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Higher Fuel Prices the Culprit for Royal Caribbean Downsizing

August 4, 2008 By: David Eisen Travel Agent

richard fain

Chairman and CEO of Royal Caribbean Cruises Ltd., Richard Fain, is implementing several cost-cutting measures in response to the increase in fuel prices

Until now, cruise lines have dealt with escalating fuel prices by passing the buck to consumers in the form of fuel surcharges. Royal Caribbean Cruises Ltd. has implemented a new tack: Buck staff. The cruise line has eliminated 400 shoreside jobs as part of a cost-cutting measure to save $125 million a year.

“Too much of our profitability is being eroded by the increase in fuel prices,” said Richard Fain, chairman and CEO of Royal Caribbean Cruises Ltd., during the company’s second-quarter earnings call at the end of July. “This is unacceptable, and we are evaluating everything we do to find ways to do it more efficiently and effectively. While our brands continue to attract premium prices, even in this difficult environment, it is imperative that we find ways to reduce our costs.”

Other Cost-Cutting Measures
In addition to cutting shoreside employees, Royal Caribbean is also discontinuing other non-essential operations, such as the Scholar Ship, an educational partnership aimed at college students studying aboard cruise ships. “This is a difficult period for virtually all businesses,” Fain said, “but we are determined to improve our operating results through tight cost controls, while preserving our outstanding guest experience and continuing to strongly support our travel agent partners. We will also continue to make measured strategic investments, especially in growing the international operations of our business.”

Breaking It Down
An analyst told shipping authority Lloyd’s List that Royal Caribbean has an overall higher cost profile than other cruise companies. He added that some cruise lines were reprising some of their post-9/11 strategies to offset higher costs. The unnamed analyst told Lloyd’s List that Royal Caribbean had never been the lowest-cost operator due to its highly corporate structure. He compared it to Carnival, which has a more decentralized structure, wherein each brand basically functions alone from its corporate parent. In Royal Caribbean’s case, its overhead is higher than other companies, the analyst told Lloyd’s List.

It wasn’t all that bad. Royal Caribbean did make a second-quarter profit, netting $84.7 million. On the other hand, last year’s second-quarter profit was $128.7 million. Despite the drop, Royal Caribbean, other cruise lines and CLIA repeatedly insist that the cruising environment is still sound. “Although pressure on the consumer persists and there is much uncertainty in the market, demand for our cruises and onboard spending continues to be resilient,” said Brian Rice, Royal Caribbean’s executive vice president and CFO. “Our yields should improve in all four quarters this year.”

Long term, Royal Caribbean said it still will look to grow its international business. “Over the last few years, we have made significant investments to seed our growth in many strategic markets,” said Rice. “These costs are now being absorbed by capacity and revenue growth in the emerging markets around the world. In addition, our scale and exceptional brand positioning in North America are enabling us to drive further efficiencies.”

Skyrocketing oil prices and an enervating economy notwithstanding, Fain said that business is still faring better than expected. “We continue to watch with concern both the high oil price and the weakening economy,” he said. “While we can’t solve high oil prices, we are gratified that, except for the oil price, our business continues to do as well or better than expected despite the economy. One might have assumed that we would have been impacted by both, but the fact that our business continues to overcome these economic pressures says volumes about its resilience.”

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