Carnival Weathers Stormy Economic Seas

The cruise operator is luring customers by positioning itself as an affordable alternative to beach resorts.
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There's no smooth sailing for the travel industry these days.

You would expect cruise operators to suffer the same revenue plunges as airlines and hotel chains. After all, people who have lost their jobs don't have extra cash to vacation in the Caribbean. Given the high costs of running a ship, companies lose big if their boats depart half empty.

So it was a surprise to hear

good news

this week from


(CCL) - Get Report

, the world's largest cruise operator. The Miami-based company reported first-quarter earnings that jumped 10% to $260 million from a year ago.

Carnival benefited from falling fuel prices, but management also reduced prices and positioned the company as an

affordable alternative

to beach resorts. It's a winning strategy that applies to companies outside the travel industry.

Here's what the company did right:

Slash prices to keep customers:

No matter how many people are aboard, a cruise ship incurs the same costs for fuel, staff, insurance and dock fees. So it makes sense to

drop prices

to fill ships.

Carnival offered special deals last winter and promoted their all-inclusive meal plans as more cost-efficient for families than traditional resorts. The company booked 10% more cruises in the first quarter than a year ago.

"Though pricing is down significantly, we continue to fill our ships by reaching people who might not have otherwise considered a cruise vacation," Chief Executive Officer Micky Arison said in a statement.

The downside is that penny-pinching travelers spend less on extras like casinos, souvenirs and shore excursions. Revenue from those businesses dropped. Still, vacationers continued to shell out for drinks and spa treatments.

Accept uncertainty:

Carnival's bookings rose, but the portion of reservations made close to ships' departure dates was higher than usual. Nervous customers are unwilling to commit to trips in advance.

Carnival was quick to downplay its performance forecast for the rest of the year. The company will probably keep offering deals, but who knows if travelers will continue to book?

The company is smart to manage investors' expectations. It's better to surprise your shareholders with good news than disappoint them with worse-than-expected performance.

Promote fiscal responsibility:

Cost cuts are a fact of life regardless of the industry. However, travel companies must be careful not to sacrifice service when they trim staff. If regular customers don't feel pampered, they won't come back.

Carnival found other ways to reduce costs. When fuel costs were high, they changed itineraries to reduce the number of miles traveled and allow for slower speeds. They're planning to decrease the number of cruises to Alaska, which cater to the luxury market more than Caribbean routes.

Despite the cuts, Carnival continues to invest in its main business. The company is spending $9 billion to build 16 ships in the next two years. It's financing the boats through cash from its operations, an impressive feat that keeps Carnival from taking on new debt.

Investing in the future of your business shows shareholders that you're in it for the long haul. Do it wisely, without building debt, and you'll sail through stormy seas too.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.