Can These Massive Luxury Ships Keep the Profits Flowing at Royal Caribbean?

Royal Caribbean's newest, most advanced ships reveal a great deal about why the cruise line operator's stock price has been surging.
By Brian Sozzi ,

A 16-deck, 1,150-foot-long ship that holds 4,180 people decked out with luxurious staterooms, including one that costs close to $3,000 a night. A skydiving simulator that lets you feel as if you just jumped out of an airplane. Two robotic bartenders that mix and serve you drinks ordered via a tablet.

These over-the-top attractions on its newest vessel explain a great deal why Royal Caribbean's (RCL) - Get Report profits, and stock price, are riding high this year.   

"The more attractive we make the ship, the more people come on board," says Royal Caribbean's long-time chairman and CEO Richard Fain over some hot tea at Patisserie, a whimsical French-themed café on board the just-launched Anthem of the Seas. Fain adds, "The quality and variety of the goods on the ships we are offering are better than we have offered in the past."

The Anthem of the Seas, which TheStreet got to experience firsthand last weekend, is a member of Royal Caribbean's latest quartet of its biggest and mostadvanced ships ever that collectively cost over $3 billion to build. The best stateroom available on the ship is the 1,640-square-foot, two-deck-high "Royal Loft," which sleeps up to six people, has two bathrooms, an open living/dining room, a TV room, a master bedroom, panoramic ocean views and a balcony Jacuzzi. 

An 8-night cruise in April from New Jersey to the Bahamas on the Royal Loft Suite costs a whopping $23,364.00.

Other gee-whiz amenities on the Anthem include an enclosed sphere called the "North Star" that offers a 360-degree view of the sea 300 feet in the air, and flying drones that are released out over the Atlantic Ocean that can be used to take selfies of passengers.

Investors have certainly jumped aboard Royal Caribbean's stock this year as its latest ships, coupled with a healthy appetite by consumers to take a cruise, have helped to fuel strong profits.   

Shares of Royal Caribbean, which is the second-largest cruise line behind rivalCarnival Corp. (CCL) - Get Report based on market cap, have surged about 20% this year compared to a 0.2% drop for the S&P 500. By comparison, shares of Carnival have gained roughly 16%. Norwegian Cruise Line (NCLH) - Get Report , the smallest cruise line operator in terms of market cap, have tacked on an impressive 26% so far in 2015.  

All three cruise line operators have benefited this year from moving away from profit-killing last minute discounting, as well as more families showing an interest in taking a cruise.


Royal Caribbean's newer ships have a more luxurious feel.

More recently, Royal Caribbean's shares were supported by a blowout third quarter, powered by results from its newest vessels. Collectively, the four ships comprise about 18% of Royal Caribbean's overall capacity, which also includes smaller brands such as Celebrity Cruises and TUI Cruises.

Ticket revenue, which is essentially how much people spend to board a ship, rose 4.9% year over year in the third quarter. And once they got on board, the spending didn't stop. On-board revenue, which reflects spending by passengers at restaurants, retail shops and on extras such as high-speed wifi, surged 8% from the prior year. Adjusted earnings of $2.84 a share easily beat consensus forecasts for $2.70 a share, which was also the company's guidance.

If Royal Caribbean achieves its 2015 earnings per share guidance of $4.80, it would mark an almost sixfold increase in earnings compared to 2009.

What is tantamount to floating cities boasting larger, more luxurious staterooms, higher quality dining options and better retail shopping experiences have helped Royal Caribbean attract vacationers at significantly higher prices.

According to Royal Caribbean's website, the price for a 9-night cruise to Bermuda and the Caribbean on the new Anthem of the Seas, with a balcony room, departing June 2, 2016 starts at $2,301. On the other hand, a 7-night eastern Caribbean cruise with a balcony departing June 19, 2016 on the 3,150 passenger Freedom of the Seas, which launched in 2006, starts at $1,104.   

"The larger, more luxurious staterooms have helped us sell more Royal Caribbean packages, especially to families," said one travel agent TheStreet talked with poolside on board the Anthem of the Seas.


Wonderland restaurant, one of the more upscale places to eat on the new Quantum class ships.

A key selling point for the Anthem of the Seas is the new high-speed wifi in partnership with O3B that is usually being offered to consumers for a pricey $15 per night, per line, although the company has also experimented with giving the service away for free.


TheStreet found the wifi service impressive and worth the money if hooked on media consumption, as it was easily able to stream music from Pandora, YouTube videos and surf the web.

Moreover, the user experience was much improved from the wifi initially offered on the Quantum of the Seas, which was billed as the fastest wifi at sea at the time it was launched in 2014. TheStreet found that service to be slow and quick to kick users off, an issue Fain acknowledged. "We had to get the bugs out with the technology," Fain said.

Bugs also appeared to have been ironed out with the water-proof smart bracelets that are used to unlock one's stateroom and pay for items on board, which was an industry-first capability initially launched on Quantum of the Seas. On the Anthem of the Seas, TheStreet had no issues opening the stateroom's door or using the smart bracelet to change a reservation by holding it up to a tablet -- both experiences were not often the case on the Quantum of the Seas. 

According to sources, rival Carnival has its own version of smart bracelet technology in development, with the initiative being led by Carnival's first chief customer experience officer John Padgett, a former executive at media giant Disney (DIS) - Get Report who oversaw the development of Disney's popular MagicBand.


Improved retail shopping experiences have boosted on-board spending.

Unlike Quantum of the Seas, which is now based in China, Anthem of the Seas will be sailing year-round from the New York area providing trips to the Caribbean and other locations for five to 12 nights at a time.

"When you come on board and you see things you want, you are willing to pay more for it," said Fain.

Royal Caribbean is not simply standing pat, however. Next year will bring two new ships, which arguably improve upon the enhanced suite of offerings for cruise-goers on the Oasis and Quantum classes. Harmony of the Seas launches in 2016 in Europe and will be the first Royal Caribbean ship to boast water slides, which should help it appeal to families.

Ovation of the Seas, the third in the company's more upscale Quantum class of ships, will also debut in 2016, destined for Chinese waters. It will feature most of the amenities found on Quantum of the Seas and Anthem of the Seas such as a skydiving simulator and a rock climbing wall. Dining options will be tailored to meet Chinese dining preferences.  


Unique to Quantum classic ships, robotic bartenders serve drinks ordered on tablets.

Despite the stock's impressive gain this year, Wall Street is still optimistic about Royal Caribbean's prospects.  

"We remain bullish on Royal Caribbean, and believe the company will benefit in 2016 and 2017 from new ship introductions in more profitable and high-growth markets, such as China and the Asia Pacific region," wrote JP Morgan analyst Kevin Milota in an Oct. 23 note. Milota, who referred to the company's 2015 performance as a "banner year," reiterated his overweight rating on the stock.

Next year has already started off well for Royal Caribbean. The company's bookings right now for cruises people plan to take in 2016 are higher year over year, and says Royal Caribbean, at the highest prices in its history. Execs remained upbeat on the growing Chinese cruise market despite recent turbulence in the stock market, slowing economy and rising capacity as Carnival and Norwegian boost their presence in the country. 

And Royal Caribbean's board also recently approved a $500 million share repurchase plan, of which $200 million is expected to be completed by the end of January 2016 even with the stock hovering near a 52-week high. 

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