Royal Caribbean's "Oasis of the Seas"
Friday, November 20, 2009PAUL KANGAS: Today the cruise line officially unveiled its "Oasis of the Seas," the biggest of all. Owning the world's largest cruise ship gives Royal Caribbean a competitive advantage. But given today's choppy economic climate, it also represents a huge bet on the part of the company's Chairman Richard Fain. But as Jeff Yastine explains, it's Fain's passengers who can make RCL a winner.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Meet Sue and Eddie Egan. They haven't been on a cruise ship since the days of the "Loveboat," but they drove four hours to see the "Oasis of the Seas."
EDDIE EGAN, CLEARWATER, FL: It's just a ship.
SUE EGAN, CLEARWATER, FL: It's the biggest one in the world. I mean, it's pretty impressive over there.
YASTINE: Royal Caribbean is banking on that impressiveness with a shopping and eating area, the royal promenade, that's longer than some land-based strip malls, a central park, a carousel and other amenities for a boardwalk experience, all to fill the ship's 2700 cabins. The cruise line's chairman says it's all part of their plan.
RICHARD FAIN, CHAIRMAN & CEO, ROYAL CARIBBEAN INT'L.: The model is remarkably simple. If we offer people more of what they want, more choice, more variety, they'll pay more. At the same time, when you make it larger, which in fact you have to do to give them that more choice, you get an economy of scale. So if you can get better revenue and an economy of scale, the combination is a winner and quite frankly it's simple but it works.
YASTINE: What kind of a bet is Royal Caribbean making when you're building a ship as big as the Oasis is?
FAIN: Any time you enter into a major project, there's a certain amount of luck involved. There's a certain gamble involved. Certainly six years ago when we started this whole process, we never imagined that we would be in the midst of such a horrible economic climate when it came out. You also have a gamble, can you pull it off? Can you actually make something that people, all accept as being fundamentally better. And though we have excellent architects and excellent engineers and we put a lot of thought into it, there always a little bit of a gamble it won't quite come together. There really is serendipity involved with something like this.
YASTINE: As you know, there are some, including competitors, who doubt that the Oasis model makes sense -- too big, too expensive to build. What do you say to that?
FAIN: The team of people working to design the ship and also equally important is the team of people who work on board the ship to provide that great vacation, cruise in, cruise out, have basically shown this thing an amazing success. We're getting inquiries from all over. Our forward bookings have been very strong. We have higher prices and higher volumes than we've ever experienced. And that's giving us a rate of return on our investment even in this economy which I think is the envy of almost anybody in not only the cruise business, but the vacation business.
YASTINE: But bigger doesn't always mean more profitable say some analysts like Ryan Wahlstrom of Cruise Market Watch.
RYAN WAHLSTROM, PUBLISHER, CRUISE MARKET WATCH: Historically is that Royal Caribbean ships have cost about 7 percent more on a per berth basis compared to Carnival. And Carnival's actually had about 7 percent better yields over time. So the more expensive ship hasn't necessarily been borne out to date as being the more profitable alternative.
YASTINE: So the Oasis has a considerable wow factor. But Wall Street has raised eyebrows at the expense, about $1.23 billion and it joins the fleet at time when U.S. economy and consumer confidence is weak. So no one really knows if people will pay full price to ride on the Oasis or if bigger discounts are required. Like most analysts, S&P's Ben Bubeck is taking a wait and see approach on the ship and the company.
BEN BUBECK, ANALYST, S&P CREDIT RESEARCH: I think that Royal navigated pretty nicely through the challenging environment. We're concerned that the challenge is not fully behind them and our expectations for 2010 is that pricing remains at sort of a depressed level and so cash flow may not rebound as quickly as some would hope.
YASTINE: As for the Egans, they're not on the inaugural cruise of the Oasis but perhaps on the next trip out of port.
E. EGAN: Knowing that it's the largest passenger ship in the world and when you're looking at it, it's like looking at a hotel, it makes you want to take a ride in it. Of course we're going to be looking into it.
YASTINE: Jeff Yastine, NIGHTLY BUSINESS REPORT, Fort Lauderdale.
