6 7.5 1.5

Total 22.5 7.45 26 8.85

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Cruise Line Industry Overview

PresentThe early 20th century is when the concept of superliners, or floating hotels, entered the industry. Advertisements of food and on-board activities showed people that there is more to riding a ship than just to cross the ocean. In 1990, the cruise line industry only had the capacity to carry 3.7 million passengers. Last year, the passenger load reached 21.5 million. The cruise lines are projected to carry a total of 22.2 million passengers in 2015. The current cruise line industry is a $37.1 billion industry as of 2014, showing a 12.17 billion dollar growth since the 2009 recession (Statista, 2014).

08 09 10 11 12 13 1405

10152025303540

27.56 24.93 26.85 29.434.54 36.27 37.1

Revenue of Cruise Industry 2008 – 2014 (in billion U.S. dollars)

Revenue

FutureThe future of the cruise line industry is promising. The revenue of the cruise line industry is expected to grow 2% per year on average (Brennan, 2014). Consumer spending is also expected to increase 2.6% each year (Brennan, 2014). According to Cruise Market Watch (2015), by 2019 there is an expected growth of 3,690,000 total passenger carried (Cruise Market Watch, 2015). “Worldwide, the cruise industry has an annual passenger compound annual growth rate of 6.55% from 1990-2019” (Cruise Market Watch, 2015). 1985 1990 1995 2000 2005 2010 2015 2020 2025

0

5,000

10,000

15,000

20,000

25,000

30,000

3,774 4,7217,214

11,180

18,42122,247

25,316

Growth Forecast of Passengers Carried(Worldwide)

Year

Pass

enge

rs (i

n th

ousa

nds)

Figure 2: Revenue of Industry (Cruise Market Watch, 2015)

Figure 3: Passengers Carried (Cruise Market Watch, 2015)


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Cruise Line Industry Overview (continued)

“The total world wide cruise industry is estimated at $39.6 billion (a 6.9% increase over 2014) with 22.2 million annualized passengers carried (a 3.2% increase over 2014). Annualized total passengers carried world wide will be 22.2 million in 2014, a 3.2% increase over 2013.” (Cruise Market Watch, 2015).

Three major competitors took up about 76.7% of revenues and catered to approximately 81.6% of total passengers in the 2014 fiscal year (Cruise Market Watch, 2014). The three competitors consist of Carnival Cruise International, Royal Caribbean Ltd, and Norwegian Cruise Lines. Evidently these three companies have been successful in standing out amongst roughly 200 other companies within the competitive landscape (Cyber Cruises).

Carnival has a market cap of $33.78 billion with 808.74 million shares outstanding. Royal Caribbean has 222.67 million shares outstanding with a total market cap of $16.57 billion. Norwegian Cruise Line has a market cap of $9.77 billion with 223.60 million shares outstanding.

42.20%

22.10%

12.40%

23.30%

Market Share by Revenue

Carnival Royal CaribbeanNorwegian Other

Figure 4: Market Share (Cruise Market Watch, 2015)

Carnival takes advantage of this large portion of the market share by operating with the most vessels out of the top competitors. Carnival currently operates 101 ships against its top competitor Royal Caribbean’s 42. If you refer to Appendix C, you will notice that Carnival had an approximate 2% smaller profit margin than Royal. By having the largest share of the market, Carnival is still able to take in more profits than Royal by nearly $500 million, despite the smaller profit margin. Royal Caribbean has spent $1 billion on their newest ships while Carnival has yet to exceed this amount. Royal Caribbean is even planning on spending $1.4 billion a ship “Oasis 3” by 2016 (Cruise Arabia & Africa, 2014). This shows how Royal takes a greater value approach versus Carnival’s quantity.

Refer to Figure 4 to see precisely how much of the market share these corporations truly take up. Carnival is the leader in terms of market share, accumulating 42.20% of total revenues. Royal Caribbean is 2nd with 22.10% of total revenues. The rest of the industry had 23.30% of revenues. Norwegian Cruise Line accounts for 12.40% of the market share leaving the rest of the industry at 23.30%. Although Carnival clearly has largest market share, this does not exemplify the amount they take in as profits. It is a competitive industry that will surely grow in the future with constant increasing demand.


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Extend Global Reach into Expanding Markets

ChinaChina is a growing market which accounts for 42.6% of total Asian cruise passengers. According to the China Cruise and Yacht Industry Association (CCYIA), the three major cruise ports in China (Shanghai, Tianjin, and Sanya) had hosted 377 international cruise ships, 55.8% more ships than in 2012 (Zhou, 2014). The total amount of passengers from 2008 to 2012 in China has shown a gradual increase per year totaling a 120% through the five year span.

35%

17%11%

37%

Percent of Passengers From Total of 1.3 Million in 2012

China Japan Malaysia Other

42.60%

20.20%

20.60%

16.60%

Percent of Passengers From Total of 3.8 Million Estimated in 2020

China Japan Malaysia Other

Figure 6: Perce

China had the highest total passenger count in 2012 by a solid 18% higher than Japan and is only estimated to increase every year. If you refer to Figure 6, you can see that the 35% in Figure 5 should increase to 42.60% during this eight year span. From an economic standpoint, China’s per capita GDP has had an exponential growth, the main reason why more Chinese citizens have been able to afford cruises (Zhou, 2014).

The big cruise companies have recognized this growing demand in China as they are beginning to reach out to this untapped market. For example, Carnival has reached out to a Chinese shipyard for a partnership in order to build vessels there. Royal Caribbean has also recognized this opportunity by being the first company to release a $1 billion ship in China, its largest worth vessel, Quantum of the Seas.

Another factor that makes China a demographic worth tapping into is the amount of vacation time they receive. Sixty-three percent of Chinese respondents answered that they plan to have over a week of vacation time (Asia, 2010). Japan’s economy has shown similar growth but has almost 10% less vacation time making it more difficult for them to attend a cruise.

MalaysiaCruise market potential in Malaysia is increasing as tourism in Asia continues to grow. In 2013 Malaysia received 512,400 cruise passengers, a one year increase of 7.6%, specifically 36,410 people. Malaysia is looking to generate $490 million in gross national income. If you refer to Figures 5 and 6, you can see that Malaysia is expected to have 20.6% of all passengers in Asia, second to China. This is significant because the total Asian cruise market has increased 31.6% compared to last year, which is a larger growth than Australia, the Caribbean, and Europe, showing that Asian countries are quickly becoming one of the largest cruise markets (Klang, 2015).

Figure 5: Passenger Percentage 2012 (Zhou, 2014)

Figure 6: Passengers Percent 2020 (Zhou, 2014)


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Extend Global Reach into Expanding Markets (continued)

AustraliaAustralia is also a growing market with the highest percent of its citizens taking a cruise last year, more than any other country in the world at 3.6%, as shown in Figure 7. Australia provided for 833,348 of total passengers last year and is predicted to increase to 1 million by 2016. Australia’s passenger growth rate was 20% last year, more than double any other country (Crouch, 2014).

Australia is one of the top countries in the amount of paid vacation time, with Australians receiving a mandatory 28 paid vacation and holiday days off. This makes Australia a much better country to expand operations in than the U.S. who has zero paid vacation days, as Australians actually have time to take a lengthy vacation on a cruise (Ray, Sanes, Schmitt, 2013).

Australia North America

UK/Ireland Germany0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00% 3.60%

3.30%

2.50%2.10%

Major Cruise Market Penetration Rates

Major Cruise Market Penetration Rates

Australia’s 2013 GDP per capita was $67,458.40. This is one of the highest in the world, beating out even the U.S. who had a GDP per capita of $53,042 in 2013 (The World Bank, 2015). This means that Australians not only have the time to take cruises, but they also are in a strong enough financial position to go vacationing regularly.

EuropeThe most notable factor for cruise line companies about the European market is that Europeans have a large amount of vacation time. “By law, every EU country has at least four weeks of paid vacation” (Hess, 2013). Despite this, only 1% of Europeans cruise each year.

“However, cruising in Europe to date has a lower level of penetration than in North America and represents a relatively small percentage of the European vacation markets. Approximately 6.4 million European-sourced guests took multi-night cruise vacations in 2013 compared to 11.7 million North American-sourced guests. Because of the relatively low penetration rates and other favorable characteristics of the cruise industry, we expect increased demand in the cruise segments of the European vacation markets” (10-K Carnival, 2014). This means that if cruise companies allocate more resources towards expanding in the European market, they should be able to experience high growth.

Figure 7: Penetration Rates (CLIA, 2013)


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Continuous Innovation in Amenities to Increase Onboard Spending

One of the most important things for the cruise line companies to consider in order to gain an edge over the competition is the pricing, number of, and quality of amenities. Cruises currently offer various forms of entertainment including casinos, movie theaters, drink packages, and outlets for physical activity. These options have been made available to combat competition with other cruise lines, to eliminate threat of alternatives, and to optimize customer satisfaction.

Onboard activities revenues account for 24% of total revenue for Carnival (Carnival 10-K, 2014), 27% for Royal (Royal 10-K, 2013), and 29% for Norwegian (Norwegian 10-K, 2014). This shows that the amenities generate a substantial part of total revenue. According to Cruise Market Watch, average onboard spending by the typical cruiser is $429 dollars for a seven day cruise (2015). Customers look for new and unique amenities as part of the cruising experience, so cruise lines need to devote resources here in order to maintain and build their customer base.

Figure 8: Onboard Payments (Mintel, 2013)

Figure 7 asks the question to regular cruisers what amenities they have paid extra for while aboard the ship. Internet access has been a major focus for Royal Caribbean’s “Quantum of the Seas”, which promotes the use of social media for all passengers. About 26% of these cruisers said they have paid extra for alternative restaurant dining; Carnival added network celebrity Guy Fieri’s Burger Joint in order to satisfy the want for exciting and unique meals. Only 24% of people said they did not pay extra for any of these amenities, meaning that 76% of cruises paid extra for at least one amenity. This highlights the earning potential that amenities possess onboard cruises.

Percent of People Who Paid Extra for AmenitiesSurveyed Cruisers Have Paid Extra For %

Internet Access 34

Spa Services 32

Alternative Restaurant Dining 26

Laundry Service 23

Preferred Dining Time/Schedule 19

Premium Seating for Entertainment 18

Use of “Adults Only” Areas 16

Exercise/Fitness Classes 16

Priority Boarding/Disembarking from Ship 12

Attendance to Shipboard Lectures/Education 12

Additional Storage 10

Celebrity Meet-and-Greet 9

None of the Above 24


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Effectively Market Your Brand to Reliable Segments

In order to be more successful than competitors in the cruise industry, companies need to target specific segments of the market that respond well to the cruise lines’ marketing and that are inclined to take cruises. The segmentation types that we found to be the best choice for cruise companies to market to are demographic and behavioral. DemographicThere are three main parts that make up demographic segmentation that cruise line companies need to take into consideration from a marketing standpoint; age, income, and family status. Cruises appeal more to an older customer base as shown in Figure 9, only 25% of people buying cruise tickets are under the age of 40. In order to easily draw in the older age range, cruise companies can advertise their activities and features that appeal to their generation. In order to bring in the younger generations, cruise companies need to show that cruises have plenty to offer them as well. The second demographic factor that needs to be considered is income. Figure 10 shows that 74% of all cruise passengers have an income of over $60 thousand. This means that the cruise lines can target these high income individuals by showing that they are a luxurious type of vacation. Conversely, the cruise lines can better target the lower income segments by showing that they have budget options that lower income groups can afford. The final important demographic factor is marital status. Cruising tends to be a vacation type that is group or family oriented. Figure 11 shows that 78% of cruise passengers are married. Also, 25% of cruisers travel with children under the age of 18, 23% travel with friends, and 21% travel with other family members (Cruise Ship Industry Statistics, 2014). By marketing their group activities, cruise companies are able to attract this large demographic segment.

Figure 11: Passengers by Marital Status (Cruise Market Watch, 2015)

7

18

2622

26

% of Passengers by Age

25-29 30-39 40-4950-59 60+

9

10

16

19

39

7 1

% of Passengers by Income

$39k-$50k $50k-$60k $60k-$75k$75k-100k $100k-$200k $200k-$300k$300k+

78

22

% of Passengers by Marital Sta-tus

Married Not Married

Figure 9: Passengers by Age

Figure 10: Passengers by Income


Effectively Market Your Brand to Reliable Segments (continued)

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BehavioralAnother important type of segmentation that cruise lines must consider is behavioral segmentation. The most important factor for cruise line companies when considering behavioral is customer loyalty, as the majority of cruise line passengers are repeat customers, and cruise customers have shown a tendency to remain loyal to one or a couple of brands.

Repeat customers are one of the leading sources of income for cruise line companies. A study in 2014 showed that 60% of total cruise passengers were repeat customers (Media Planet, 2014). Since cruises are of high value, the cruise experience for passengers tends to exceed expectations. According to Travel Truth, 96.4% of first time cruisers say they would like to repeat a cruise vacation in the future (2010). According to Figure 12, 94% of people report at least a satisfying experience, with 45% reporting an extremely satisfying experience. This shows the satisfaction customers feel towards the industry by people who have attended a cruise vacation and is a great way to spread word-of-mouth to new potential customers.

45%

49%

6%

Customer Satisfaction

Extremely Satisfied Satisfying Unsatisfying

Another aspect of behavioral segmentation that is important to consider is price sensitivity. Even though most cruise line customers tend to be repeat customers, repeat customers tend to be more price sensitive than first-time cruisers. Since these customers are experienced, they tend to try to find future, high quality cruises for a low price (Ahola, 2011). This means that repeat cruisers are not guaranteed customers, and that cruise line companies need to be value conscientious in order to keep these customers.

Figure 12: Customer Satisfaction (CLIA, 2011)


Company Analysis: Carnival Cruise Lines

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Debt Ratio Gross Margin Gross Profit0%5%

10%15%20%25%30%35%40%45%50%

39%

29%

44%

38%

28%

43%

39%

29%

46%

Carnival 2012-2014 Key Ratios

201220132014

OverviewCarnival is the top company out of the leading three in both revenue and passengers. Carnival Cruise Lines was founded in 1972. They almost went bankrupt until adding live entertainment. This helped their company take off and become the top competitor in the cruise industry. Carnival Trend AnalysisDividends remained constant from 25 cents a share as of February 22nd 2012 through November 17th 2014. Return on equity shows the amount of profit a company generates with the money shareholders have invested. Over the past three years Carnival has outperformed Royal Caribbean with an average ROE of 4.97%, which is 0.027% higher than their top competitor. Carnival was able to capitalize on their returns in 2012 with a 5.2% higher yield than Royal Caribbean. Carnival’s ROE remained constant over this three year span by not fluctuating over 1% once. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Carnival’s ROA had an average of 3.04%, and again does not exceed 1% in fluctuation. Carnival portrays a less volatile movement in return for each of these aspects, much like an annuity since they hit around their same return every year by hedging out idiosyncratic risk. Carnival is showing that they are changing their capital structure to be more heavily focused on equity and avoid debt Benchmark for Carnival Refer to Appendix D to find the common-sized financial statements for Carnival Cruise International. For fiscal year 2014, Carnival’s revenue was $15,883 million. To compare our top two companies to the industry as a whole we created average comparables derived from the top three competitors: Carnival, Royal Caribbean, and Norwegian. Carnival is the only company beating the top competitor average of $8,964.73 million in revenue for 2014 with a total revenue of $15,883 million. Carnival takes significantly less debt than Royal Caribbean and Norwegian with total liabilities of 38.6% compared to the top competitor average of 53%. With more equity than debt, Carnival has a less risky approach to their capital structure because they get to avoid dividend coupon payments that come along with issuing bonds. If for some reason Carnival’s cash flow does not meet their projected estimates, then they do not have to worry about eating profits to pay off dividends.

ROE ROA0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%5.42%

3.31%

4.39%

2.69%

5.09%

3.13%

Carnival 2012-2014 Key Ratios

201220132014

Figure 13: Carnival Key Ratios (10-K Carnival, 2014)

Figure 14: Carnival Key Ratios (10-KCarnival, 2014)


Company Analysis: Carnival Cruise Lines (continued)

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Carnival Marketing EnvironmentCarnival’s marketing position in relation to the rest of the industry is very strong. Carnival has shown that they have a thorough understanding of the marketing environment. Specifically, Carnival has good policies relating to the four P’s, price, product, place, and promotion. Companies in the cruise line industry tend to drop their prices for cruises near the departure date in order to completely fill their ships, a strategy called Yield Management Pricing (Anderson, 2010). However, Carnival is the leading company in the industry, so other companies have to match their prices to whatever Carnival sets in order to compete. Carnival has a decent amount of product mix, with varying room quality allowing for customers with varying price ranges buy cruise tickets. Carnival’s execution of promotion is probably their weakest of the four. In Carnival’s recent Super bowl ad, they didn’t mention their company name or logo until the very end. As a result, they ended up promoting the industry as a whole and not their brand, which is poor marketing.

Carnival Company SegmentationCarnival is active in several different segmentation types. According to Carnival’s 2014 10-K, their products and services are tailored to specific geographic areas and lifestyles. It also says that they are currently conducting both qualitative and quantitative surveys and analyses for psychographic segmentation studies. They say they are doing this in order to “gain a more insightful and impactful understanding of our guests’ needs, wants and expectations.” Carnival is planning on targeting their future advertising and promotions to these specific target segments (10-K Carnival, 2014).

Carnival Information SystemsCarnival Cruise International has a large amount of Information Technology in place that assists with operations. Carnival installed the MXP ERP system provided by MarineXchange on their entire fleet of ships. This system allows Carnival to spend less time on spreadsheets and email, improve financial controls, integrate port agents, and port service vendors and authorities, due to the system’s business-to-business e-commerce servers (Toolbox, 2014). Carnival has an SCM system that supports all of its supply necessities. They also utilize a supply chain team split into three groups; one for sourcing, one for buying, and one for receiving (Hoppe, 2014).

Carnival has a global technology model that focuses on creating innovative platforms and solutions to create exceptional guest experiences while leveraging common technologies to drive process efficiency and effectiveness across their brand. Carnival is currently working on a new “Smart Hybrid” technology which will boost satellite connectivity enhancing internet connection. They are also working to create a safer cyber-security protection for guests and employees to ensure full compliance and easy recovery for incidences. Carnival hopes to optimize the value of their information systems to gain simple usability for customers and employees (10-K Carnival, 2014).


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Carnival Key Success Factor Evaluation

Extend Global Reach into Expanding MarketsWhen it comes to the amount of countries offered as destinations, Carnival is unmatched, with 98 countries. Carnival offers cruises to five continents, giving them presence in most of the world. However, Carnival is not very efficient with their ship usage, as they have 106 ships allocated to those 98 countries (Ramos, 2015). This means that they have multiple ships visiting the same places, while other cruise lines often have each ship go to multiple places. This is why even though Carnival is the leader in destination variety, they don’t get a perfect score.

Continuous Innovation in Amenities to Increase Onboard SpendingCarnival is very successful in their execution of including new and innovative amenities and attractions for their cruises. We define amenities as features that are a physical part of the ship such as bars and casinos. Carnival has a wide variety of high quality amenities offered for customers aboard their ships.

Carnival has several amenities that make them stand out from the competition. One of these is Carnival WaterWorks, which is a waterpark that Carnival has on many of its ships. They also offer SkyRide, which is a pedal-powered go-mobile that zips around a suspended course on the top deck. Carnival also offers many high profile performers, such as comedian and actor George Lopez, DJ Irie, and game shows such as Hasbro, The Game Show. Hasbro, The Game Show is a live game event where they play Yahtzee, Connect-Four, Sorry!, Operation, and Simon with live people as the game pieces (Carnival, 2015). Carnival offers big name brand restaurants such as Guy’s Burger Joint, Bonsai Sushi, an array of steak houses, and Green Eggs and Ham Breakfast.

Amenities (30%)

Raw Score 7

Weighted Score 2.1

Figure 16: Carnival Valued Expansion and Innovation

Reach (50%)

Raw Score 7.5

Weighted Score 3.75

Overall, we decided that Carnival does well in their offerings of amenities. They have been fairly good at keeping up to date and coming out with new highly advanced, quality amenities, although they are not the leaders in this category, so we decided that they should receive a score of seven.

Carnival is expanding their global reach at a respectable pace, however they are behind many other companies in this category. “Carnival Cruise Lines has been ‘a little bit late coming to the party’ in terms of global expansion, admits the previous president and CEO, Gerry Cahill” (Coulter, 2012). This is shown by recent developments in China, where Royal Caribbean made the first move to expand into. After Royal’s announcement of their plans to expand into China, Carnival rushed to place more of their own ships in the Chinese market.

Figure 15: Carnival Valued Destination Variety/Reach


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Carnival Key Success Factor Evaluation (continued)

Effectively Market Your Brand to Reliable SegmentsCarnival has done a great job at appealing to customer loyalty by offering reward packages such as their VIFP Club membership program. This program has a point system which allows repeat customers to have various perks depending on how many times they have cruised with Carnival, and is a great way to appeal to repeat customers. This is an effective way of getting around the increased price sensitivity of repeat customers (Carnival, 2015).

Another demographic that carnival has effectively marketed to is the Baby-Boomer Generation. Carnival has included options such as the Serenity Adults Only Retreat which is a kids-free zone providing a phenomenal view of the ocean. This appeals to adults which encompasses the Baby-Boomer Generation (iExplore, 2015).

We scored Carnival with an eight due to their solid performance. While they did very well, they haven’t done anything out of the box or extraordinary to earn a perfect score.

Figure 17: Carnival Valued Demographics and Incidents

Segments (20%)

Raw Score 8

Weighted Score 1.6


Company Analysis: Royal Caribbean Ltd.

18

OverviewRoyal Caribbean is the second out of the leading three in both revenues and passengers. Royal Caribbean was founded in 1968 and now has a total of 42 ships. Each ship can hold up to 104,898 passengers. Now tapping into the Chinese market, Royal Caribbean is hoping to grow into becoming the top competitor.

Benchmark for Royal CaribbeanIf you refer to Appendix D, you will find the common-sized financial statements for Royal Caribbean Ltd. Royal Caribbean’s revenue was $8,073.9 million for the fiscal year of 2014. Royal Caribbean’s total revenue last year showed a slight difference of $890.83 million from the top competitor average of $8,964 million. Even though this missed the top competitor average and far underperforms Carnival, Royal Caribbean essentially has half the market capitalization at $16.59 billion compared to Carnival’s $33.67 billion. Carnival currently operates over twice the amount of ships than Royal Caribbean does and over twice the amount of market capitalization, yet their total revenue is only 96.73% greater. This shows that Royal Caribbean is more efficient with their operations. Royal Caribbean takes in more debt than Carnival with 60% total liabilities. Interest payments are tax deductible, therefore having more debt is cheaper than equity. By doing this, Royal Caribbean has positioned themselves to be more financially leveraged and sustain more of the revenues they take in as profits.

Notable Key Ratios AnalysisAlthough over the past three years Carnival has outperformed Royal Caribbean on ROE on average, Royal Caribbean had a 9.22% ROE in the fiscal year 2014. Carnival’s ROE remained constant around 5% while Royal Caribbean shot up to 9.22% in 2014, showing over a 4% difference between the two. With Royal Caribbean’s 3.69% ROA, they show a 0.56% higher return. This, again, shows how Royal Caribbean was more efficient with their investments than their competitor Carnival. To reiterate, Royal Caribbean adjusted their debt level to 60% last year, allowing them to fund cheaper money. In 2012, Royal incurred three additional expenses that they did not face in the previous years, causing them to lose money from there total net income. These costs include net cruise cost per APCD, net cruise costs excluding fuel, and net yield. These three costs totaled to be $405.28 million significantly decreasing net income which, in turn, affected ROE and ROA.

Debt Ratio Gross Margin

Gross Profit0%

10%

20%

30%

40%

50%

60%

70%

80%

58%

76%

58%56%

74%

58%60%

72%

58%

Royal Caribbean 2012-2014 Key Ratios

2012

2013

2014

ROE ROA0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%

10.00%

0.22% 0.09%

5.38%

2.36%

9.22%

3.69%

Royal Caribbean 2012-2014 Key Ratios

201220132014

Figure 18: Royal Key Ratios 1 (10-K Royal, 2013) Figure 19: Royal Key Ratios 2 (10-K Royal, 2013)


Company Analysis: Royal Caribbean Ltd. (continued)

19

Royal Caribbean Marketing EnvironmentRoyal Caribbean is the second largest company in the cruise industry, and their marketing position is very solid. Similar to Carnival, Royal’s policies relating to the Four P’s are very effective. Although Carnival is the largest company in the industry, Royal is still large enough so that they are still a price maker, and don’t have to match Carnival’s prices like other smaller companies do. Royal has about the same level of product mix in the sense of differentiating room qualities as Carnival does, so they reach out to customers with similar price ranges. We talk about “place” extensively in our key success factor “Extend Global Reach into Expanding Markets,” refer there for more information. According to Royal Caribbean’s Marketing Plan article, they have a budget of roughly $50 million allocated towards advertising, including commercials, magazine advertisements, and direct mail pieces (Hanson, 2014). This makes them have high promotional effectiveness.

Royal Caribbean Company SegmentationRoyal Caribbean claims that their brands possess the versatility to penetrate multiple segments within the industry. The different brands they own appeal to different psychographic types of people, based on their lifestyle. For example, Celebrity Cruises is positioned within the “premium” section of the market. Royal additionally says that they have been expanding their itinerary and onboard offerings to appeal to the cultural characteristics and preferences of international guests. They also appeal to various demographic groups based on income and age. Royal also claims that they “are focused on targeting high-value guests by better understanding consumer data and insights and creating communication strategies that best resonate with our target audience” (10-K Royal, 2013). Royal has also recently began an intensive $60 million dollar ad campaign that targets millennials, who currently make up just 7% of passengers. Their new ad campaign markets cruising as a memory-making experience (Mann, 2014).

Royal Caribbean Information SystemsRoyal Caribbean has several Information Systems in place within the company in order to optimize operations. Royal Caribbean recently upgraded its ERP system to JD Edwards EnterpriseOne in order to increase the efficiency of their operations. Royal Caribbean’s IT manager stated that implementing this new ERP system that could quickly and easily integrate with their existing applications and systems would allow them to effectively execute their current growth strategy (Woodie, 2010). As far as SCM for Royal goes, they currently have two systems in place. Each of these systems are managed by a Provision Master. The first supply chain includes all food, beverage, and lodging inventories that are needed for the trips. The second encompasses all corporate spending such as office supplies, printing services, hardware and software, printed materials, computer supplies, marine consumables like fuel, spare parts, lubricants, and all services associated with the ship maintenance (123 Help Me, 2015).

Royal Caribbean focuses on cost efficiency in their 10-K report. Their new ships have designs that integrate a more fuel-efficient engine as well as the implementation of more efficient hardware. This hardware will help create a cooling system in the ship that will provide less consumption of energy. Another system being put into place is their price tool that helps to increase promotion management capabilities. The sales force will have new tools to better support their travel agents.


20

Royal Caribbean Key Success Factor Evaluation

Amenities (30%)

Score 9.5

Weighted Score 2.85

Extend Global Reach into Expanding MarketsRoyal Caribbean is by far one of the leading companies in terms of countries offered as destinations, although they fall behind Carnival. Royal Caribbean offers cruises to 77 countries against Carnival’s 98, but they offer six continents against Carnival’s five. However, Royal Caribbean makes much more effective use of their ships, as they mange to stretch their 42 ship fleet across those 77 countries (Young, 2015).

Continuous Innovation in Amenities to Increase Onboard SpendingOverall, Royal Caribbean offers top-of-the-line amenities, showcased best by their brand new ship Quantum of the Seas. Quantum of the Seas offers brand new amenities such as SeaPlex, “the largest indoor active space at sea,” which includes activities ranging from a flying trapeze to bumper cars (Travel Agent Central, 2013). In each of the indoor non-balcony rooms, Quantum of the Seas offers a Virtual Balcony displaying real-time views of the sea or beach. The North Star addition, an extending arm reaching 300 feet above sea level carries people above the whole ship for a 360 degree panoramic view.

Royal Caribbean teamed with DreamWorks Productions adding themed cruises for younger children offering performances and mascots that walk around the ship. Broadway at Sea features high class performances such as Cats, Chicago, Saturday Night Fever, and Mamma Mia!, noting their selves for offering the best for on-board productions. Royal Caribbean is the first and only to cruise company to introduce ice-skating rinks on-board with performances to go along (Royal Caribbean, 2015).

Figure 21: Royal Valued Expansion and Innovation

Global Reach (50%)

Score 9

Weighted Score 4.5

Royal Caribbean is leading in the amount and quality of amenities offered. We rated their amenities at nine and a half because there is always room for improvement, but for now, they truly are top-of-the-line.

Expansion into untapped markets, like China, allows for great opportunity. With Royal Caribbean introducing the Quantum of the Seas, they are creating global awareness for their company while also taking hold of a brand new customer base. Quantum of the Seas caused disruptive innovation, creating a market that essentially never existed. The other major players in the industry are currently playing catch-up, following wherever Royal Caribbean leads to.

Figure 20: Royal Valued Destination Variety/Reach


21

Royal Caribbean Key Success Factor Evaluation (continued)

Segments (20%)

Raw Score 7.5

Weighted Score 1.5

Effectively Market Your Brand to Reliable SegmentsRoyal Caribbean is good at penetrating reliable markets by targeting the Baby-Boomer Generation, offering wine-tastings, jazz evenings, and special buffets are just a few of the activities used to promote their brand to the Baby-Boomer Generation (iExplore, 2015).

Also, similar to Carnival, Royal Caribbean offers a rewards program called Crown & Anchor. This is a point based program that gives on board benefits on top of benefits when planning your cruise. Having loyalty programs is a great way to make repeat cruisers remain loyal to a specific brand, and is probably the best way to get around repeat customers’ price sensitivity.

We rate Royal Caribbean with a seven and a half due to the fact that while Carnival and Royal both do a good job at reaching out to the right segments, Carnivals methods simply stand out more to us than Royal’s.

Figure 22: Royal Demographics and Incidences


22

Recommendations

Recommendation #1: Carnivals Response to Quantum of the Seas FleetCarnival has been the leader in the cruise line industry for quite some time, which has caused them to come complacent. Carnival Cruise has fallen behind in the race to China and making the top ship. With Royal Caribbean being the first to penetrate the Chinese market, they have been able to attract the attention of the market. Not only did they penetrate the Chinese market first, but they also did it with the best ship to ever exist. The Quantum of the Seas has the most up to date amenities and technology available. It also includes the best internet to ever sail the ocean.

To compete with Royal Caribbean, Carnival needs to follow Royal Caribbean’s lead in creating a revolutionary new ship, outfitted with the latest and greatest amenities and technologies. However, Carnival needs to distinguish themselves from Royal Caribbean and everyone else by creating a distinctively different ship. With Carnivals superior resources, this should be a manageable task that is very possible to complete in the next few years. By making use of the psychographic surveys that they conducted, they should be able to figure out what new amenities and/or technologies that new and returning consumers would like to see. By getting these responses, they should be able to attract more attention from the target markets, which would result in more ticket sales for Carnival.

In order to increase the impact of introducing their new ships, Carnival should follow what Royal Caribbean was able to do and infiltrate a new and underdeveloped market. By being the first to breach a new market, their brand will be most known because it was the first introduced. Looking at the impact made by Royal Caribbean in the Chinese market, it would be expected to be the same for Carnival if they were to tap into a new underdeveloped market as well. By tapping into this new market Carnival will be able to increase their brand value by being the most known because of being the first introduced into the market.

It’ll cost a high capital investment to create a new ships as highly innovated as the Quantum of the Seas. Carnival will pay specifically around $1 billion to build a ship of equivalence to the Quantum fleet. Reaching into a new market costs money for advertisement and development, as this is no easy task, it will implement a better structure for future revenue growth.

Limitations Limitations of this recommendation include high capital and pressed for time to release a new ship. It takes more than a year to build a ship from the ground up, if Carnival is to build a new ship, they must use innovative technical designs current to the year of implementing the ship into the market.


Recommendations (continued)

23

Recommendation #2: Issue Out More Debt, Buy Back EquityInterest rates are currently at an all-time low at 0.25%, making debt cheaper than ever. Carnival has a debt ratio of 38.90% against its top competitor Royal Caribbean’s 60%. Royal Caribbean has been showing strong signs of growth, largely in part by having such high debt. If Carnival were to issue out more debt and use less capital from investors, they would be able to keep more revenues as profits. With the help of the low interest rate and the high worth of the dollar, businesses should be looking to capitalize on borrowing more money domestically.

On February 2nd 2015, Apple announced they are going to raise at least $5 billion by selling bonds. This move came on the coattail of record setting quarterly earnings of $74.6 billion and a record quarterly net profit of $18 billion, which were the highest earnings ever on the market. So as you can see, Apple is a company that is performing really well, yet they still decide to offer more debt knowing the interest rates are so low. This will allow them to borrow less money and use it for the future to repurchase their own stock.

We believe that Carnival Cruise can implement the same kind of strategy. Our key recommendation includes the repurchase of their shares of stock with the belief that it is undervalued only to issue more debt. Carnival currently has 18.1 million of their PLC ordinary shares and 32 million common shares available to repurchase. Granted it is risky to repurchase too much at once, Carnival should implement the repurchase of a majority of these shares. The belief is that their stock price is undervalued, and will appreciate over the next couple years. Over the past three years, Carnival’s debt ratio has been on a steady decline to its current ratio of 38.56%. To become more profitable, Carnival should look to increase this debt ratio gradually over a five year period. If Carnival were to increase debt by 2-3% each year, they would see a ratio of close to 50% in the year 2020.

Our recommendation suggests that Carnival should be more aggressive in the beginning of this capital structure reform. If they increase debt by 3% in the first two years, 2% the following three years, the debt ratio would climb to 50.56% in this five year span. Now investors do not look at Carnival’s stock as undervalued and the company can reinvest their earnings to increase their return on equity.

LimitationsLimitations of this recommendation include a limit to how much debt a company can possibly take on. It is too risky for Carnival to issue out a lot of debt at one time so it is important for them to cautiously increase the ratio by a few percent each year. Carnival also has a 21.5 million common stock repurchase valid until the end of 2015. Carnival has not repurchased any stock within the past three years.


24

Recommendations (continued)

Recommendation #3: Responding to IncidencesCarnival needs to step up their game in their approach of responding to incidences. While they currently have some good policies in place on how to compensate passengers whenever incidences happen, this is not enough in order to impress the general public enough to maintain their brand image. First and foremost, Carnival needs to improve its reaction time towards incidences. Even if the response isn’t the most effective the company could have made, the public will be relieved if they see that the company is paying close attention and responds immediately to problems. Conversely, the public’s opinion will be detrimentally affected by the lack of a timely response, and will lose faith in the company. This is showcased best by Carnival’s poor timeliness in reacting to the sinking of the Costa Concordia.

Carnival also needs to improve the measures they take to prevent future problems after a problem occurs, and plainly spell out to the public what their plans of making these improvements actually are. After a disaster occurs, the general populace will be dissuaded from taking a cruise with Carnival if they don’t receive certain assurances that a similar disaster won’t befall them as well. It is Carnival’s duty to put these fears of their potential customers to rest, and it is financially smart for the company to do so as well.

Carnival is currently very good at financially compensating their customers whenever these incidences happen. They should be sure not to sacrifice this area when improving the other incidences. Carnival cannot fix all their customers’ problems by just throwing money at them, as they seem to think they can, and do need to put serious consideration into how to more timely respond to incidences and assure the public that they will stop future ones.

Carnival needs to build a better communication software and spend more money on being alert. By doing this, Carnival will run less risk of negative publicity post-incidents. Also, they must spend more money on safety measures to ensure reliability while on the ships and within the company.

LimitationsLimitations of this recommendation include timing of communication between consumers and their company. Bad incidences are preventable, but still occur and will always be around, therefore, Carnival must allocate more of their time and money on customer follow-up and information.


25

Conclusion

This project reviews what it takes in order for a company to be successful in the cruise line industry. Cruise companies are expanding to be the most exciting vacation destination available in the world. As more people take vacations every year, the technology these companies use to create exciting attractions will continue to advance. Quantum of the Seas early success portrays how international business in this industry will be important, hence the reason that Carnival will have four ships out in China by the end of 2015. Royal’s Anthem of the Seas is a sister to Quantum coming out later this year, which will port in the New York, New Jersey area. Royal will continue to make at least one new ship every year for the next four to five years (Young, 2015).

Carnival’s size gives them a competitive advantage in one of the most capital-intensive industries. They use their capital to invest in vessels with larger passenger capacities. Carnival’s passenger capacity is expected to grow 3.2% every year through 2017, while Royal Caribbean’s is expected to grow at 1.7% (Cooper, 2014). By doing this, Carnival is relying on the total industry to not exceed demand. Carnival hopes that this increase in passenger capacity will help to maintain its leading market share. After assessing the companies we have decided that Royal Caribbean is the more favorably positioned between the two. Royal doesn’t have as many destinations, but they make more effective use of their ships and are doing much better at extending the global reach of their company. Royal has a huge advantage over Carnival with amenities offered due to the edition of their new ship Quantum of the Seas. Royal and Carnival are both fairly good at marketing to appropriate segments.

Our first recommendation for Carnival is for them to make their own innovative and technologically advanced ship similar to Royal Caribbean’s Quantum fleet, and then introduce this ship into a relatively new market. Our second recommendation for Carnival is to issue out more debt and buy back more equity to keep more revenues as profit. Our third recommendation for Carnival is to respond in a timely fashion when regarding incidences that they need to rebound from.

Company(Weight)

Carnival Raw Weighted Royal Caribbean Raw

Weighted

Extending Global Reach(50%)

7.5 3.75 9 4.5

Amenities(30%)

7 2.1 9.5 2.85

Effective Marketing(20%)

8 1.6 7.5 1.5

Total 22.5 7.45 26 8.85

Figure 23: Weighted Averages 2


References

26

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31

Appendix A: Porter’s Five Forces

For the first Appendix, we performed an industry analysis using the Porter’s Five Forces model. Within the model, we discuss competition, threats of new entrants, bargaining power of the buyers, bargaining power of the suppliers, and the threats of substitutes that the industry faces. Threats of new entrants is broken into two key parts, the barriers new entrants face and what it takes to run a cruise line. Bargaining powers of the buyers is broken into how they have high bargaining power or low bargaining power. The threats of substitutes section includes what threats the industry faces and the reaction the companies have to these threats.

Competition

Competition within the industry is variable The top three brands are Carnival Cruise Lines, Royal Caribbean International, and Norwegian Cruise Line Carnival came in at the top of the charts with $16.64 billion, roughly 42.2% of total revenues

Carnival operates 106 ships total Royal Caribbean, second on the charts, accumulated $8.73 billion, roughly 22.1% of total revenues

Royal Caribbean operates 42 ships in total Norwegian ranks third in line with revenues at $4.89 billion, owning approximately 12.4% of total revenues

Norwegian operates 22 ships total

Threats of New Entrants

Barriers Barriers to entry in the cruise line industry are relatively high Requires high initial capital investment

Around $800 million to $1.4 billion to build a cruise ship (BOATER Exam, 2011). The need for complete knowledge of the industry Cost of maintenance is very expensive

Corrosion repair costs average $200 thousand each ship (Goodway, 2011).

What it Takes to Run a Cruise According to David Bernstein, the CFO of Carnival, $800 million or more will be spent in the upcoming

year on all 106 ships in general maintenance and upgrades (Miriam Valverde and Doreen Hemlock, 2013). On average, most cruises consume up to 700 tons of food per week long cruise; 3,100 gallons of soda and

8,200 cups of coffee are consumed per week An estimated 34 crew members work on washing linens alone, in additional to hundreds of people working

in the kitchens and housekeeping departments The operations of the ship must also constantly replace lifeboats, linens, chemicals for cleaning, food,

ovens, and much more The staff has to be paid, administered healthcare, and provided room/board

New entrants must take all of this into account when planning to enter the industry

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Appendix A: Porter’s Five Forces (continued)

Bargaining Power of Buyers

High Bargaining Power Customers are able to choose which cruise line they wish to attend Buyers are able to sort out what they want to pay for while on the cruise

Beverage packages, Wi-Fi, stores on the boat, and casino privileges Cruises lower their prices as the departure date approaches to fill empty spots left on vessel Attendees are able to pick from different accommodation choices

If the customer were to pick a lower-end room, it would prevent them for paying more money to the cruise line Consumers also have many other vacation and travel options to choose from that could be less expensive

Low Bargaining Power The cruise line sets the price for all amenities Certain company’s have the buyer play into their hand by including more charges into the package

An example of this is including an airplane ticket with the price built into the cruise ticket price Other cruise lines charge people for Wi-Fi usage while customers are believing it is free

Even though these certain events occur, cruisers are able to take the hit to their wallet

Bargaining Power of Suppliers

The Bargaining power of suppliers in the cruise line industry is moderately strong (Levin, Jones, Slade, 2012). Carnival corporation stated that in its most recent annual report that its “largest purchases are for fuel, travel agency services, food and beverages, air transportation services, port facility utilization, repairs and maintenance, including dry-docking, advertising and marketing, hotel and restaurant products and supplies, communication services, and the construction and refurbishing of our ships.” The threat of integration by these suppliers is very low (Levin, Jones, Slade, 2012).

Threats of Substitutes

Industry Threats Other destinations such as hotels, resorts, theme parks, and land-based casinos are in direct competition with the

industry (FirstResearch, 2014). “These industries tend to offer lower cost vacation options which consumers search for during economic

downturns” (IBIS, 2014). As it currently stands, somewhere around 3% of North Americans cruise every year (FirstResearch, 2014).

Also, only 1% of Europeans cruise every year (FirstResearch, 2014). Catastrophic onboard incidents increases the likelihood of vacationers preferring other means of leisure Levin, Jones,

Slade, 2012).

Industry Reaction Cruise line companies will add destinations and onboard activities that directly combat other vacation destinations

Some cruises offer excursions to desired destinations such as snorkeling, safari adventures, and onboard casinos The Caribbean is the most popular destination with 45% of all cruises attending those islands (Cruise Ships,

2014). Cruise lines try to make each destination a unique experience making them differentiate themselves from other

vacation offerings

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Appendix B: PEST Analysis

The following appendix contains a PEST analysis which is an analysis of the political, economic, social, and technological factors. These macro-economic factors describes a framework in the environmental scanning component of strategic management.

Political “Demand for cruising can be affected by consumer concerns about traveling near politically unstable areas

and about public health issues, such as regional virus outbreaks. For example, drug-related violence in Mexico and Ebola outbreaks in West Africa may deter travelers from choosing cruises to those areas” (FirstResearch, 2014).

CLIA (cruise lines international association) pushes for policies that enhance shipboard safety, and calls for practices that go beyond what they’re legally required to do. (CLIA, 2014).

The CLIA has many regulatory policies that they require their member companies to follow including public health policies, emergency instruction policy, lifeboat loading for training purposes, security incidents, etc.

Economic “Proper timing of vessel expansion can be crucial to a firm’s top and bottom line performance” (IBIS, 2015). “The industry’s growth is expected to accelerate, standing at 5% over the forecast period. Growth is largely

associated with the energy boom in the US and growing global demand for gas” (Euromonitor, 2014). “Although the industry typically grows about 7 percent annually, growth slowed to about 2 to 3 percent

annually in recent years due to the economic recession, according to the Florida-Caribbean Cruise Association” (FirstResearch, 2014).

Social With 500 million Facebook users worldwide as well as 50 million tweets, travel companies have been using

social networks to advertise or announce last-minute deals, but also encouraging dialogue with customers through online communities (Passport, 2010).

Gay and lesbian tourists now account for around 10% of the global travel market. They tend to have higher disposable incomes than their heterosexual counterparts, while in countries where gay unions have been legalized, gay honeymoons have become big business (Passport, 2010).

The switch to more environmentally friendly ships has also been a more trend that a lot of companies have been following. Environmental concerns and regulations have led cruise lines to make the switch to reduce pollution, waste, and overall waste of energy.

Technology Because people have become more environmentally conscious, cruise ship companies are implementing

advanced energy technologies including low sulfur fuels to reduce pollution, LED lighting, solar power, more efficient appliances, and windows to reduce energy use (FirstResearch, 2014).

Cruise companies have been using new technology to make it easier to track customer tendencies and behaviors to know how to maximize profits for each demographic that attends the cruise.

Wristbands now have radio frequencies that connect to smartphones to identify quicker payment systems, easier access to areas needing coded entrance, and easier tracking on children for parents during areas of free roam time (Cruise Ships, 2014).

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Appendix C: Company Financial Ratios

Ratio 2012 2013 2014

ROA 3.31% 2.69% 3.13%

ROE 5.42% 4.39% 5.09%

NPM 8.44% 6.97% 7.79%

M/B 1.2017 1.2595 1.4501

TAT 39.28% 38.54% 40.18%

SGR 3.38% 3.25% 3.81%

Quick 0.1950 0.2326 0.1646

Debt 0.3890 0.3877 0.3856

Ratios 2012 2013 2014

ROA 0.09% 2.36% 3.69%

ROE 0.22% 5.38% 9.22%

NPM 0.24% 5.95% 9.46%

M/B 0.9424 0.5181 0.8837

TAT 38.77% 39.65% 38.98%

SGR 1.86% 3.19% 1.39%

Quick 0.1824 0.1887 0.1760

Debt 0.5810 0.5612 0.6000

Carnival Cruise International

Royal Caribbean Cruises Ltd.

Appendix C shows the key ratios that we have derived from the information provided by the 10-K from each company. With the two tables on the page, we can easily compare the two company’s ratios.

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Appendix D: Common Sized Statements

12 Months Ending FY 2012

FY 2013

FY 2014

FY 2015 (Estimated)

Revenue(millions)

15,382 15,456 15,883 16,211.6

Onboard and other (Amenities)

3,513 3,598 3,780 - -

-COGS 55.8% 56.7% 53.3% - -

Gross Profit 44.2% 43.3% 46.7% 59.6%

-Operating Expenses

33.6% 34.5% 35.5% - -

Operating Income 10.7% 8.7% 11.3% 14.6%

-Interest Expense 2.2% 2.1% 1.8% - -

-Foreign Exchange Losses (Gains)

0% 0% 0% - -

-Net Non-Operating Losses (Gains)

0% -0.3% 1.6% - -

Pretax Income 8.5% 6.9% 7.8% 12.3%

-Income Tax Expense

0% 0% 0.1% - -

Income Before XO Items

8.4% 7% 7.8% 12.3%

Net Income 8.4% 7% 7.8% 12.2%

Net Income Available to Shareholders

8.4% 7% 7.8% - -

12 Months Ending

FY 2012 FY 2013 FY 2014 FY 2015 (Estimated)

Accounting Standard

US GAAP

US GAAP US GAAP - -

EBITDA 20.6% 19.0% 21.6% 25.1%EBITDA Margin (T12M)

0.13 0.12 0.14 0.15

Gross Margin 0.29 0.28 0.29 0.37

Operating Margin

0.07 0.06 0.7% 0.09

Profit Margin 0.05 0.05 0.05 0.08

Actual Sales per Employee(millions)

1,170.96 1,133.79 1,095.29 - -

Dividends per Share

0.01 0.01 0.01 0.01

Total Cash Common Dividends

7.6% 5.0% 4.9% - -

Interest Income

0.1% 0.1% 0.1% - -

Capitalized Interest Expense

0.2% 0.2% 0.1% - -

R&D Expense

0% 0% 0% - -

Personal Expense

11.3% 12.0% 12.2% - -

Depreciation Expense

- - - - - - - -

Rental Expense

0.4% 0.4% 0.4% - -

Carnival Cruise Lines Income Statements

Appendix D provides the common sized income statements and balance sheets. All of the data is displayed as a percentage except for revenue on the income statement. We have split the common sized income statement in half so that it fits on one page and the reader can easily view the information provided.

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Appendix D: Common Sized Statements (continued)

12 Months Ending FY 2012 FY 2013 FY 2014Total Assets 39,161 40,140 39,532

+Cash & Near Items 1.2% 1.2% 0.8%

+Accounts & Notes Receivable

0.7% 1.0% 0.8%

+Inventories 1.0% 0.9% 0.9%

+Other Current Assets 1.8% 1.7% 1.2%Total Current Assets 4.7% 4.8% 3.8%

+Net Fixed Assets 82.1% 82.0% 82.9%

+Other Long-Term Assets

13.3% 13.1% 13.3%

Total Long-Term Assets 95.3% 95.2% 96.2%

Total Assets 100.0% 100.0% 100.0%

12 Months Ending FY 2012 FY 2013 FY 2014+Accounts Payable 1.4% 1.6% 1.6%+Short-Term Borrowings 4.4% 3.7% 4.4%

+Other Short-Term Liabilities

12.9% 11.5% 11.6%

Total Current Liabilities 18.7% 16.8% 17.5%

+Long-Term Borrowings 18.3% 20.2% 18.6%

+Other Long-Term Liabilities

1.8% 1.8% 2.4%

Total Long-Term Liabilities

20.2% 22.0% 21.1%

Total Liabilities 38.9% 38.8% 38.6%+Total Preferred Equity 0.0% 0.0% 0.0%

+Minority Interest 0.0% 0.0% 0.0%+Share Capital & APIC 22.0% 21.7% 22.1%

+Retained Earnings & Other Equity

39.1% 39.6% 39.3%

Total Equity 61.1% 61.2% 61.4%Total Liabilities & Equity 100.0% 100.0% 100.0%

Carnival Cruise Lines Balance Sheets

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Twelve Months Ending


Revenue(millions)

7,688 7,959.9 8,073.9 8,578.4

Onboard and other 2,093.4 2,237.2 2,180

-COGS 41.3% 41.2% 41.9% - -

Gross Profit 58.7% 58.8% 58.1% 37.4%

-Operating Expenses

53.4% 48.8% 46.5% - -

Operating Income 5.2% 10.0% 11.7% 15.1%

-Interest Expense 4.6% 4.2% 3.2% - -

-Net Non-Operating Losses (Gains)

0.4% (0.1%) (1.0%) - -

Pretax Income 0.2% 6.0% 9.5% 12.3%

Income before XO Items

0.2% 6.0% 9.5% 12.3%

Net Income 0.2% 6.0% 9.5% 12.3%

Net Income Available to Common Shareholders

0.2% 6.0% 9.5% - -

12 Months Ending


Accounting Standard

US GAAP US GAAP US GAAP

- -

EBITDA 14.7% 19.5% 21.2% 24.9%

EBITDA Margin (T12M)

0.19 0.25 0.26 0.29

Gross Margin

76% 74% 72% 44%

Operating Profit

0.07 0.13 0.14 0.18

Profit Margin

0.00 0.07 0.12 0.14

Total Cash Common Dividends

0.3% 2.0% 0.8% - -

Interest Expense

0.3% 0.2% 0.1% - -

Personnel Expense

10.8% 10.6% 10.5% - -

Rental Expense

0.8% 0.7% - - - -

Royal Caribbean International Income Statements

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12 Moths Ending FY 2012 FY 2013 FY 2014+Accounts Payable 1.8% 1.9% 1.6%+Short-Term Borrowings

7.7% 7.8% 3.9%

+Other Short-Term Liabilities

11.1% 11.6% 13.1%

Total Current Assets 20.5% 21.3% 18.6%

+Long-Term Borrowings

35.2% 32.4% 36.9%

+Other Long-Term Liabilities

2.4% 2.4% 4.5%

Total Long-Term Liabilities

37.6% 34.9% 41.4%

Total Liabilities 58.1% 56.1% 60.0%+Share Capital & APIC 15.7% 15.7% 15.7%

+Retained Earnings & Other Equity

26.2% 28.1% 24.3%

Total Equity 41.9% 43.9% 40.0%Total Liabilities & Equity

100.0% 100.0% 100.0%

12 Months Ending FY 2012 FY 2013 FY 2014

Total Assets 19,827.9 20,072.9 20,713.2+Cash & Near Cash Items

1.0% 1.0% 0.9%

+Accounts & Note Receivable

1.4% 1.3% 1.3%

+Inventories 0.7% 0.8% 0.6%+Other Current Assets 1.3% 1.7% 1.1%

Total Current Assets 4.5% 4.8% 3.9%

+Net Fixed Assets 88.0% 87.3% 88.0%+Other Long-Term Assets

7.5% 8.0% 8.1%

Total Long-Term Assets

95.5% 95.2% 96.1%

Total Assets 100.0% 100.0% 100.0%

Royal Caribbean International Balance Sheets

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Appendix E: Business Model Canvas

Carnival Cruise Lines

The final Appendix portrays a business model canvas for Carnival and Royal Caribbean. The canvas covers various areas including key aspects of the business. Primary subjects discussed are the different customer segments, value of the company, and customer expectations. It also has brief information on sources of revenue, what costs are incurred, and what activities each company does in order to be successful.

40

Appendix E: Business Model Canvas (continued)

Royal Caribbean Ltd.

success and failure in the cruise line industry

Documents