Building on solid global momentum

Ship christenings, interior upgrades, major newbuild orders and new deployments are just some of the developments at Royal Caribbean Cruises Ltd.’s six cruise brands in 2016. Chairman and CEO Richard Fain talks to Rebecca Gibson

Building on solid global momentum
This article was first published in the Autumn/Winter 2016 issue of International Cruise & Ferry Review. All information was correct at the time of printing, but may since have changed.

Royal Caribbean International made history on 24 June when it held its first-ever ship christening ceremony in China for Ovation of the Seas, the line’s third Quantum-class vessel. Officially inaugurated by Chinese actress Fan Bingbing in Tianjin, the 4,180-guest Ovation of the Seas is the first world-class ship to make China its homeport immediately after her delivery and boasts various onboard features tailored to Asian travellers. This May, the cruise line debuted its third Oasis-class ship and the world’s largest cruise ship, the 5,479-passenger Harmony of the Seas.

Royal Caribbean International’s growth is set to continue well into the future. This May, parent company Royal Caribbean Cruises Ltd. (RCL) contracted French shipbuilder STX France to construct a fifth Oasis-class ship for delivery in spring 2021. In addition, this June RCL agreed to build and operate a 170,000sqft cruise terminal for the brand’s Oasis-class ships at PortMiami, which is expected to attract 1.8 million passengers annually when it opens in 2018.

While Royal Caribbean International’s growth in 2016 has been noteworthy, it is not the only one of RCL’s six major cruise brands to have expansion plans. “RCL has had so much happening since the start of the year and there’s no sign of it slowing down,” says Richard Fain, RCL’s chairman and CEO.

Included in RCL’s order with STX France were two additional Edge Class vessels for modern luxury brand Celebrity Cruises. They will be delivered by autumn 2021 and 2022 and will join two previously ordered Edge Class vessels, the first of which will debut in 2018.

Celebrity has also acquired Galápagos Islands tour operator Ocean Adventures and its 48-guest vessel Eclipse and 16-guest catamaran Athala II, to expand its guest capacity in the Galápagos by 65%. To be rebranded and refreshed in January 2017, the vessels will be renamed Celebrity Xploration and Celebrity Xperience and enter service alongside the 100-guest Celebrity Xpedition in the Galapágos in March. “This will be a great opportunity for Celebrity,” says Fain.

Germany-based operator TUI Cruises’ growth has been particularly impressive, according to Fain. This July, the line joined with German singer and songwriter Lena Meyer-Landrut to name its new 2,794-guest Mein Schiff 5 in Lübeck-Travemünde, Germany.

“TUI Cruises’ evolution has been extraordinary,” Fain remarks. “The addition of Mein Schiff 5 reinforces the line’s position in the premium cruise market and further solidifies the successful partnership between our two companies. The further expansion with Mein Schiff 6 in 2017 and two more newbuilds in 2018 and 2019 provides a great opportunity to strengthen our position with one of the most modern fleets in the German market.”

Significant changes are also taking place in the Pullmantur Group, which comprises Spanish cruise line Pullmantur and its France-based subsidiary Croisières de France (CDF). Earlier this year, RCL revealed plans to sell a 51% stake in the group to Madrid-based private equity firm Springwater Capital to offer ‘culturally authentic, best-in-class cruise experiences’ tailored to Spanish and French tourists. RCL will continue to provide marine operations services to both brands via a management agreement and will retain full ownership of Pullmantur’s Monarch and Sovereign, and CDF’s Horizon and Zenith. However, these vessels will be leased to Springwater. It is expected that Pullmantur’s fleet will continue to sail voyages in the Mediterranean, Northern Europe, Norway’s fjords and the Caribbean, while CDF’s vessels will remain in the Mediterranean.

Noting that Pullmantur and CDF have a long history of offering localised cruise vacations to their home markets, Fain says: “Given the signs of recovery we have seen in the Spanish economy, as well as increased interest in cruising from tourists in France, we felt it was the right time to bring together the teams at Pullmantur and CDF, and combine them with the local travel and tourism expertise of the Springwater team. The company’s local management presence in Madrid, coupled with RCL’s long-standing history in cruise operations, will provide the foundation for improved returns in the future.”

Pullmantur Group is now managed by former TUI Cruises president Richard Vogel who succeeded Jorges Vilches as president and CEO this July, rejoining RCL after a two-year stint as non-executive director at Saga Cruises.

“Richard has a wealth of experience within the cruise industry, including his great success with the creation and development of TUI Cruises,” says Fain. “He brings the experience and the dynamic vision we need to ensure Pullmantur Group’s future success.”

Fain attributes the recent growth of RCL’s six brands – and the entire global cruise industry – to the evolution of the design, technology and onboard offerings on cruise ships.

“On today’s modern ships, you’ll find a level of choice and amenities that take your breath away – everything from skydiving to surfing simulators, dozens of restaurants and suites,” he says. “It’s a far cry from the smaller accommodations and limited dining and recreation options in the era of transatlantic liners. The cruise experience is always being redefined, so we challenge ourselves to stay ahead of the curve. Fortunately, cruise lines have resisted the temptation to homogenise their products and our different brands continue to offer highly individualised ships and experiences that appeal to their distinct market segments.”

Certainly, some of RCL’s six brands have taken steps to enhance the onboard experience this year. Guests and crew onboard all 25 of Royal Caribbean International’s cruise ships have access to VOOM, billed as the fastest internet connection at sea that provides more fleet-wide bandwidth than any other cruise line. This will allow guests to stream entertainment, access e-mail and social media, send text messages and make phone or video calls. Similarly, Celebrity Cruises will roll out a new Xcelerate service to its entire fleet – except Galápagos Islands-based Celebrity Xpedition – offering four times its current internet bandwidth capacity.

“We’re always looking at what’s happening to our business and the industry as a whole, but our main task is to apply that learning to constantly enhance our product,” remarks Fain. “Our mantra is ‘continuous improvement’, and we keep an eye on current trends and guest feedback so we go in the right direction when we revitalise our services and vessels. We can see what’s successful from our guests’ feedback, and our revenue and booking performance, so we do more of what’s working well.”

Testament to this ‘continuous improvement’ philosophy, RCL has ploughed on with its programme of revitalisation projects onboard select ships across its fleets. Azamara Club Cruises’ boutique 686-guest sister ships Azamara Journey and Azamara Quest were drydocked for extensive upgrades to their guest accommodation, public areas, and dining and entertainment venues in January and April, respectively. “Azamara’s major renovations have been met with great feedback,” says Fain.

Since December 2015, Celebrity has refurbished Celebrity Infinity, Celebrity Summit and Celebrity Millennium, enhancing the Penthouse and Royal Suites, adding an Italian ristorante and enoteca Tuscan Grille, and introducing the new Rooftop Terrace with its A Taste of Film dining and film experience. In 2018, the line will launch the first of four Edge Class vessels.

Royal Caribbean International has also been upgrading dining venues, adding more suites and accommodation, increasing onboard entertainment options and refreshing existing interiors onboard its ships. While Liberty of the Seas emerged from a month-long drydock this February, Jewel of the Seas was renovated during a US$30 million makeover prior to starting her Mediterranean season this April, and Majesty of the Seas was refreshed before heading to Port Canaveral, Florida to sail Bahamas itineraries this May. Empress of the Seas, which returned to Royal Caribbean earlier this year after a secondment to Pullmantur, was revamped for US$50 million, while Adventure of the Seas will undergo a US$61 million revitalisation this November.

In addition, RCL has continued to invest in improving the environmental sustainability of the ships in its six brands, primarily to reduce emissions, enhance regulatory compliance and lower operational costs. Royal Caribbean International’s Harmony of the Seas, for example, features the world’s largest marine exhaust gas cleaning system (scrubber) installation provided by Wärtsilä. Similarly, TUI Cruises’ Mein Schiff 5 is fitted with a combined scrubber and catalytic converter system to reduce sulphur emissions by 99% and nitrogen oxide emissions by 75%. Other environmentally friendly technologies ensure the vessel consumes around 30% less energy than similar-sized cruise ships and 4% less than sister Mein Schiff 3.

“We have been meeting and exceeding the industry’s many environmental requirements for years; we always invest in innovating our hardware and practices as part of our Saves the Waves programme,” notes Fain. “We’ve installed advanced wastewater purification systems and air-lubrication solutions, configured our ships’ hulls and most recently, we’ve partnered with the leaders in global conservation – the World Wildlife Fund – to help us improve our practices even more. We already have, and will continue to raise our own bar on environmental protection. Our guests expect that from us, and we expect it of ourselves.

Fain adds: “The idea that the cruise industry is challenged by environmental issues is a common misconception; in reality, we’re no more challenged than other transportation and travel industries. The only challenge, or rather the opportunity, is to communicate how environmentally responsible we are.”

Now that multiple RCL brands have newbuilds and more eco-efficient, revitalised ships to offer, Fain has added branching into new areas and increasing capacity in rapidly growing markets like China and Asia to his agenda for 2016 and beyond.

China currently represents 9% of RCL’s overall capacity and it has the largest fleet of any cruise line sailing in the country. Royal Caribbean International’s new Ovation of the Seas will homeport in Tianjin until December 2016, Legend of the Seas is deployed in Xiamen, and Quantum of the Seas sails from Shanghai (Baoshan). Meanwhile, Mariner of the Seas operates itineraries from both Shanghai and Singapore, while Voyager of the Seas is based in Hong Kong.

Between October 2016 and May 2017, Ovation of the Seas, Mariner of the Seas and Voyager of the Seas will offer a combined total of 55 cruises from Singapore to various destinations in Southeast Asia. This will increase Royal Caribbean International’s capacity in Southeast Asia by 30% compared to 2016, enabling the line to host 200,000 passengers. In fact, Ovation of the Seas is expected to attract 42,000 additional passengers to the Singapore cruise scene during its 10 sailings between March and April alone.

Royal Caribbean International also aims to attract more overseas fly-cruise visitors to sail on its Asia itineraries and help transform Singapore into major passenger source market and regional cruise hub via a multimillion-dollar marketing collaboration with the Singapore Tourism Board (STB) and Changi Airport Group. This is supported by its existing partnership with China’s major online travel agency Ctrip and a new agreement for Indian travel agency Tirun Travel Marketing to charter Voyager of the Seas on Southeast Asia cruises out of Singapore via the STB. Planned to coincide with India’s summer vacation period, the itineraries will take Indian travellers, particularly families, to popular destinations in Malaysia, Thailand, Hong Kong and Vietnam.

“We’re particularly pleased by the very powerful brand presence and preference that Royal Caribbean International has achieved there,” says Fain. “We expect China’s market to continue to grow and we’ll work to grow our business with it.”

While China and Southeast Asia are high priorities, RCL is careful to plan ship deployments so its individual brands retain sufficient capacity in well-established markets such as the US, Caribbean, Europe and the Mediterranean. It is also collaborating with governments, ports and local tourism associations to further develop local passenger source markets.

“We’re always observing what is happening in terms of bookings, current events, guest feedback, trends, revenue, and we evaluate this alongside our key business priorities to decide where each of our brands and their respective ships should be based, and when they should be repositioned,” explains Fain. “Fortunately, we have enough new capacity coming on stream to satisfy our objectives in both the emerging and well established markets. Ports and governments are as motivated as we are to build up local tourism, and they continue to be competitive to increase their business. They are constantly looking for new and better ways to improve.”

Despite previous industry concerns about the devaluation of the Chinese Yuan and more recent concerns about how the UK’s exit from the European Union will affect business in Europe, Fain is fairly optimistic that neither will have a major impact on RCL’s current and future deployments in the regions. In fact, RCL’s second quarter earnings report only showed a US$0.20 decrease in the company’s full year adjusted earnings per share (EPS) predictions, due to a US$0.27 negative impact from currency and fuel rates. Around US$0.14 is related to weakness in the British Pound following the Brexit vote, while lower than expected fuel expense in the second quarter partially offset the full-year impact of weaker foreign currencies and rise in fuel prices.

“Foreign exchange can always affect business, but current behaviours and performance in China indicates the market is currently digesting the rapid increase in capacity it’s seen and the Yuan has remained relatively stable,” Fain says. “Similarly Brexit has hurt the British Pound, but this is painful rather than catastrophic, and so far, it does not appear to have materially affected British or European demand for cruising.”

Fain believes that the way RCL communicates its six brands to different passenger source markets will be key to driving future passenger and revenue growth. “The fact that our three newly launched ships each entered vastly different markets serves as a reminder of the role that market segmentation and diversification plays in our overall strategy,” he says. “We have to be clear about what each of our brands stands for and find ways to convey to guests the incredible value we offer in a vacation for every demographic because this is what distinguishes us from others. If we drive our messages home through the right channels, such as marketing, travel agents, media and public relations, the decision making process becomes clear and simple.”

Clearly RCL’s growth, ship deployment and marketing strategies are working. This August, it reported more than 25% growth in its second quarter earnings and predicted that full year earnings would increase by a similar percentage. The report indicated that the company’s booked position for the remainder of 2016 remains similar to last year’s record levels, while its booked position for the next 12 months is up on both rate and volume, versus the same time in 2015. Net yields are expected to increase by 4-4.5%, driven primarily by the deconsolidation of the Pullmantur Group and the continued strength of North American products, which are helping to offset weakness in the Eastern Mediterranean and in Shanghai.

“Our business remains strong and we continue to improve our return profile,” comments Fain. “We are on track with Double-Double, an internal programme to achieve adjusted EPS of at least double that in 2014 and to reach double-digit return on invested capital by 2017. The programme focuses on the same three pillars: yield improvement, effective cost control and modest capacity growth.”

To ensure it meets the 2017 goal, RCL will strive to meet the needs of its core stakeholder groups, which include employees, investors, passengers, travel agents, governments, ports and destinations and suppliers.

“Our first priority is always to keep our guests and crew safe and healthy, the second is to provide guests with the vacation of a lifetime and third is to maintain profitability,” Fain comments. “When we maintain focus on those three objectives, we tend to do well by all our stakeholders. For example, although upgrading crew accommodation can be expensive, our crew members are the single most important driver of guest satisfaction, which in turn, is the single most important driver of yields.”

While most people would find overseeing six diverse brands operating a combined total of 48 ships sailing to around 490 destinations on all seven continents stressful, Fain remains as driven and motivated to grow and enhance each cruise product as when he first took the helm of RCL in 1988.

“I never hide the fact that I have the best job in the world,” he enthuses. “Being totally committed to both innovation and continuous improvement means that you’re always running in a race that has no finish line. I wake up every day eager to see what challenge comes next.”

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Rebecca Gibson
By Rebecca Gibson
Friday, September 9, 2016