Royal Caribbean Says Just About Everything Is Going Right

In January, Royal Caribbean Cruises CEO Richard Fain took stock of the way 2017 was shaping up and declared the company was getting ready for a “sensational year.”

“Life is good,” he told analysts at the time. “Long may it continue.”

It has.

During the cruise operator’s second-quarter earnings call Tuesday, Fain said his early suspicion that the year could be “particularly positive” has proven true.

“Since then, the outlook has only gotten better,” he said.

Revenues increased from $2.1 billion in the second quarter last year to about $2.2 billion in 2017. Profits rose nearly 61 percent to $369.5 million, or $1.71 per share — higher than the company and Wall Street had expected.

Net yields, or revenue generated per passenger per day, rose nearly 10 percent.

The company raised its full-year forecast again — “another beat-and-raise quarter,” one analyst wrote. Shares closed at $116.86, up more than 3 percent.

Demand was strong from North American passengers, who paid higher prices and spent more on board this year compared to last. Shore excursions, drinks, and Wi-Fi packages were all popular purchases.

Bookings for European sailings have been comparatively robust, especially given the reluctance of North Americans last year to travel to Europe amid safety concerns.

“Fewer geopolitical events and stable air pricing have contributed to a surge in demand from our higher-paying North American guests,” Chief Financial Officer Jason Liberty said. “As a result, North American guests will account for a larger percentage of Europe itinerary sourcing than in any other recent year.”

Executives also said that a discipline they put into place within the past couple years — what they call the price integrity program — has been paying off as well. Rather than slashing prices to fill empty cabins close to the departure date as cruise lines have traditionally done, Royal Caribbean has been sticking to higher fares no matter what.

“As we had predicted, the early stages of that program cost us revenue in both 2015 and 2016,” Fain said. “That hurt, but once we had established our consistency and credibility with the travel agents, with the public, and with our own revenue managers, the benefits started flowing in.”

Fain said the program has been successful in rewarding the behavior the company wants — early booking — and encouraging last-minute bargain hunters to change their ways.

“We don’t do it only when it’s painless or convenient,” he said. “We maintain the program even when it hurts, and sometimes we have to let cabins sail empty. That goes against every one of our instincts, but the focus and the discipline have proven their value.”

The company, which owns and operates Royal Caribbean International, Celebrity Cruises, and Azamara Club Cruises and has a large stake in two European brands, is 95 percent booked for 2017.

And new bookings over the past three months have been up double digits compared to last year, with prices coming in higher.

Even when cruise companies have a good quarter, there’s typically something going wrong that cuts into profits: spiking fuel prices, higher costs, problematic currency exchange rates, or regional disturbances.

But for the most part, Royal Caribbean has been relatively unscathed.

“In a normal year, we have a lot of pluses and minuses and they usually balance each other out,” Fain said. “But this year, we are experiencing many more positive forces than negative ones.”

The China Drag

The one drag, still, was China, where Royal Caribbean has stationed some of its newer ships.

With South Korean ports still off limits to Chinese travelers amid tensions between the two countries, the cruise company has been forced to change itineraries and call on destinations that are not as popular.

Executives said that while they saw record occupancy in China during the quarter, prices were down compared to the same time a year ago.

“Unfortunately, the South Korea travel restrictions created a challenge for this year’s China season, resulting in less-than-ideal itineraries and lower pricing,” Liberty said. “Our strong relationship with key travel partners, combined with expanding direct business, contributed to a relatively quick stabilization in demand after the travel restrictions were announced.”

Despite the “painful” impact of restrictions on travel to Korea, Fain said the outlook for China’s future remains confident.

In an interview, Liberty said the company hopes for a resolution to the dispute sooner rather than later.

“What we do know is that there’s been a lot of constructive dialogue,” he said. “A challenge, as you can imagine, is when there are continuous activities happening in the Korean peninsula, you sometimes take two steps forward and one step back.”

A Cautionary Note

China aside, results have been so good this year that Fain gave an early heads up that 2018 might have no choice but to suffer by comparison.

“We’re conscious of the fact that a particularly strong 2017 also provides particularly difficult comparables for 2018,” he said. “This is definitely a very nice problem to have, but it is nevertheless a very real issue.”

While Fain said business for next year is shaping up well, there’s no guarantee everything will continue to work in Royal Caribbean’s favor.

“We’re having an extraordinarily good year in an extraordinarily strong market and i think it behooves us to say that not everything goes your way every time,” he said.

Morningstar analyst Jaime Katz also added some cautionary language about pricing potential in a note for investors.

“Given the duration of the current economic expansion and the potential for a slowdown during our forecast, pricing gains could be harder to come by despite smarter revenue management tactics (although they should still prove better than the past, given
pricing integrity changes),” she wrote.

Like Fain, Katz acknowledged that cruise companies typically see a few more headwinds.

“While all potential puts and takes appear to be helping the cash flow profile of Royal currently, factors like foreign exchange and fuel prices have historically helped to whipsaw the growth potential of the business,” she wrote. “And we don’t think it will be perpetual smooth sailing for the cruise operators.