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Royal Caribbean Looks Beyond Carnival, Norwegian

The cruise line isn't solely focused on competing with Carnival and Norwegian. It wants to take on land-based travel options.

While it's easy to see the major cruise lines as battling with each other for the dollars being spent by customers looking to take a cruise, that's not how Royal Caribbean (RCL) - Get Royal Caribbean Group Report CEO Jason Liberty views the marketplace. Certainly, the segment of people who already like to cruise might be picking between Liberty's company, or key rivals Carnival Cruise Lines (CCL) - Get Carnival Corporation Report, or Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

Another group of travelers -- a much larger group -- does not think cruise first when it comes to a vacation. Instead, they book land-based vacations and that's an area where Liberty thinks Royal Caribbean can make big gains.

It's not about wooing customers away from its rivals, Liberty wants to bring more customers into the cruising tent. That would be good not just for Royal Caribbean, but also for Carnival and Norwegian.

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Royal Caribbean Looks to Take on Land-Based Vacations

Liberty answered a question about competing with land-based vacations from Wolfe Research Analyst Fred Wightman during his company's first-quarter earnings call.  

"Pre-COVID, the combination of things like Perfect Day, you can add things like the edge-class ships and so forth, we saw a pretty significant reduction in that gap to land-based vacations, especially in key products like in Orlando and other products that are out there. And I think that we very much are focused on that," he said.

Liberty explained that many of Royal Caribbean's investments have been about building that value for vacationers.

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We have really managed to enhance the experience, both on the ship and on land-based on really tuning into the customer for us to be able to go ahead and do that. So I think that's why we are seeing similar trends. But when you look at the overall fleet as a whole and you compare those to land-based vacation in Europe or you look at a land-based vacation in Alaska or Vegas, etc., there's still that gap and there's still that opportunity that we're very honed in on. I mean, that's really where, if you saw us pre-COVID or during COVID where we have focused our energy, is less about our cruise peers, but more about how do we close those gaps to land-based vacations.

The CEO never mentioned Walt Disney (DIS) - Get Walt Disney Company Report or any other competitor by name, but it seems clear what he's broadly talking about. A cruise can offer tremendous value compared to a theme park trip or a Las Vegas vacation due to the mostly all-inclusive nature of a cruise. That's a value proposition Liberty seems to want to lean into.

Would a Recession Hurt Royal Caribbean?

The cruise industry has just begun to normalize after its long pandemic shutdown and its slow return to normal. Royal Caribbean, Carnival, and Norwegian all added to their debt during this period (it's pretty hard not to when you're shut down for over a year).

Liberty made it clear that he's not overly worried about the prospect of an economic downturn because he believes in his company's value proposition.

"So when a consumer -- let's just say, if they are feeling a level of pressure and they still need and want to go on vacations and build experiences and memories. And I think that value differential, which we are every day doing all we can to close that gap, is one in which the consumer recognizes and that tend to kind of fare well relative to other travel or consumer discretionary products during times like that," he said.

CFO Naftali Holtz also made it clear that the company was standing on firm financial ground despite the events of the pandemic"

And just to add quickly. We are in a very strong liquidity position," he said. "We're obviously in this inflection point of free cash flow -- of operating cash flows. And our focus is, as I said in my remarks, is to continue to refinance the balance sheet."