How Carnival is sailing one year after the Costa Concordia disaster

After boarding the latest addition to the Carnival Cruise Lines family, Josh Beaver sampled lasagna at the new onboard Italian restaurant, downed some drinks with his traveling companions and hit the water slides while the afternoon was still young.

“So far, from what I’ve seen, there’s lots to do,” said Beaver, 33, of Holden Beach, N.C.

The Carnival Breeze hadn’t even left Port Miami yet on a recent Saturday, and already it buzzed with vacationers exploring all there was to do: nosh on a Pig Patty from the new Guy’s Burger Bar, make friends with bartenders at the new RedFrog Pub or check out a novel and a glass of the grape at the new Library Bar.

Here aboard one of the largest ships in the biggest brand of the Number One cruise ship company in the world, there was little hint that the last year was one of the toughest in the 41-year history of parent company Carnival Corp. & plc.

Last year got off to a catastrophic start when Costa Concordia, owned by Carnival unit Costa Cruises, struck rocks in Italian waters as the captain steered the ship on an unauthorized route. The massive liner listed to one side, and 32 people died in the chaos that followed.

“When you lose lives, it’s heartbreaking,” said Carnival Corp. Vice Chairman and COO Howard Frank, who devoted much of his time last winter handling the aftermath with Costa leaders. “And so I think in terms of our emotional reaction to it, it’s been the toughest year we’ve had.”

Carnival Corp. Chairman and CEO Micky Arison took criticism for not going to Italy following the wreck, but said he believes the company did the right thing and doesn’t second-guess his actions.

Financially, the company took a hit as well, starting with discounts that were necessary to drum up business after the accident. Costa’s future bookings plunged, but picked up after the operator slashed prices. As of mid-December, prices at Costa remained lower than they were a year earlier, though the company expects that to change once the anniversary of the accident passes.

“I think we’ve been consistent in saying the recovery at Costa is not a one-year issue,” Arison said during the December earnings call with analysts. “It’s going to be multiple years, and we are forecasting a recovery of about half the yield deterioration.”

The ship remains on its side off the island of Giglio; it’s expected to be removed by the end of summer.

A flurry of civil lawsuits have been filed, but none have reached trial yet; the company has reached compensation agreements with 70 percent of the more than 3,000 passengers who were not physically injured and 60 percent of injured passengers and families of those who died.

As the company and broader industry focused anew on safety, the summer months presented a fresh set of problems when the European economy weakened just as cruise lines were stationing more ships in the Mediterranean. While North America was immune to those concerns, the run-up to the Presidential election and the fiscal cliff debates prompted Carnival to worry about a slowdown in business at home.

Last month, Carnival forecast 2013 earnings that were lower than expectations and said advance bookings for the year were behind what they were a year earlier at lower prices. Many analysts believe the projections were conservative, though, and executives said they were hopeful that January would bring more robust business.

“If we have some relative calm for some period of time, I see us fully recovering our yields in a matter of a few years,” Arison said.

And he intends to be at the helm when that happens. At 63, Arison, who also owns the Miami Heat, said retirement is not a near-term prospect.

“I have no hobbies,” he said, other than the championship basketball team. “So I don’t know what I’d do if I didn’t do this…This is all I’ve done for 40-plus years, and done it 24-7.”

Still, he said he has discussions with Carnival’s board regularly about a succession plan in case something unexpected were to happen to him.

“We have an outstanding group of executives around the globe, many of whom are capable candidates to take over if something happens to me,” he said. “The board is very much aware of what I would do in the circumstance of me being hit by a truck…I don’t think it’s appropriate to discuss it because there’s more than one executive who would be interested in competing for that.”

Frank, 71, who has been with the company since 1989, said he wants to stick around as long as Arison and the board want him to. Guidelines for corporate governance say that directors won’t be nominated to the board after they turn 75, but provides that such a nomination could happen “under special circumstances.”

“I think the business is something in some small way I helped to create with Micky,” he said. “I think of it more as my business, and I think of it more as an owner than a manager…It is my life in many, many ways and I enjoy it.”

Arison said he’s told Frank to see how he feels in a year or two — for awhile now.

“We’ve been doing that for five or six years,” he said.

But Frank said he’s probably more excited about the company’s future now than he was even five years ago.

Despite the downs in 2012, the company remained profitable, bringing in net income of $1.3 billion — the lowest annual profit since 2003 — on $15.4 billion in revenues. That followed the itinerary upheaval associated with the Arab Spring in 2011 and, of course, the recession in the United States that sent profits and revenues tumbling in 2009.

“What’s been strange in the cruise space is it’s been a longer recovery time from the recession than most of us would have thought originally to try to recapture those 2008 yields,” said Sharon Zackfia, an analyst with William Blair & Co., a Chicago-based investment firm. “There have been several years of difficult events that the cruise lines have had to digest: swine flu, more significant was the Arab Spring, last year Concordia. It’s just been almost two steps forward, one step back.”

But Arison pointed out that Carnival has remained profitable throughout all of those twists. And the company has other reasons for optimism. In June, the 3,600-passenger Royal Princess debuts for the Princess Cruises brand, featuring a soaring atrium, new dining options and a glass-bottomed enclosed walkway jutting out 28 feet beyond the deck.

Royal Princess is just one of two ships Carnival Corp. is expecting this year; the other, for the German AIDA brand, arrives in March. The company has only two ships per year on order through 2016; Carnival has been saying for the past several years that it wants only two to three new ships a year.

Frank said the plan is to focus on increasing prices rather than the number of available berths.

“If you think of the cruise industry in the last 10 years, there’s been a dramatic growth in ships by us and our competitors,” he said. “To some degree, the capacity growth undermines the prices we can get in the market.”

Part of the long-term growth plan: tap developing markets such as Asia, where the company has been making inroads with its Costa brand for several years. This year, Princess Cruises will enter the Japanese markets with nine sailings between April and July, and the company recently opened sales and reservations office in Toyko as well as a corporate office in Singapore. Those moves are aimed at Asian passengers, not Americans taking cruises in Asia.

Frank said he doesn’t expect huge returns in Asia right away, but expects the investment to pay off in the long term. And he still believes that European brands, which cater to local markets, hold promise for growth.

“Certainly I think we need to be patient in Europe because I don’t think 2013 is going to be a great year for our business in Europe,” he said.

The history

Carnival’s history shows the company has learned patience — and how to weather bad years.

Arison, whose father Ted Arison founded Carnival Cruise Lines in 1972, remembers the early years of the company as very lean.

“It’s hard to envision it because it was so long ago, but the first four-to-six years were about survival,” said Arison, who worked a variety of jobs in the company before becoming CEO in 1979. “We were not a well capitalized company. We were just trying to survive much more well-capitalized companies competing with us with much newer ships.”

The company got off to an inauspicious start: On its inaugural sailing, the Mardi Gras ran aground leaving Miami.

The company went public in 1987 and soon began acquiring other brands: Holland America Line in 1989, luxury Seabourn in 1992, Italian company Costa Cruises in 1997 and Cunard Line in 1998. In 2003, despite competition from Royal Caribbean Cruises, Carnival merged with P&O Princess Cruises to become the world’s largest cruise operator by far. Their main competitors are Royal Caribbean Cruises, which owns Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and some European brands; and Norwegian Cruise Line, which recently announced it intends to go public.

“They have been very, very good at acquisitions over the years,” Zackfia said. “Obviously, at this point, since they represent about 50 percent of the global industry, they may not be acquiring much more because of anti-trust.”

Many of the companies the Carnival now owns have histories that date back to the 19th century — and Arison sees value in making sure they hold on to their legacies.

“We basically own the entire history of shipping in our portfolio of brands,” he said. “They have this independent culture, they have independent management, they do their own marketing, they do their own pricing.”

Teijo Niemel, editor and publisher of the Cruise Business Review, said the company chose their acquisitions wisely and took whatever steps needed to put the right management in place and nurture growth.

“Every time they bought something, they have really tried to develop that brand and they have never destroyed a brand that they bought,” he said.

The result: distinct brands that carve out their own niche in the marketplace, even when they offer similar price points and itineraries.

“The companies do a really good job with having their own identity,” said cruise specialist Serkan “Seko” Sener, who owns a Cruise One franchise in Miami Beach. “The cross-branding doesn’t take place.”

Sener said even clients who are repeat cruisers don’t realize that premium brands such as Princess and Holland America are owned by Carnival Corp.

Stein Kruse, president and chief executive officer of Holland America Line Inc. and chairman of Seabourn, said that brand distinctionis completely by design.

“I have all the information that I could ever want about Princess; I can look at the financials, operation, menus, there are no secrets,” he said. “Yet I view Princess also as a competitor — not as a primary competitor that I target, but it is a competitor.”

The giant

The massive organization also allows the company to gain efficiency from economies of scale, and to merge some behind-the-scenes operations to cut costs.

In 2011, on the heels of adding three new ships in three years, Seabourn Cruise Line moved its headquarters from Miami to Holland America Line’s headquarters in Seattle. As part of the move, Richard Meadows became Seabourn’s president while holding on to his role as Holland America’s executive vice president of marketing, sales and guest programs.

“I actually literally have two offices,” he said. The move has allowed the six-ship Seabourn unit to tap the larger line’s technology operations, logistics, accounting and other systems. As a result, Seabourn has been able to launch an improved website and customize a customer relations management platform that Holland America built. Through that technology, the brand launched a loyalty program over the summer that gives points for every day sailed.

“The beauty of having such a large company is that they can manage resources for the benefit of all their brands,” said Miami cruise expert Stewart Chiron, CEO of CruiseGuy.com. For example, he said, the company can use the same hull design across brands.

“Royal Caribbean is specifically building brand new classes of ships while Carnival was doing the same design,” said Chiron. Royal Caribbean International’s Oasis of the Seas and Allure of the Seas both hold 5,400 passengers at double occupancy, the largest cruise ships in the world, and the company recently announced that they had ordered a third.

“Carnival is a distinctly different group from their competitors,” he said. “It’s very numbers driven and they’re providing a very specific product….They’re not producing ships just to blow people away.”

The company’s brands also plan itineraries with fuels costs in mind, weighing the number of ports with how much each stop will cost. The company anticipates a 5 percent improvement in fuel use this year.

“We’re very conscious about where we go now and does the consumer see value in going there,” said Gerry Cahill, president and CEO of Carnival Cruise Lines. “That’s the basic fact of life and we live with that today.”

Zackfia said Carnival is well known — even outside the cruise industry — for its cost-cutting prowess, calling it “just kind of second to none.”

“I think they’ve tried to be cognizant of not affecting the passenger experience,” she said. “Ultimately that will affect the price passengers will be willing to pay. It’s a fine line. They’ve kind of walked that line for 10 years.”

At Carnival Cruise Lines, the company’s largest brand with 24 ships, the balancing act is trimming costs where possible while also investing $500 million in a new renovation program dubbed Fun Ship 2.0. The initiative, announced in late 2011, includes branded partnerships with game company Hasbro, comedian George Lopez, Food Network personality Guy Fieri, DJ Irie and EA Sports, as well as a host of new eateries, bars and public spaces.

The innovations are designed in many ways to attract first-time cruisers, a key market for Carnival Cruise Lines. The line has also been attracting more families, which has dropped the average age to 39 from the low 40s just a couple years ago, Cahill said.

Carnival Breeze, which also sports a new tropical, beach-inspired look, is the first new ship to offer most of the updates. But the company is rolling out many of the features on older ships. Phase One of the project will see 14 ships get the updates by 2015; the most dramatic is Carnival Destiny, which is getting a $155 million retrofit to become Carnival Sunshine when it re-launches in April.

“Carnival Breeze defined how we think of our product today,” said Cahill, who became the brand’s president and CEO in 2007. “Now the real challenge is to try to roll as much of that back to the existing fleet, as much as you can as fast as you can, without going broke.”

Changes at carnival

Carolyn Spencer Brown, editor-in-chief of the website CruiseCritic.com, said the biggest changes at Carnival Corp. are happening at Carnival Cruise Lines.

“There’s a lot of new energy, there’s a lot of new style, new branded features, the biggest refurbishment effort we’ve ever seen with Carnival Sunshine/Destiny,” she said. “It’s really taking a leap from the Carnival of old. And that’s both good and bad.”

The good part is that the brand is refreshing an image that had grown dated. But the bad, Spencer Brown said, can be seen in Cruise Critic reviews of the Carnival Breeze that bemoan a decline in food quality and service.

Cahill said he doesn’t pay a lot of attention to review sites, which he called “very anecdotal,” but relies on surveys sent to guests after their cruise. Dining scores are very high, he said.

Christopher Cooper, a longtime Carnival Cruise Lines customer, wrote one of those Cruise Critic reviews, though he said he enjoyed the ship and all it had to offer on a recent Carnival Breeze cruise. He’s been on more than a dozen Carnival cruises since 2003.

“I think if you’re a first-time cruiser, things are going to be overwhelming and you’re going to think it’s pretty neat,” said Cooper, a 53-year-old firefighter who lives in Port St. Lucie. “If you’ve got the 15 cruises I have, the cutbacks are just coming in waves.”

Still, he singled out the RedFrog Pub (only on Carnival Breeze, Carnival Magic and Carnival Sunshine) as a new favorite and said his next cruise, in February on Carnival Glory, will suffer by comparison.

“There is no such thing as a bad cruise, but it’s not going to be to that level,” he said.

On a recent Saturday, new passengers were discovering the island-themed pub, where bartenders snapped pictures to display on a screen and suggested cocktails in a $19.95 oversized “fish bowl” glass as a beverage option.

Des Moines resident Keith Moeller, 31, got a Long Island iced tea with a Caribbean twist and reflected on what prompted him, his wife and 81 of their friends to vacation with Carnival.

Using a word very important to the cruise line, he said: “It’s funner.”