As consumers become more selective about how and where they vacation, cruise lines are fighting for Americans’ tourism budgets. Royal Caribbean believes that shortening trips and filling days with activities and exclusive opportunities will keep customers hooked.
“I think we’re an experience-based mindset,” Royal Caribbean CEO Jason Liberty told CNBC’s “Squawk on the Street” this week. “More than half of our guests are actually millennials or younger, and when you survey those guests, about 42% of them say that in the next 12 months their plans are to actually take shorter vacation experiences.”
On Royal’s Utopia of the Seas, the second largest ship in the world with a maximum capacity of nearly 5,800 passengers, guests are welcomed to 13 swimming pools, 21 dining options, two casinos and more. This is Royal Caribbean’s second cruise ship launch in six months. Liberty says the voracious appetite for post-pandemic cruises hasn’t gone away.
“We’re not seeing any pushback from the consumer, whether they’re planning their vacation experiences further out… [or] then on the ships, they go out and continue to spend,” Liberty said. “There is no area on the ship where we have seen a change in their spending behavior.”
To scale its business and broaden its appeal, Royal Caribbean is looking at how best to compete with other types of vacations that customers choose, such as skiing, casinos or theme parks.
“When we look at what our guests are doing when they’re not with us, they’re going to Orlando, they’re going to Vegas, they’re going to all-inclusive resorts,” Liberty said. “What we’re trying to do is make sure our experience, whether on board or on our private islands, is something that’s highly competitive with land-based holidays.”
Morningstar travel and leisure analyst Jamie Katz believes Liberty’s strategy to tap into the Disney theme park traveler is working.
“The American traveler doesn’t always have time to take a six- to eight-day cruise because of work schedules and kids’ school calendars,” Katz said. “A three-day cruise gives customers more options.”
Expansion plans
One of the advantages of bringing a new ship to market — you can charge more.
“You’re seeing really significant pricing premiums. Historically, a new ship is priced at a 20% premium to existing ships across the industry,” said Patrick Scholes, travel and leisure analyst at Truist Securities.
Scholes said the Utopia price hike for Royal Caribbean could be even bigger.
Liberty said it expected higher prices to persist in the second half of the year, pointing to the “value gap” between cruises and land-based holidays.
Opponent Carnivalalso raised prices amid strong demand.
“We haven’t seen that sign of a consumer slowdown, if anything, we’re seeing an acceleration,” CEO Josh Weinstein told CNBC after the company’s most recent earnings report in mid-June.
Analysts point out that cruising is one of the few areas in the travel and hospitality industry where prices continue to rise sharply. Last week, Delta Air Lines revealed lower prices compared to last year. HSBC analysts expect air fares to remain flat or decline in 2024 compared to 2023.
Several analysts and investors will be sailing on Utopia this week to better understand what differentiates the cruise ship from its competitors.
One area of interest will be the impact of cutting-edge technologies: Liberty said artificial intelligence is helping Utopia reduce food waste by 30% to 40%. The company also uses AI to help with dynamic pricing and intelligent management of customer data.
Aside from the Utopia, there aren’t too many ships coming online from the cruise giants.
Royal Caribbean currently has the strongest order book in the industry. The company’s Icon of the Seas, the world’s largest cruise ship with a capacity of 7,600 passengers, broke ground earlier this year.
In Royal Caribbean’s recent earnings call, executives said Icon bookings remain strong through 2025.
“We are entering a period of two to three years where there is a minimal number of vessels coming online. Typically, the industry increases supply by 5% to 7% each year,” Scholes said.
But building a huge cruise ship requires extensive work. Wall Street analysts estimate it takes three to five years to order and deliver a ship.
Norwegian Cruise Line is working to bring eight new ships to market over the next six years.
Viking Cruiseswhich went public earlier this year and has seen its stock trade well above its debut price, is bringing three new ocean cruise ships to market over the next three years, not including its river-based vessels.
