Success and Failure in the Cruise Line Industry

1
To: Luke McElfresh
Dr. John L. Keifer
Nadège Levallet
Tom Marchese
Catherine Penrod
From: Team #7:
Bobby Abbett
Evan Lewis
Eric Bartel
Kyle Hausfeld
Carlin Hillier
Date: February 16, 2015
Subject: Memo of Transmittal
As requested by the managers of Copeland Associates, our team has performed an analysis of the cruise line
industry. The report contains the current and future outlook of the industry, key success factors, a company
analysis between Carnival Cruise International and Royal Caribbean Ltd, followed by our recommendations
for Carnival to improve their operations.
The key success factors our team has decided the industry must consider are:
-Extend Global Reach into Expanding Markets
-Continuous Innovation in Amenities to Increase Onboard Spending
-Effectively Market Your Brand to Reliable Segments
Our recommendations for Carnival include:
-Create a fleet of ships matching or surpassing the quality of Quantum of the Seas
-Change the capital structure to be more highly leveraged
-Respond more appropriately and effectively to incidences
Our team would like to personally thank you for the opportunity to expand our knowledge and professional
development in the business community. If there are any questions about the information we have researched
or for any other reason please feel free to contact our project coordinator at ra889612@ohio.edu or 301-300-
0107 (Bobby Abbett).
College of Business
Copeland Hall, Ohio University
Athens, Ohio 45701

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Success and Failure in the Cruise Line Industry
Prepared for:
Copeland Associates Managers
College of Business
Ohio University
Prepared by:
Business Analysts of Copeland Associates
Mid 107 Team 7
College of Business
Ohio University
February 9, 2015

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Key Success Factors:
• Our highest graded key success factor for a company within the cruise industry is to Extend Global Reach
into Expanding Markets. Cruise lines have reached out to China, Cuba, and Europe, driving the
competition within the industry in order to have their company be the first that these new markets see.
• Our next highest graded key success factor is for these companies to Continuous Innovation in Amenities
to Increase Onboard Spending. Cruise lines have added innovative amenities to attract new customers to
differentiate themselves from the competition within the industry.
• Effectively marketing their brand to potential segments was weighted the third highest. Companies
looking to grow must reach out to new customers in their target market to expand their business. Finding
the right customers and pleasing them with the experience they want will give cruise companies the
benefit of vacation versus substitute vacations.
Carnival and Royal Caribbean Analysis
Carnival is the current leader in market share offering the most destinations, has the most ships, and operates
with the most capital out of all the companies within the cruise industry. Royal Caribbean comes next with
innovations, which they hope will surpass Carnival in a near future. We rank Royal Caribbean higher than
Carnival in terms of future outlook after extensive research leading to the assumption of a higher efficiency
rating.
Recommendations for Carnival
• Carnival needs to come out with a response to Royal’s Quantum of the Seas
• Carnival should buy back equity and issue out debt in order to keep more of their revenues as profit
• Carnival needs to better respond to incidences, in a timely and honest manor so that the public does not
think poorly of their brand.
Conclusion
Carnival and Royal Caribbean are undeniably the two top firms in the cruise line industry. Each company has
proven to be a successful business while pleasing thousands of vacationers with their remarkable ships.
Executive Summary
MID 107 Team #7
Cruise Industry Description
The cruise industry is a global business that
promotes the ideal vacation that a typical family
would enjoy. It costs hundreds of millions of
dollars in order get passengers aboard your vessel to
make a profit worth the investment.
Project Review
Within our report, you will find information about the
current and future outlook of the industry as well as a
comparison of the two top competitors within the
industry, Carnival Cruise International and Royal
Caribbean Ltd. We also include a breakdown of how
these companies are doing based on our own grading
criteria.

Table of Contents
Introduction……………………………………………………………………………………………………...6
Cruise Line Industry Overview…………………………………………………………………………………8
Present…………………………………………………………………………………………………………..8
Future…………………………………………………………………………………………………………….8
KSF # 1: Extend Global Reach into Expanding Markets…………………......................................................9
China………………………………........................................................................................................................9
Malaysia..............................................................................................................................................................9
Australia.................................................................................................................................................................10
Europe....................................................................................................................................................................10
KSF # 2: Continuous Innovation in Amenities to Increase Onboard Spending.............................................11
KSF # 3: Effectively Market Your Brand to Reliable Segments….................................................................12
Demographic…….......................................................................................................................................12
Behavioral..............................................................................................................................................................13
Company Analysis: Carnival Cruise Lines......................................................................................................14
Carnival Trend Analysis........................................................................................................................................14
Benchmark for Carnival........................................................................................................................................14
Notable Key Ratios Analysis................................................................................................................................14
Carnival Marketing Environment.........................................................................................................................15
Carnival Company Segmentation.........................................................................................................................15
Carnival Information Systems..............................................................................................................................15
Carnival Key Success Factor Evaluation.........................................................................................................16
Extend Global Reach into Expanding Markets......................................................................................................16
Continuous Innovation in Amenities to Increase Onboard Spending……............................................................16
Effectively Market Your Brand to Reliable Segments...........................................................................................17
Company Analysis: Royal Caribbean LTD......................................................................................................18
Overview………………………..........................................................................................................................18
Benchmark for Royal Caribbean............................................................................................................................18
Notable Key Ratios Analysis................................................................................................................................18
Royal Caribbean Marketing Environment............................................................................................................19
Royal Caribbean Company Segmentation............................................................................................................19
Royal Caribbean Information Systems.................................................................................................................19
Royal Caribbean Key Success Factor Evaluation..........................................................................................20
Extend Global Reach into Expanding Markets…..................................................................................................20
Continuous Innovation in Amenities to Increase Onboard Spending………………………………………........20
Effectively Market Your Brand to Reliable Segments...........................................................................................21
Recommendations..............................................................................................................................................22
Recommendation # 1: Carnival’s Response to Quantum of the Seas..................................................................22
Recommendation # 2: Buy Back More Equity, Issue out More Debt.................................................................23
Recommendation # 3: Responding to Incidences...............................................................................................24
Conclusion..........................................................................................................................................................25
References...........................................................................................................................................................26
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Table of Figures
Figure 1: Weighted Averages…………………………………………………………………………………….6
Figure 2: Revenue of Industry……………..…………………………..…………………………………………7
Figure 3: Passengers Carried………………..………………………………………………………………........7
Figure 4: Market Share…………...………………………………………………………………………………8
Figure 5: Passenger Percentage 2012…………...…..........……………………………………………........……9
Figure 6: Passengers Percent 2020……………………………………………………………………………….9
Figure 7: Penetration Rates………...........................................................................................................………10
Figure 8: Onboard Payments………………………………………………………………………………........11
Figure 9: Passengers by Age………………………………………………………………………………….…12
Figure 10: Passengers by Income……………………………………………………………………………...12
Figure 11: Passengers by Marital Status………………………………...………………………………………12
Figure 12: Customer Satisfaction………………………………………………………………………………13
Figure 13: Carnival Key Ratios 1……………………………………………………………………………….14
Figure 14: Carnival Key Ratios 2…………………………………………………………………………….....14
Figure 15: Carnival Valued Destination Variety/Reach…………………………………………………….......16
Figure 16: Carnival Valued Expansion and Innovation………………………………………………................16
Figure 17: Carnival Valued Demographics and Incidents………………………………………………………17
Figure 18: Royal Key Ratios 1………………………………………………………………………………….18
Figure 19: Royal Key Ratios 2………………………………………………………………………………….18
Figure 20: Royal Valued Destination Variety/Reach…………………………………………………………...20
Figure 21: Royal Valued Expansion and Innovation……………………………………………………………20
Figure 22: Royal Demographics and Incidences…………………………………………………………..........21
Figure 23: Weighted Averages 2………………………………………………………………………………..25
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Purpose and Preview of Project and Findings
Introduction Overview
Key Success
Factors
Company Analysis Recommendations Conclusion
For Part B of the Company Analysis, the Copeland Associates Managers asked us to research the two main
competitors of the Cruise Line Industry. In this report, we examine the strategic position of each company and
ultimately offer recommendations for Carnival to help improve its competitiveness and market share as we
came to the conclusion that they were less favorably positioned.
Throughout the report we are going to touch on three key segments: each company’s current position relative to
the marketplace, evaluation of each company’s performance against our key success factors, and recommend
what Carnival can do in order to beat Royal Caribbean.
We will start by benchmarking the companies against their key competitors in the marketplace and evaluating
their financial position and what information systems they use. From there, we have created Marketing
Environments of the companies in relation to the industry as a whole, and then to each other. Lastly, we touch
on how each company segments their targeting and positioning strategies to reach new opportunities for growth
of new demographics.
After providing this information of each company’s strategic position, we explain our recommendations for
Carnival to improve its operations. This will include a brief rationale as to how these recommendations will
help Carnival in relation to the key success factors we have identified. Each of these recommendations will
overview how the company should go about implementing them, what the financial impact will be of these
recommendations, and what limitations they may face.
Our first key success factor is weighted at 50% because certain countries show high growth potential for the
industry, such as China. Innovation in amenities is weighted at 30% since income from onboard expenditures
make up around 25% of total revenue. Effective marketing is weighted at 20% because some segments have
shown to be critical for companies to market to in order to get ahead.
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Figure 1: Weighted Averages
Company
(Weight)
Carnival Raw Weighted Royal Caribbean
Raw
Weighted
Extending Global
Reach
(50%)
7.5 3.75 9 4.5
Amenities
(30%)
7 2.1 9.5 2.85
Effective
Marketing
(20%)
8 1.6 7.5 1.5
Total 22.5 7.45 26 8.85

Cruise Line Industry Overview
Present
The early 20th century is when the concept
of superliners, or floating hotels, entered the
industry. Advertisements of food and on-
board activities showed people that there is
more to riding a ship than just to cross the
ocean. In 1990, the cruise line industry only
had the capacity to carry 3.7 million
passengers. Last year, the passenger load
reached 21.5 million. The cruise lines are
projected to carry a total of 22.2 million
passengers in 2015. The current cruise line
industry is a $37.1 billion industry as of
2014, showing a 12.17 billion dollar growth
since the 2009 recession (Statista, 2014).
08 09 10 11 12 13 14
Revenue 27.56 24.93 26.85 29.4 34.54 36.27 37.1
27.56 24.93 26.85 29.4
34.54 36.27 37.1
0
10
20
30
40
Revenue of Cruise Industry 2008 – 2014
(in billion U.S. dollars)
Revenue
Future
The future of the cruise line industry is
promising. The revenue of the cruise line
industry is expected to grow 2% per year on
average (Brennan, 2014). Consumer
spending is also expected to increase 2.6%
each year (Brennan, 2014). According to
Cruise Market Watch (2015), by 2019 there
is an expected growth of 3,690,000 total
passenger carried (Cruise Market Watch,
2015). “Worldwide, the cruise industry has
an annual passenger compound annual
growth rate of 6.55% from 1990-2019”
(Cruise Market Watch, 2015).
3,7744,721
7,214
11,180
18,421
22,247
25,316
0
5,000
10,000
15,000
20,000
25,000
30,000
1980 1990 2000 2010 2020 2030
Passengers(inthousands)
Year
Growth Forecast of Passengers Carried
(Worldwide)
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Figure 2: Revenue of Industry (Cruise Market Watch, 2015)
Figure 3: Passengers Carried (Cruise Market Watch, 2015)
Key Success
Factors

Cruise Line Industry Overview (continued)
“The total world wide cruise industry is estimated at $39.6 billion (a 6.9% increase over 2014) with 22.2
million annualized passengers carried (a 3.2% increase over 2014). Annualized total passengers carried world
wide will be 22.2 million in 2014, a 3.2% increase over 2013.” (Cruise Market Watch, 2015).
Three major competitors took up about 76.7% of revenues and catered to approximately 81.6% of total
passengers in the 2014 fiscal year (Cruise Market Watch, 2014). The three competitors consist of Carnival
Cruise International, Royal Caribbean Ltd, and Norwegian Cruise Lines. Evidently these three companies have
been successful in standing out amongst roughly 200 other companies within the competitivelandscape (Cyber
Cruises).
Carnival has a market cap of $33.78 billion with 808.74 million shares outstanding. Royal Caribbean has
222.67 million shares outstanding with a total market cap of $16.57 billion. Norwegian Cruise Line has a
market cap of $9.77 billion with 223.60 million shares outstanding.
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42.20%
22.10%
12.40%
23.30%
Market Share by Revenue
Carnival Royal Caribbean Norwegian Other
Figure 4: Market Share (Cruise Market Watch, 2015)
Carnival takes advantage of this large portion of the market share by operating with the most vessels out of
the top competitors. Carnival currently operates 101 ships against its top competitor Royal Caribbean’s 42. If
you refer to Appendix C, you will notice that Carnival had an approximate 2% smaller profit margin than
Royal. By having the largest share of the market, Carnival is still able to take in more profits than Royal by
nearly $500 million, despite the smaller profit margin. Royal Caribbean has spent $1 billion on their newest
ships while Carnival has yet to exceed this amount. Royal Caribbean is even planning on spending $1.4
billion a ship “Oasis 3” by 2016 (Cruise Arabia & Africa, 2014). This shows how Royal takes a greater value
approach versus Carnival’s quantity.
Refer to Figure 4 to see precisely how
much of the market share these
corporations truly take up. Carnival is
the leader in terms of market share,
accumulating 42.20% of total revenues.
Royal Caribbean is 2nd with 22.10% of
total revenues. The rest of the industry
had 23.30% of revenues. Norwegian
Cruise Line accounts for 12.40% of the
market share leaving the rest of the
industry at 23.30%. Although Carnival
clearly has largest market share, this does
not exemplify the amount they take in as
profits. It is a competitive industry that
will surely grow in the future with
constant increasing demand.
Key Success
Factors

Extend Global Reach into Expanding Markets
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China
China is a growing market which accounts for 42.6% of total Asian cruise passengers. According to the China
Cruise and Yacht Industry Association (CCYIA), the three major cruise ports in China (Shanghai, Tianjin, and
Sanya) had hosted 377 international cruise ships, 55.8% more ships than in 2012 (Zhou, 2014). The total
amount of passengers from 2008 to 2012 in China has shown a gradual increase per year totaling a 120%
through the five year span.
35%
17%11%
37%
Percent of Passengers From Total of 1.3
Million in 2012
China Japan Malaysia Other
42.60%
20.20%
20.60%
16.60%
Percent of Passengers From Total of 3.8
Million Estimated in 2020
China Japan Malaysia Other
Figure 6: Perce
China had the highest total passenger count in 2012
by a solid 18% higher than Japan and is only
estimated to increase every year. If you refer to
Figure 6, you can see that the 35% in Figure 5 should
increase to 42.60% during this eight year span. From
an economic standpoint, China’s per capita GDP has
had an exponential growth, the main reason why
more Chinese citizens have been able to afford
cruises (Zhou, 2014).
The big cruise companies have recognized this
growing demand in China as they are beginning to
reach out to this untapped market. For example,
Carnival has reached out to a Chinese shipyard for a
partnership in order to build vessels there. Royal
Caribbean has also recognized this opportunity by
being the first company to release a $1 billion ship in
China, its largest worth vessel, Quantum of the Seas.
Another factor that makes China a demographic
worth tapping into is the amount of vacation time
they receive. Sixty-three percent of Chinese
respondents answered that they plan to have over a
week of vacation time (Asia, 2010). Japan’s
economy has shown similar growth but has almost
10% less vacation time making it more difficult for
them to attend a cruise.
Malaysia
Cruise market potential in Malaysia is increasing as tourism in Asia continues to grow. In 2013 Malaysia
received 512,400 cruise passengers, a one year increase of 7.6%, specifically 36,410 people. Malaysia is
looking to generate $490 million in gross national income. If you refer to Figures 5 and 6, you can see that
Malaysia is expected to have 20.6% of all passengers in Asia, second to China. This is significant because the
total Asian cruise market has increased 31.6% compared to last year, which is a larger growth than Australia,
the Caribbean, and Europe, showing that Asian countries are quickly becoming one of the largest cruise
markets (Klang, 2015).
Figure 5: Passenger Percentage 2012 (Zhou, 2014)
Figure 6: Passengers Percent 2020 (Zhou, 2014)
Key Success
Factors

Extend Global Reach into Expanding Markets (continued)
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Australia
Australia is also a growing market with the highest percent of its citizens taking a cruise last year, more than any
other country in the world at 3.6%, as shown in Figure 7. Australia provided for 833,348 of total passengers last
year and is predicted to increase to 1 million by 2016. Australia’s passenger growth rate was 20% last year,
more than double any other country (Crouch, 2014).
Australia is one of the top countries in the amount of paid vacation time, with Australians receiving a mandatory
28 paid vacation and holiday days off. This makes Australia a much better country to expand operations in than
the U.S. who has zero paid vacation days, as Australians actually have time to take a lengthy vacation on a
cruise (Ray, Sanes, Schmitt, 2013).
3.60%
3.30%
2.50%
2.10%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
Australia North
America
UK/Ireland Germany
Major Cruise Market Penetration Rates
Major Cruise Market Penetration Rates
Australia’s 2013 GDP per capita was $67,458.40.
This is one of the highest in the world, beating out
even the U.S. who had a GDP per capita of $53,042
in 2013 (The World Bank, 2015). This means that
Australians not only have the time to take cruises,
but they also are in a strong enough financial
position to go vacationing regularly.
Europe
The most notable factor for cruise line companies
about the European market is that Europeans have a
large amount of vacation time. “By law, every EU
country has at least four weeks of paid vacation”
(Hess, 2013). Despite this, only 1% of Europeans
cruise each year.
“However, cruising in Europe to date has a lower level of penetration than in North America and represents
a relatively small percentage of the European vacation markets. Approximately 6.4 million European-
sourced guests took multi-night cruise vacations in 2013 compared to 11.7 million North American-sourced
guests. Because of the relatively low penetration rates and other favorable characteristics of the cruise
industry, we expect increased demand in the cruise segments of the European vacation markets” (10-K
Carnival, 2014). This means that if cruise companies allocate more resources towards expanding in the
European market, they should be able to experience high growth.
Figure 7: Penetration Rates (CLIA, 2013)
Key Success
Factors

Continuous Innovation in Amenities to Increase Onboard
Spending
One of the most important things for the cruise line companies to consider in order to gain an edge over the
competition is the pricing, number of, and quality of amenities. Cruises currently offer various forms of
entertainment including casinos, movie theaters, drink packages, and outlets for physical activity. These
options have been made available to combat competition with other cruise lines, to eliminate threat of
alternatives, and to optimize customer satisfaction.
Onboard activities revenues account for 24% of total revenue for Carnival (Carnival 10-K, 2014), 27% for
Royal (Royal 10-K, 2013), and 29% for Norwegian (Norwegian 10-K, 2014). This shows that the amenities
generate a substantial part of total revenue. According to Cruise Market Watch, average onboard spending by
the typical cruiser is $429 dollars for a seven day cruise (2015). Customers look for new and unique amenities
as part of the cruising experience, so cruise lines need to devote resources here in order to maintain and build
their customer base.
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Figure 8: Onboard Payments (Mintel, 2013)
Figure 7 asks the question to regular
cruisers what amenities they have
paid extra for while aboard the ship.
Internet access has been a major
focus for Royal Caribbean’s
“Quantum of the Seas”, which
promotes the use of social media for
all passengers. About 26% of these
cruisers said they have paid extra for
alternative restaurant dining; Carnival
added network celebrity Guy Fieri’s
Burger Joint in order to satisfy the
want for exciting and unique meals.
Only 24% of people said they did not
pay extra for any of these amenities,
meaning that 76% of cruises paid
extra for at least one amenity. This
highlights the earning potential that
amenities possess onboard cruises.
Percent of People Who Paid Extra for Amenities
Surveyed Cruisers Have Paid Extra For %
Internet Access 34
Spa Services 32
Alternative Restaurant Dining 26
Laundry Service 23
Preferred Dining Time/Schedule 19
Premium Seating for Entertainment 18
Use of “Adults Only” Areas 16
Exercise/Fitness Classes 16
Priority Boarding/Disembarking from Ship 12
Attendance to Shipboard Lectures/Education 12
Additional Storage 10
Celebrity Meet-and-Greet 9
None of the Above 24
Key Success
Factors

Effectively Market Your Brand to Reliable Segments
In order to be more successful than competitors in the cruise
industry, companies need to target specific segments of the
market that respond well to the cruise lines’ marketing and
that are inclined to take cruises. The segmentation types that
we found to be the best choice for cruise companies to
market to are demographic and behavioral.
Demographic
There are three main parts that make up demographic
segmentation that cruise line companies need to take into
consideration from a marketing standpoint; age, income, and
family status. Cruises appeal more to an older customer base
as shown in Figure 9, only 25% of people buying cruise
tickets are under the age of 40. In order to easily draw in the
older age range, cruise companies can advertise their
activities and features that appeal to their generation. In
order to bring in the younger generations, cruise companies
need to show that cruises have plenty to offer them as well.
The second demographic factor that needs to be considered
is income. Figure 10 shows that 74% of all cruise passengers
have an income of over $60 thousand. This means that the
cruise lines can target these high income individuals by
showing that they are a luxurious type of vacation.
Conversely, the cruise lines can better target the lower
income segments by showing that they have budget options
that lower income groups can afford.
The final important demographic factor is marital status.
Cruising tends to be a vacation type that is group or family
oriented. Figure 11 shows that 78% of cruise passengers are
married. Also, 25% of cruisers travel with children under the
age of 18, 23% travel with friends, and 21% travel with
other family members (Cruise Ship Industry Statistics,
2014). By marketing their group activities, cruise companies
are able to attract this large demographic segment.
Figure 11: Passengers by Marital Status
(Cruise Market Watch, 2015)
12
7
18
2622
26
% of Passengers by Age
25-29 30-39 40-49 50-59 60+
9
10
16
19
39
7 1
% of Passengers by Income
$39k-$50k $50k-$60k
$60k-$75k $75k-100k
$100k-$200k $200k-$300k
$300k+
78
22
% of Passengers by Marital Status
Married Not Married
Figure 9: Passengers by Age
Figure 10: Passengers by Income
Key Success
Factors

(continued)
13
Behavioral
Another important type of segmentation that cruise lines must consider is behavioral segmentation. The most
important factor for cruise line companies when considering behavioral is customer loyalty, as the majority of
cruise line passengers are repeat customers, and cruise customers have shown a tendency to remain loyal to one
or a couple of brands.
Repeat customers are one of the leading sources of income for cruise line companies. A study in 2014 showed
that 60% of total cruise passengers were repeat customers (Media Planet, 2014). Since cruises are of high value,
the cruise experience for passengers tends to exceed expectations. According to Travel Truth, 96.4% of first
time cruisers say they would like to repeat a cruise vacation in the future (2010). According to Figure 12, 94%
of people report at least a satisfying experience, with 45% reporting an extremely satisfying experience. This
shows the satisfaction customers feel towards the industry by people who have attended a cruise vacation and is
a great way to spread word-of-mouth to new potential customers.
45%
49%
6%
Customer Satisfaction
Extremely Satisfied Satisfying Unsatisfying
Another aspect of behavioral segmentation
that is important to consider is price
sensitivity. Even though most cruise line
customers tend to be repeat customers, repeat
customers tend to be more price sensitive
than first-time cruisers. Since these customers
are experienced, they tend to try to find
future, high quality cruises for a low price
(Ahola, 2011). This means that repeat
cruisers are not guaranteed customers, and
that cruise line companies need to be value
conscientious in order to keep these
customers.
Figure 12: Customer Satisfaction (CLIA, 2011)
Key Success
Factors

Company Analysis: Carnival Cruise Lines
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39%
29%
44%
38%
28%
43%
39%
29%
46%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Debt Ratio Gross Margin Gross Profit
Carnival 2012-2014 Key Ratios
2012
2013
2014
Overview
Carnival is the top company out of the leading three in both revenue and passengers. Carnival Cruise Lines was
founded in 1972. They almost went bankrupt until adding live entertainment. This helped their company take
off and become the top competitor in the cruise industry.
Carnival Trend Analysis
Dividends remained constant from 25 cents a share as of February 22nd 2012 through November 17th 2014.
Return on equity shows the amount of profit a company generates with the money shareholders have invested.
Over the past three years Carnival has outperformed Royal Caribbean with an average ROE of 4.97%, which is
0.027% higher than their top competitor. Carnival was able to capitalize on their returns in 2012 with a 5.2%
higher yield than Royal Caribbean. Carnival’s ROE remained constant over this three year span by not
fluctuating over 1% once. ROA gives an idea as to how efficient management is at using its assets to generate
earnings. Carnival’s ROA had an average of 3.04%, and again does not exceed 1% in fluctuation. Carnival
portrays a less volatile movement in return for each of these aspects, much like an annuity since they hit around
their same return every year by hedging out idiosyncratic risk. Carnival is showing that they are changing their
capital structure to be more heavily focused on equity and avoid debt
Benchmark for Carnival
Refer to Appendix D to find the common-sized financial statements for Carnival Cruise International. For
fiscal year 2014, Carnival’s revenue was $15,883 million. To compare our top two companies to the industry
as a whole we created average comparables derived from the top three competitors: Carnival, Royal Caribbean,
and Norwegian. Carnival is the only company beating the top competitor average of $8,964.73 million in
revenue for 2014 with a total revenue of $15,883 million. Carnival takes significantly less debt than Royal
Caribbean and Norwegian with total liabilities of 38.6% compared to the top competitor average of 53%. With
more equity than debt, Carnival has a less risky approach to their capital structure because they get to avoid
dividend coupon payments that come along with issuing bonds. If for some reason Carnival’s cash flow does
not meet their projected estimates, then they do not have to worry about eating profits to pay off dividends.
5.42%
3.31%
4.39%
2.69%
5.09%
3.13%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
ROE ROA
Carnival 2012-2014 Key Ratios
2012
2013
2014
Figure 13: Carnival Key Ratios (10-K Carnival, 2014) Figure 14: Carnival Key Ratios (10-K
Carnival, 2014)
Key Success
Factors

Company Analysis: Carnival Cruise Lines (continued)
15
Carnival Marketing Environment
Carnival’s marketing position in relation to the rest of the industry is very strong. Carnival has shown that they
have a thorough understanding of the marketing environment. Specifically, Carnival has good policies relating
to the four P’s, price, product, place, and promotion. Companies in the cruise line industry tend to drop their
prices for cruises near the departure date in order to completely fill their ships, a strategy called Yield
Management Pricing (Anderson, 2010). However, Carnival is the leading company in the industry, so other
companies have to match their prices to whatever Carnival sets in order to compete. Carnival has a decent
amount of product mix, with varying room quality allowing for customers with varying price ranges buy cruise
tickets. Carnival’s execution of promotion is probably their weakest of the four. In Carnival’s recent Super
bowl ad, they didn’t mention their company name or logo until the very end. As a result, they ended up
promoting the industry as a whole and not their brand, which is poor marketing.
Carnival Company Segmentation
Carnival is active in several different segmentation types. According to Carnival’s 2014 10-K, their products
and services are tailored to specific geographic areas and lifestyles. It also says that they are currently
conducting both qualitative and quantitative surveys and analyses for psychographic segmentation studies.
They say they are doing this in order to “gain a more insightful and impactful understanding of our guests’
needs, wants and expectations.” Carnival is planning on targeting their future advertising and promotions to
these specific target segments (10-K Carnival, 2014).
Carnival Information Systems
Carnival Cruise International has a large amount of Information Technology in place that assists with
operations. Carnival installed the MXP ERP system provided by MarineXchange on their entire fleet of ships.
This system allows Carnival to spend less time on spreadsheets and email, improve financial controls, integrate
port agents, and port service vendors and authorities, due to the system’s business-to-business e-commerce
servers (Toolbox, 2014). Carnival has an SCM system that supports all of its supply necessities. They also
utilize a supply chain team split into three groups; one for sourcing, one for buying, and one for receiving
(Hoppe, 2014).
Carnival has a global technology model that focuses on creating innovative platforms and solutions to create
exceptional guest experiences while leveraging common technologies to drive process efficiency and
effectiveness across their brand. Carnival is currently working on a new “Smart Hybrid” technology which will
boost satellite connectivity enhancing internet connection. They are also working to create a safer cyber-
security protection for guests and employees to ensure full compliance and easy recovery for incidences.
Carnival hopes to optimize the value of their information systems to gain simple usability for customers and
employees (10-K Carnival, 2014).
Key Success
Factors

Carnival Key Success Factor Evaluation
16
When it comes to the amount of countries offered as destinations, Carnival is unmatched, with 98 countries.
Carnival offers cruises to five continents, giving them presence in most of the world. However, Carnival is not
very efficient with their ship usage, as they have 106 ships allocated to those 98 countries (Ramos, 2015). This
means that they have multiple ships visiting the same places, while other cruise lines often have each ship go to
multiple places. This is why even though Carnival is the leader in destination variety, they don’t get a perfect
score.
Continuous Innovation in Amenities to Increase Onboard Spending
Carnival is very successful in their execution of including new and innovative amenities and attractions for their
cruises. We define amenities as features that are a physical part of the ship such as bars and casinos. Carnival
has a wide variety of high quality amenities offered for customers aboard their ships.
Carnival has several amenities that make them stand out from the competition. One of these is Carnival
WaterWorks, which is a waterpark that Carnival has on many of its ships. They also offer SkyRide, which is a
pedal-powered go-mobile that zips around a suspended course on the top deck. Carnival also offers many high
profile performers, such as comedian and actor George Lopez, DJ Irie, and game shows such as Hasbro, The
Game Show. Hasbro, The Game Show is a live game event where they play Yahtzee, Connect-Four, Sorry!,
Operation, and Simon with live people as the game pieces (Carnival, 2015). Carnival offers big name brand
restaurants such as Guy’s Burger Joint, Bonsai Sushi, an array of steak houses, and Green Eggs and Ham
Breakfast.
Amenities (30%)
Raw Score 7
Weighted Score 2.1
Figure 16: Carnival Valued Expansion and Innovation
Reach (50%)
Raw Score 7.5
Weighted Score 3.75
Overall, we decided that Carnival does well in
their offerings of amenities. They have been
fairly good at keeping up to date and coming
out with new highly advanced, quality
amenities, although they are not the leaders in
this category, so we decided that they should
receive a score of seven.
Carnival is expanding their global reach at a
respectable pace, however they are behind
many other companies in this category.
“Carnival Cruise Lines has been ‘a little bit
late coming to the party’ in terms of global
expansion, admits the previous president and
CEO, Gerry Cahill” (Coulter, 2012). This is
shown by recent developments in China, where
Royal Caribbean made the first move to
expand into. After Royal’s announcement of
their plans to expand into China, Carnival
rushed to place more of their own ships in the
Chinese market.
Figure 15: Carnival Valued Destination Variety/Reach
Key Success
Factors

Carnival Key Success Factor Evaluation (continued)
17
Carnival has done a great job at appealing to customer loyalty by offering reward packages such as their VIFP
Club membership program. This program has a point system which allows repeat customers to have various
perks depending on how many times they have cruised with Carnival, and is a great way to appeal to repeat
customers. This is an effective way of getting around the increased price sensitivity of repeat customers
(Carnival, 2015).
Another demographic that carnival has effectively marketed to is the Baby-Boomer Generation. Carnival has
included options such as the Serenity Adults Only Retreat which is a kids-free zone providing a phenomenal
view of the ocean. This appeals to adults which encompasses the Baby-Boomer Generation (iExplore, 2015).
We scored Carnival with an eight due to their solid performance. While they did very well, they haven’t done
anything out of the box or extraordinary to earn a perfect score.
Figure 17: Carnival Valued Demographics and Incidents
Segments (20%)
Raw Score 8
Weighted Score 1.6
Key Success
Factors

Company Analysis: Royal Caribbean Ltd.
18
Overview
Royal Caribbean is the second out of the leading three in both revenues and passengers. Royal Caribbean was
founded in 1968 and now has a total of 42 ships. Each ship can hold up to 104,898 passengers. Now tapping
into the Chinese market, Royal Caribbean is hoping to grow into becoming the top competitor.
Benchmark for Royal Caribbean
If you refer to Appendix D, you will find the common-sized financial statements for Royal Caribbean Ltd.
Royal Caribbean’s revenue was $8,073.9 million for the fiscal year of 2014. Royal Caribbean’s total revenue
last year showed a slight difference of $890.83 million from the top competitor average of $8,964 million. Even
though this missed the top competitor average and far underperforms Carnival, Royal Caribbean essentially has
half the market capitalization at $16.59 billion compared to Carnival’s $33.67 billion. Carnival currently
operates over twice the amount of ships than Royal Caribbean does and over twice the amount of market
capitalization, yet their total revenue is only 96.73% greater. This shows that Royal Caribbean is more efficient
with their operations. Royal Caribbean takes in more debt than Carnival with 60% total liabilities. Interest
payments are tax deductible, therefore having more debt is cheaper than equity. By doing this, Royal Caribbean
has positioned themselves to be more financially leveraged and sustain more of the revenues they take in as
profits.
Notable Key Ratios Analysis
Although over the past three years Carnival has outperformed Royal Caribbean on ROE on average, Royal
Caribbean had a 9.22% ROE in the fiscal year 2014. Carnival’s ROE remained constant around 5% while
Royal Caribbean shot up to 9.22% in 2014, showing over a 4% difference between the two. With Royal
Caribbean’s 3.69% ROA, they show a 0.56% higher return. This, again, shows how Royal Caribbean was more
efficient with their investments than their competitor Carnival. To reiterate, Royal Caribbean adjusted their debt
level to 60% last year, allowing them to fund cheaper money. In 2012, Royal incurred three additional expenses
that they did not face in the previous years, causing them to lose money from there total net income. These
costs include net cruise cost per APCD, net cruise costs excluding fuel, and net yield. These three costs totaled
to be $405.28 million significantly decreasing net income which, in turn, affected ROE and ROA.
58%
76%
58%
56%
74%
58%60%
72%
58%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Debt Ratio Gross Margin Gross Profit
Royal Caribbean 2012-2014 Key Ratios
2012
2013
2014
0.22% 0.09%
5.38%
2.36%
9.22%
3.69%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
ROE ROA
Royal Caribbean 2012-2014 Key Ratios
2012
2013
2014
Figure 18: Royal Key Ratios 1 (10-K Royal, 2013) Figure 19: Royal Key Ratios 2
(10-K Royal, 2013)
Key Success
Factors

Company Analysis: Royal Caribbean Ltd. (continued)
19
Royal Caribbean Marketing Environment
Royal Caribbean is the second largest company in the cruise industry, and their marketing position is very solid.
Similar to Carnival, Royal’s policies relating to the Four P’s are very effective. Although Carnival is the largest
company in the industry, Royal is still large enough so that they are still a price maker, and don’t have to match
Carnival’s prices like other smaller companies do. Royal has about the same level of product mix in the sense
of differentiating room qualities as Carnival does, so they reach out to customers with similar price ranges. We
talk about “place” extensively in our key success factor “Extend Global Reach into Expanding Markets,” refer
there for more information. According to Royal Caribbean’s Marketing Plan article, they have a budget of
roughly $50 million allocated towards advertising, including commercials, magazine advertisements, and direct
mail pieces (Hanson, 2014). This makes them have high promotional effectiveness.
Royal Caribbean Company Segmentation
Royal Caribbean claims that their brands possess the versatility to penetrate multiple segments within the
industry. The different brands they own appeal to different psychographic types of people, based on their
lifestyle. For example, Celebrity Cruises is positioned within the “premium” section of the market. Royal
additionally says that they have been expanding their itinerary and onboard offerings to appeal to the cultural
characteristics and preferences of international guests. They also appeal to various demographic groups based
on income and age. Royal also claims that they “are focused on targeting high-value guests by better
understanding consumer data and insights and creating communication strategies that best resonate with our
target audience” (10-K Royal, 2013). Royal has also recently began an intensive $60 million dollar ad
campaign that targets millennials, who currently make up just 7% of passengers. Their new ad campaign
markets cruising as a memory-making experience (Mann, 2014).
Royal Caribbean Information Systems
Royal Caribbean has several Information Systems in place within the company in order to optimize operations.
Royal Caribbean recently upgraded its ERP system to JD Edwards EnterpriseOne in order to increase the
efficiency of their operations. Royal Caribbean’s IT manager stated that implementing this new ERP system
that could quickly and easily integrate with their existing applications and systems would allow them to
effectively execute their current growth strategy (Woodie, 2010). As far as SCM for Royal goes, they currently
have two systems in place. Each of these systems are managed by a Provision Master. The first supply chain
includes all food, beverage, and lodging inventories that are needed for the trips. The second encompasses all
corporate spending such as office supplies, printing services, hardware and software, printed materials,
computer supplies, marine consumables like fuel, spare parts, lubricants, and all services associated with the
ship maintenance (123 Help Me, 2015).
Royal Caribbean focuses on cost efficiency in their 10-K report. Their new ships have designs that integrate a
more fuel-efficient engine as well as the implementation of more efficient hardware. This hardware will help
create a cooling system in the ship that will provide less consumption of energy. Another system being put into
place is their price tool that helps to increase promotion management capabilities. The sales force will have new
tools to better support their travel agents.
Key Success
Factors

Royal Caribbean Key Success Factor Evaluation
20
Amenities (30%)
Score 9.5
Weighted Score 2.85
Royal Caribbean is by far one of the leading companies in terms of countries offered as destinations, although
they fall behind Carnival. Royal Caribbean offers cruises to 77 countries against Carnival’s 98, but they offer
six continents against Carnival’s five. However, Royal Caribbean makes much more effective use of their
ships, as they mange to stretch their 42 ship fleet across those 77 countries (Young, 2015).
Continuous Innovation in Amenities to Increase Onboard Spending
Overall, Royal Caribbean offers top-of-the-line amenities, showcased best by their brand new ship Quantum of
the Seas. Quantum of the Seas offers brand new amenities such as SeaPlex, “the largest indoor active space at
sea,” which includes activities ranging from a flying trapeze to bumper cars (Travel Agent Central, 2013). In
each of the indoor non-balcony rooms, Quantum of the Seas offers a Virtual Balcony displaying real-time
views of the sea or beach. The North Star addition, an extending arm reaching 300 feet above sea level carries
people above the whole ship for a 360 degree panoramic view.
Royal Caribbean teamed with DreamWorks Productions adding themed cruises for younger children offering
performances and mascots that walk around the ship. Broadway at Sea features high class performances such as
Cats, Chicago, Saturday Night Fever, and Mamma Mia!, noting their selves for offering the best for on-board
productions. Royal Caribbean is the first and only to cruise company to introduce ice-skating rinks on-board
with performances to go along (Royal Caribbean, 2015).
Figure 21: Royal Valued Expansion and Innovation
Global Reach (50%)
Score 9
Weighted Score 4.5
Royal Caribbean is leading in the amount
and quality of amenities offered. We rated
their amenities at nine and a half because
there is always room for improvement, but
for now, they truly are top-of-the-line.
Expansion into untapped markets, like
China, allows for great opportunity. With
Royal Caribbean introducing the Quantum
of the Seas, they are creating global
awareness for their company while also
taking hold of a brand new customer base.
Quantum of the Seas caused disruptive
innovation, creating a market that essentially
never existed. The other major players in the
industry are currently playing catch-up,
following wherever Royal Caribbean leads
to.
Figure 20: Royal Valued Destination Variety/Reach
Key Success
Factors

Royal Caribbean Key Success Factor Evaluation (continued)
21
Segments (20%)
Raw Score 7.5
Weighted Score 1.5
Royal Caribbean is good at penetrating reliable markets by targeting the Baby-Boomer Generation, offering
wine-tastings, jazz evenings, and special buffets are just a few of the activities used to promote their brand to
the Baby-Boomer Generation (iExplore, 2015).
Also, similar to Carnival, Royal Caribbean offers a rewards program called Crown & Anchor. This is a point
based program that gives on board benefits on top of benefits when planning your cruise. Having loyalty
programs is a great way to make repeat cruisers remain loyal to a specific brand, and is probably the best way to
get around repeat customers’ price sensitivity.
We rate Royal Caribbean with a seven and a half due to the fact that while Carnival and Royal both do a good
job at reaching out to the right segments, Carnivals methods simply stand out more to us than Royal’s.
Figure 22: Royal Demographics and Incidences
Key Success
Factors

Recommendations
22
Recommendation #1: Carnivals Response to Quantum of the Seas Fleet
Carnival has been the leader in the cruise line industry for quite some time, which has caused them to come
complacent. Carnival Cruise has fallen behind in the race to China and making the top ship. With Royal
Caribbean being the first to penetrate the Chinese market, they have been able to attract the attention of the
market. Not only did they penetrate the Chinese market first, but they also did it with the best ship to ever exist.
The Quantum of the Seas has the most up to date amenities and technology available. It also includes the best
internet to ever sail the ocean.
To compete with Royal Caribbean, Carnival needs to follow Royal Caribbean’s lead in creating a revolutionary
new ship, outfitted with the latest and greatest amenities and technologies. However, Carnival needs to
distinguish themselves from Royal Caribbean and everyone else by creating a distinctively different ship. With
Carnivals superior resources, this should be a manageable task that is very possible to complete in the next few
years. By making use of the psychographic surveys that they conducted, they should be able to figure out what
new amenities and/or technologies that new and returning consumers would like to see. By getting these
responses, they should be able to attract more attention from the target markets, which would result in more
ticket sales for Carnival.
In order to increase the impact of introducing their new ships, Carnival should follow what Royal Caribbean
was able to do and infiltrate a new and underdeveloped market. By being the first to breach a new market, their
brand will be most known because it was the first introduced. Looking at the impact made by Royal Caribbean
in the Chinese market, it would be expected to be the same for Carnival if they were to tap into a new
underdeveloped market as well. By tapping into this new market Carnival will be able to increase their brand
value by being the most known because of being the first introduced into the market.
It’ll cost a high capital investment to create a new ships as highly innovated as the Quantum of the Seas.
Carnival will pay specifically around $1 billion to build a ship of equivalence to the Quantum fleet. Reaching
into a new market costs money for advertisement and development, as this is no easy task, it will implement a
better structure for future revenue growth.
Limitations
Limitations of this recommendation include high capital and pressed for time to release a new ship. It takes
more than a year to build a ship from the ground up, if Carnival is to build a new ship, they must use innovative
technical designs current to the year of implementing the ship into the market.
Key Success
Factors

Recommendations (continued)
23
Recommendation #2: Issue Out More Debt, Buy Back Equity
Interest rates are currently at an all-time low at 0.25%, making debt cheaper than ever. Carnival has a debt ratio
of 38.90% against its top competitor Royal Caribbean’s 60%. Royal Caribbean has been showing strong signs
of growth, largely in part by having such high debt. If Carnival were to issue out more debt and use less capital
from investors, they would be able to keep more revenues as profits. With the help of the low interest rate and
the high worth of the dollar, businesses should be looking to capitalize on borrowing more money
domestically.
On February 2nd 2015, Apple announced they are going to raise at least $5 billion by selling bonds. This move
came on the coattail of record setting quarterly earnings of $74.6 billion and a record quarterly net profit of $18
billion, which were the highest earnings ever on the market. So as you can see, Apple is a company that is
performing really well, yet they still decide to offer more debt knowing the interest rates are so low. This will
allow them to borrow less money and use it for the future to repurchase their own stock.
We believe that Carnival Cruise can implement the same kind of strategy. Our key recommendation includes
the repurchase of their shares of stock with the belief that it is undervalued only to issue more debt. Carnival
currently has 18.1 million of their PLC ordinary shares and 32 million common shares available to repurchase.
Granted it is risky to repurchase too much at once, Carnival should implement the repurchase of a majority of
these shares. The belief is that their stock price is undervalued, and will appreciate over the next couple years.
Over the past three years, Carnival’s debt ratio has been on a steady decline to its current ratio of 38.56%. To
become more profitable, Carnival should look to increase this debt ratio gradually over a five year period. If
Carnival were to increase debt by 2-3% each year, they would see a ratio of close to 50% in the year 2020.
Our recommendation suggests that Carnival should be more aggressive in the beginning of this capital structure
reform. If they increase debt by 3% in the first two years, 2% the following three years, the debt ratio would
climb to 50.56% in this five year span. Now investors do not look at Carnival’s stock as undervalued and the
company can reinvest their earnings to increase their return on equity.
Limitations
Limitations of this recommendation include a limit to how much debt a company can possibly take on. It is too
risky for Carnival to issue out a lot of debt at one time so it is important for them to cautiously increase the ratio
by a few percent each year. Carnival also has a 21.5 million common stock repurchase valid until the end of
2015. Carnival has not repurchased any stock within the past three years.
Key Success
Factors

Recommendations (continued)
24
Recommendation #3: Responding to Incidences
Carnival needs to step up their game in their approach of responding to incidences. While they currently have
some good policies in place on how to compensate passengers whenever incidences happen, this is not enough
in order to impress the general public enough to maintain their brand image. First and foremost, Carnival needs
to improve its reaction time towards incidences. Even if the response isn’t the most effective the company
could have made, the public will be relieved if they see that the company is paying close attention and responds
immediately to problems. Conversely, the public’s opinion will be detrimentally affected by the lack of a
timely response, and will lose faith in the company. This is showcased best by Carnival’s poor timeliness in
reacting to the sinking of the Costa Concordia.
Carnival also needs to improve the measures they take to prevent future problems after a problem occurs, and
plainly spell out to the public what their plans of making these improvements actually are. After a disaster
occurs, the general populace will be dissuaded from taking a cruise with Carnival if they don’t receive certain
assurances that a similar disaster won’t befall them as well. It is Carnival’s duty to put these fears of their
potential customers to rest, and it is financially smart for the company to do so as well.
Carnival is currently very good at financially compensating their customers whenever these incidences happen.
They should be sure not to sacrifice this area when improving the other incidences. Carnival cannot fix all their
customers’ problems by just throwing money at them, as they seem to think they can, and do need to put
serious consideration into how to more timely respond to incidences and assure the public that they will stop
future ones.
Carnival needs to build a better communication software and spend more money on being alert. By doing this,
Carnival will run less risk of negative publicity post-incidents. Also, they must spend more money on safety
measures to ensure reliability while on the ships and within the company.
Limitations
Limitations of this recommendation include timing of communication between consumers and their company.
Bad incidences are preventable, but still occur and will always be around, therefore, Carnival must allocate
more of their time and money on customer follow-up and information.
Key Success
Factors

Conclusion
25
This project reviews what it takes in order for a company to be successful in the cruise line industry. Cruise
companies are expanding to be the most exciting vacation destination available in the world. As more people
take vacations every year, the technology these companies use to create exciting attractions will continue to
advance. Quantum of the Seas early success portrays how international business in this industry will be
important, hence the reason that Carnival will have four ships out in China by the end of 2015. Royal’s
Anthem of the Seas is a sister to Quantum coming out later this year, which will port in the New York, New
Jersey area. Royal will continue to make at least one new ship every year for the next four to five years
(Young, 2015).
Carnival’s size gives them a competitive advantage in one of the most capital-intensive industries. They use
their capital to invest in vessels with larger passenger capacities. Carnival’s passenger capacity is expected to
grow 3.2% every year through 2017, while Royal Caribbean’s is expected to grow at 1.7% (Cooper, 2014). By
doing this, Carnival is relying on the total industry to not exceed demand. Carnival hopes that this increase in
passenger capacity will help to maintain its leading market share.
After assessing the companies we have decided that Royal Caribbean is the more favorably positioned between
the two. Royal doesn’t have as many destinations, but they make more effective use of their ships and are doing
much better at extending the global reach of their company. Royal has a huge advantage over Carnival with
amenities offered due to the edition of their new ship Quantum of the Seas. Royal and Carnival are both fairly
good at marketing to appropriate segments.
Our first recommendation for Carnival is for them to make their own innovative and technologically advanced
ship similar to Royal Caribbean’s Quantum fleet, and then introduce this ship into a relatively new market. Our
second recommendation for Carnival is to issue out more debt and buy back more equity to keep more revenues
as profit. Our third recommendation for Carnival is to respond in a timely fashion when regarding incidences
that they need to rebound from.
Company
(Weight)
Carnival Raw Weighted Royal Caribbean
Raw
Weighted
Extending Global
Reach
(50%)
7.5 3.75 9 4.5
Amenities
(30%)
7 2.1 9.5 2.85
Effective
Marketing
(20%)
8 1.6 7.5 1.5
Total 22.5 7.45 26 8.85
Figure 23: Weighted Averages 2
Key Success
Factors

References
26
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28
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30
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Appendix A: Porter’s Five Forces
For the first Appendix, we performed an industry analysis using the Porter’s Five Forces model. Within the
model, we discuss competition, threats of new entrants, bargaining power of the buyers, bargaining power of
the suppliers, and the threats of substitutes that the industry faces. Threats of new entrants is broken into two
key parts, the barriers new entrants face and what it takes to run a cruise line. Bargaining powers of the buyers
is broken into how they have high bargaining power or low bargaining power. The threats of substitutes section
includes what threats the industry faces and the reaction the companies have to these threats.
Competition
 Competition within the industry is variable
 The top three brands are Carnival Cruise Lines, Royal Caribbean International, and Norwegian Cruise
Line
 Carnival came in at the top of the charts with $16.64 billion, roughly 42.2% of total revenues
 Carnival operates 106 ships total
 Royal Caribbean, second on the charts, accumulated $8.73 billion, roughly 22.1% of total revenues
 Royal Caribbean operates 42 ships in total
 Norwegian ranks third in line with revenues at $4.89 billion, owning approximately 12.4% of total
revenues
 Norwegian operates 22 ships total
Threats of New Entrants
Barriers
 Barriers to entry in the cruise line industry are relatively high
 Requires high initial capital investment
 Around $800 million to $1.4 billion to build a cruise ship (BOATER Exam, 2011).
 The need for complete knowledge of the industry
 Cost of maintenance is very expensive
 Corrosion repair costs average $200 thousand each ship (Goodway, 2011).
What it Takes to Run a Cruise
 According to David Bernstein, the CFO of Carnival, $800 million or more will be spent in the
upcoming year on all 106 ships in general maintenance and upgrades (Miriam Valverde and
Doreen Hemlock, 2013).
 On average, most cruises consume up to 700 tons of food per week long cruise; 3,100 gallons of
soda and 8,200 cups of coffee are consumed per week
 An estimated 34 crew members work on washing linens alone, in additional to hundreds of people
working in the kitchens and housekeeping departments
 The operations of the ship must also constantly replace lifeboats, linens, chemicals for cleaning,
food, ovens, and much more
 The staff has to be paid, administered healthcare, and provided room/board
 New entrants must take all of this into account when planning to enter the industry
31

Appendix A: Porter’s Five Forces (continued)
Bargaining Power of Buyers
High Bargaining Power
 Customers are able to choose which cruise line they wish to attend
 Buyers are able to sort out what they want to pay for while on the cruise
 Beverage packages, Wi-Fi, stores on the boat, and casino privileges
 Cruises lower their prices as the departure date approaches to fill empty spots left on vessel
 Attendees are able to pick from different accommodation choices
 If the customer were to pick a lower-end room, it would prevent them for paying more money to
the cruise line
 Consumers also have many other vacation and travel options to choose from that could be less expensive
Low Bargaining Power
 The cruise line sets the price for all amenities
 Certain company’s have the buyer play into their hand by including more charges into the package
 An example of this is including an airplane ticket with the price built into the cruise ticket price
 Other cruise lines charge people for Wi-Fi usage while customers are believing it is free
 Even though these certain events occur, cruisers are able to take the hit to their wallet
Bargaining Power of Suppliers
 The Bargaining power of suppliers in the cruise line industry is moderately strong (Levin, Jones, Slade,
2012).
Carnival corporation stated that in its most recent annual report that its “largest purchases are for fuel,
travel agency services, food and beverages, air transportation services, port facility utilization, repairs
and maintenance, including dry-docking, advertising and marketing, hotel and restaurant products and
supplies, communication services, and the construction and refurbishing of our ships.” The threat of
integration by these suppliers is very low (Levin, Jones, Slade, 2012).
Threats of Substitutes
Industry Threats
 Other destinations such as hotels, resorts, theme parks, and land-based casinos are in direct competition
with the industry (FirstResearch, 2014).
 “These industries tend to offer lower cost vacation options which consumers search for during
economic downturns” (IBIS, 2014).
 As it currently stands, somewhere around 3% of North Americans cruise every year (FirstResearch,
2014).
 Also, only 1% of Europeans cruise every year (FirstResearch, 2014).
 Catastrophic onboard incidents increases the likelihood of vacationers preferring other means of leisure
Levin, Jones, Slade, 2012).
Industry Reaction
 Cruise line companies will add destinations and onboard activities that directly combat other vacation
destinations
 Some cruises offer excursions to desired destinations such as snorkeling, safari adventures, and
onboard casinos
 The Caribbean is the most popular destination with 45% of all cruises attending those islands
(Cruise Ships, 2014).
 Cruise lines try to make each destination a unique experience making them differentiate themselves
from other vacation offerings
32

Appendix B: PEST Analysis
The following appendix contains a PEST analysis which is an analysis of the political, economic, social, and
technological factors. These macro-economic factors describes a framework in the environmental scanning
component of strategic management.
Political
 “Demand for cruising can be affected by consumer concerns about traveling near politically unstable
areas and about public health issues, such as regional virus outbreaks. For example, drug-related
violence in Mexico and Ebola outbreaks in West Africa may deter travelers from choosing cruises to
those areas” (FirstResearch, 2014).
 CLIA (cruise lines international association) pushes for policies that enhance shipboard safety, and calls
for practices that go beyond what they’re legally required to do. (CLIA, 2014).
 The CLIA has many regulatory policies that they require their member companies to follow including
public health policies, emergency instruction policy, lifeboat loading for training purposes, security
incidents, etc.
Economic
 “Proper timing of vessel expansion can be crucial to a firm’s top and bottom line performance” (IBIS,
2015).
 “The industry’s growth is expected to accelerate, standing at 5% over the forecast period. Growth is
largely associated with the energy boom in the US and growing global demand for gas” (Euromonitor,
2014).
 “Although the industry typically grows about 7 percent annually, growth slowed to about 2 to 3 percent
annually in recent years due to the economic recession, according to the Florida-Caribbean Cruise
Association” (FirstResearch, 2014).
Social
 With 500 million Facebook users worldwide as well as 50 million tweets, travel companies have been
using social networks to advertise or announce last-minute deals, but also encouraging dialogue with
customers through online communities (Passport, 2010).
 Gay and lesbian tourists now account for around 10% of the global travel market. They tend to have
higher disposable incomes than their heterosexual counterparts, while in countries where gay unions have
been legalized, gay honeymoons have become big business (Passport, 2010).
 The switch to more environmentally friendly ships has also been a more trend that a lot of companies
have been following. Environmental concerns and regulations have led cruise lines to make the switch to
reduce pollution, waste, and overall waste of energy.
Technology
 Because people have become more environmentally conscious, cruise ship companies are implementing
advanced energy technologies including low sulfur fuels to reduce pollution, LED lighting, solar power,
more efficient appliances, and windows to reduce energy use (FirstResearch, 2014).
 Cruise companies have been using new technology to make it easier to track customer tendencies and
behaviors to know how to maximize profits for each demographic that attends the cruise.
 Wristbands now have radio frequencies that connect to smartphones to identify quicker payment systems,
easier access to areas needing coded entrance, and easier tracking on children for parents during areas of
free roam time (Cruise Ships, 2014).
33

Appendix C: Company Financial Ratios
Ratio 2012 2013 2014
ROA 3.31% 2.69% 3.13%
ROE 5.42% 4.39% 5.09%
NPM 8.44% 6.97% 7.79%
M/B 1.2017 1.2595 1.4501
TAT 39.28% 38.54% 40.18%
SGR 3.38% 3.25% 3.81%
Quick 0.1950 0.2326 0.1646
Debt 0.3890 0.3877 0.3856
Ratios 2012 2013 2014
ROA 0.09% 2.36% 3.69%
ROE 0.22% 5.38% 9.22%
NPM 0.24% 5.95% 9.46%
M/B 0.9424 0.5181 0.8837
TAT 38.77% 39.65% 38.98%
SGR 1.86% 3.19% 1.39%
Quick 0.1824 0.1887 0.1760
Debt 0.5810 0.5612 0.6000
Carnival Cruise International
Royal Caribbean Cruises Ltd.
34
Appendix C shows the key ratios that we have derived from the information provided by the 10-K from each
company. With the two tables on the page, we can easily compare the two company’s ratios.

Appendix D: Common Sized Statements
35
12 Months Ending FY
2012
FY
2013
FY
2014
FY 2015
(Estimated)
Revenue
(millions)
15,382 15,456 15,883 16,211.6
Onboard and other
(Amenities)
3,513 3,598 3,780 - -
-COGS 55.8% 56.7% 53.3% - -
Gross Profit 44.2% 43.3% 46.7% 59.6%
-Operating
Expenses
33.6% 34.5% 35.5% - -
Operating Income 10.7% 8.7% 11.3% 14.6%
-Interest Expense 2.2% 2.1% 1.8% - -
-Foreign Exchange
Losses (Gains)
0% 0% 0% - -
-Net Non-Operating
Losses (Gains)
0% -0.3% 1.6% - -
Pretax Income 8.5% 6.9% 7.8% 12.3%
-Income Tax
Expense
0% 0% 0.1% - -
Income Before XO
Items
8.4% 7% 7.8% 12.3%
Net Income 8.4% 7% 7.8% 12.2%
Net Income
Available to
Shareholders
8.4% 7% 7.8% - -
12 Months
Ending
FY 2012 FY 2013 FY 2014 FY 2015
(Estimated)
Accounting
Standard
US
GAAP
US GAAP US GAAP - -
EBITDA 20.6% 19.0% 21.6% 25.1%
EBITDA
Margin
(T12M)
0.13 0.12 0.14 0.15
Gross Margin 0.29 0.28 0.29 0.37
Operating
Margin
0.07 0.06 0.7% 0.09
Profit Margin 0.05 0.05 0.05 0.08
Actual Sales
per Employee
(millions)
1,170.96 1,133.79 1,095.29 - -
Dividends per
Share
0.01 0.01 0.01 0.01
Total Cash
Common
Dividends
7.6% 5.0% 4.9% - -
Interest
Income
0.1% 0.1% 0.1% - -
Capitalized
Interest
Expense
0.2% 0.2% 0.1% - -
R&D
Expense
0% 0% 0% - -
Personal
Expense
11.3% 12.0% 12.2% - -
Depreciation
Expense
- - - - - - - -
Rental
Expense
0.4% 0.4% 0.4% - -
Carnival Cruise Lines Income Statements
Appendix D provides the common sized income statements and balance sheets. All of the data is displayed as
a percentage except for revenue on the income statement. We have split the common sized income statement
in half so that it fits on one page and the reader can easily view the information provided.

Appendix D: Common Sized Statements (continued)
36
12 Months Ending FY 2012 FY 2013 FY 2014
Total Assets 39,161 40,140 39,532
+Cash & Near Items 1.2% 1.2% 0.8%
+Accounts & Notes
Receivable
0.7% 1.0% 0.8%
+Inventories 1.0% 0.9% 0.9%
+Other Current Assets 1.8% 1.7% 1.2%
Total Current Assets 4.7% 4.8% 3.8%
+Net Fixed Assets 82.1% 82.0% 82.9%
+Other Long-Term
Assets
13.3% 13.1% 13.3%
Total Long-Term Assets 95.3% 95.2% 96.2%
Total Assets 100.0% 100.0% 100.0%
+Accounts Payable 1.4% 1.6% 1.6%
+Short-Term Borrowings 4.4% 3.7% 4.4%
+Other Short-Term
Liabilities
12.9% 11.5% 11.6%
Total Current Liabilities 18.7% 16.8% 17.5%
+Long-Term Borrowings 18.3% 20.2% 18.6%
+Other Long-Term
Liabilities
1.8% 1.8% 2.4%
Total Long-Term
Liabilities
20.2% 22.0% 21.1%
Total Liabilities 38.9% 38.8% 38.6%
+Total Preferred Equity 0.0% 0.0% 0.0%
+Minority Interest 0.0% 0.0% 0.0%
+Share Capital & APIC 22.0% 21.7% 22.1%
+Retained Earnings &
Other Equity
39.1% 39.6% 39.3%
Total Equity 61.1% 61.2% 61.4%
Total Liabilities & Equity 100.0% 100.0% 100.0%
Carnival Cruise Lines Balance Sheets

37
Twelve Months
Ending
FY 2012 FY 2013 FY 2014 FY 2015
(Estimated)
Revenue
(millions)
7,688 7,959.9 8,073.9 8,578.4
Onboard and other 2,093.4 2,237.2 2,180
-COGS 41.3% 41.2% 41.9% - -
Gross Profit 58.7% 58.8% 58.1% 37.4%
-Operating
Expenses
53.4% 48.8% 46.5% - -
Operating Income 5.2% 10.0% 11.7% 15.1%
-Interest Expense 4.6% 4.2% 3.2% - -
-Net Non-Operating
Losses (Gains)
0.4% (0.1%) (1.0%) - -
Pretax Income 0.2% 6.0% 9.5% 12.3%
Income before XO
Items
0.2% 6.0% 9.5% 12.3%
Net Income 0.2% 6.0% 9.5% 12.3%
Net Income
Available to
Common
Shareholders
0.2% 6.0% 9.5% - -
12 Months
Ending
FY 2012 FY 2013 FY 2014 FY 2015
(Estimated)
Accounting
Standard
US GAAP US GAAP US
GAAP
- -
EBITDA 14.7% 19.5% 21.2% 24.9%
EBITDA
Margin
(T12M)
0.19 0.25 0.26 0.29
Gross
Margin
76% 74% 72% 44%
Operating
Profit
0.07 0.13 0.14 0.18
Profit
Margin
0.00 0.07 0.12 0.14
Total Cash
Common
Dividends
0.3% 2.0% 0.8% - -
Interest
Expense
0.3% 0.2% 0.1% - -
Personnel
Expense
10.8% 10.6% 10.5% - -
Rental
Expense
0.8% 0.7% - - - -
Royal Caribbean International Income Statements

38
12 Moths Ending FY 2012 FY 2013 FY 2014
+Accounts Payable 1.8% 1.9% 1.6%
+Short-Term
Borrowings
7.7% 7.8% 3.9%
+Other Short-Term
Liabilities
11.1% 11.6% 13.1%
+Long-Term
Borrowings
35.2% 32.4% 36.9%
+Other Long-Term
Liabilities
2.4% 2.4% 4.5%
Total Long-Term
Liabilities
37.6% 34.9% 41.4%
Total Liabilities 58.1% 56.1% 60.0%
+Share Capital &
APIC
15.7% 15.7% 15.7%
+Retained Earnings &
Other Equity
26.2% 28.1% 24.3%
Total Equity 41.9% 43.9% 40.0%
Total Liabilities &
Equity
100.0% 100.0% 100.0%
Total Assets 19,827.9 20,072.9 20,713.2
+Cash & Near Cash
Items
1.0% 1.0% 0.9%
+Accounts & Note
Receivable
1.4% 1.3% 1.3%
+Inventories 0.7% 0.8% 0.6%
+Other Current Assets 1.3% 1.7% 1.1%
+Net Fixed Assets 88.0% 87.3% 88.0%
+Other Long-Term
Assets
7.5% 8.0% 8.1%
Total Long-Term
Assets
95.5% 95.2% 96.1%
Total Assets 100.0% 100.0% 100.0%
Royal Caribbean International Balance Sheets

Appendix E: Business Model Canvas
39
Carnival Cruise Lines
The final Appendix portrays a business model canvas for Carnival and Royal Caribbean. The canvas covers
various areas including key aspects of the business. Primary subjects discussed are the different customer
segments, value of the company, and customer expectations. It also has brief information on sources of
revenue, what costs are incurred, and what activities each company does in order to be successful.

Appendix E: Business Model Canvas (continued)
40
Royal Caribbean Ltd.

Success and Failure in the Cruise Line Industry

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