Carnival CEO Aims to Bust the Biggest Myths About the Cruise Industry

NEW YORK (The Street) -- Taking a cruise vacation isn't just for retired old fogeys or people who want to party and get drunk. And Carnival Corp. (CCL), whose Princess line played a prominent role in popular 1970s TV show  The Love Boat, isn't too big or behind-the-times to boost its profits.

At least these are several of the myths Carnival CEO Arnold Donald, who has been at the helm of the world's largest cruise line since July 2013, is seeking to dispel. 

"Historically, the nine brands operated by Carnival had acted independently, at times there were major firewalls up and things were kept confidential within the brands," said Donald in an interview. Showing Wall Street that all of Carnival's brands are floating in the same direction may help bust the myth the stock isn't as attractive as smaller competitors.

Over the last two years, Carnival shares have gained 36%. Rivals Royal Caribbean (RCL) and Norwegian Cruise Lines (NCLH), however, have seen their stocks jump 99% and 79%, respectively, over the same time period, propelled by buzzy new ships and more recently, the plunge in fuel prices. Carnival has battled the lingering effects of some high-profile mechanical breakdowns at sea prior to Donald's appointment. 

Early on in his tenure as CEO, Donald, who had previously spent 12 years on the company's board, got to work on kicking down some of the walls that were preventing stronger results for shareholders and experiences for vacationers at sea. The new mantra put in place by the company's new admiral: communication, collaboration and coordination.  

Carnival now uses its heft to better negotiate prices on food and air travel for passengers. Marketing materials for travel agents have taken on a more coherent voice, while beverage packages for consumers are more enticing. Having these facets of the business clicking are critical in securing customers. Last-minute discounting on Carnival cruises is also being eliminated, similar to changes underway at Royal Carnival and Norwegian, much to the chagrin of deal-seekers. Booking a cruise is beginning to purchasing an airline flight -- if one pays earlier, the rate is cheaper than if waiting for the last minute. 

For the cruise lines, the shift in pricing philosophy is welcome news as last minute discounting on tickets is a profit-killer. Furthermore, having ships booked well in advance of peak vacation season allows a cruise line to better plan their business and articulate financial goals to Wall Street.  



"This concept of prices dropping at the end is something that's just not going to last," Arnold recalled saying to his team a few months into the holding the top job.

But to kick profits into an even higher gear, Carnival will have to conquer two other myths -- one, that cruising isn't for everyone, and another, that China is an overhyped market.

"You will hear the misperception that cruising is only for old people who are retired and have plenty of time on their hands, and in the other myth, you will hear that cruising is only for people that want to party and get drunk -- both are myths", says Donald. He added, "Today, a lot of millennials are taking a cruise -- we know this because we do a lot of weddings on board, and we have a lot of honeymoons." Carnival also sails the largest number of children, besting Disney (DIS), which to its credit only has four ships in operation.



According to data provider Cruise Market Watch, only 53% of the target North American market (or 24% of the whole U.S. population) has ever taken an ocean cruise. All the cruise ships in the entire world filled at capacity all year long would still only amount to less than ½ of the total number of visitors to gambling mecca Las Vegas.

Carnival, along with others in the industry, may finally be broadening its appeal to prospective vacationers with the arrival of new ships with celebrity chef-inspired restaurants and more exciting onboard activities. For instance, the Carnival Vista that debuts in 2016 will feature a restaurant inspired by celebrity chef and Food Network star Guy Fieri, as well as the sea's first Imax movie theater. Strong "wave seasons" for the industry this year, which is the period from January to March when spring and summer cruises are booked, is a strong indicator that people are starting to take a different view of cruising.

In total, a record 23 million passengers are expected to take a cruise this year, according to the Cruise Line Industrial Association (CLIA).

As for China, Carnival is a major player in a market everyone is chasing amid friendly government initiatives to promote investment in the industry. Carnival, which is profitable in China according to Donald, has four vessels in the market in its Costa and Princess lines, and will debut another in 2016. The company projects 2.5 million passenger cruise days in China this year, jumping to 4 million or so next year.

Royal Caribbean, which is competing in China with its new Quantum of the Seas and three other ships, will notch about 1.8 million passenger cruise days in 2015, according to Donald. In 2016, Royal Caribbean's new Ovation of the Seas will be based in China, as well.

China is likely to prove its worth to the bottom line of the major cruise lines putting ships their very soon. The number of cruise vacationers could top 8 million per year by 2020, accord to CLIA. In 2014, a mere 700,000 out of China's 110 million leisure travelers booked a cruise.

"It's a fun business," said Arnold, discussing the challenges and opportunities he faces. And it stands to be even more fun for him and Carnival should the company continue to travel down the comeback trail.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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