When CEO Jason Liberty talks about competition from Royal Caribbean Group, he doesn’t mention Carnival Corporation. Instead, the CEO name-checks Orlando and Las Vegas.

The CEO’s strategy is to steer Royal Caribbean Group toward competing with high-end land-based resorts.

“We spend almost no time thinking about our cruise competitors,” Liberty told Skift. “We consider ourselves an experience company. We’re in direct competition with places like Orlando and Las Vegas. We compete with Taylor Swift concerts.

In other words, Liberty is positioning the world’s second-largest cruise operator as a provider of Instagrammable vacation activities set at sea.

Liberty is executing a strategy that challenges long-held assumptions about the cruise industry’s performance ceilings. But not everyone agrees.

“There is a view that (the company) is near the top of the mountain in terms of price, market share and margin,” Deutsche Bank analyst Chris Woronka wrote in a report this year.

Liberty told Skift that skeptics have already been proven wrong. During the pandemic, some skeptics wondered whether consumers would cruise again.

“Today the propensity to browse is much, much higher than it was pre-Covid,” said Liberty, who led the company during Covid as CFO before becoming CEO in 2022.

More pricing power

Recent numbers are solid.

• The company’s ships are operating at 98% occupancy.

• The group expects its net return – a key sector indicator – to reach almost 11% this year. (Net return is the money left per cruise day available after variable expenses, such as commissions paid to travel agents.)

Over the past decade, Royal Caribbean has become more profitable by building larger ships. While historically cruise vacations were often sold at a discount of around a third compared to land-based alternatives, this price gap has narrowed.

Over time, Royal Caribbean has welcomed more people onto its ships, lowering its costs per passenger, while incentivizing travelers to spend more per trip, thereby increasing their profit margins. It now estimates its offerings are comparable to land-based resorts, but about 20% cheaper, which should help it continue to attract new customers.

“Some ships, like the new Icon of the Seas, are already reaching pricing levels consistent with Disney World’s high-end resort options,” William Blair analysts Sharon Zackfia and Zach Riddle wrote.

Larger ships also offer the opportunity to charge more for more features and amenities. “When you talk to the consumer, they really consider the experiences that we offer that are on par with land-based (recreational) offerings,” Liberty said.

Liberty said Royal Caribbean had gotten rid of old-fashioned stereotypes that cruise ships were filled with older people or people looking for discount travel. About half of Royal Caribbean’s guests are now millennials or younger — a demographic that never saw “The Love Boat” in the 1970s.

The company has also expanded its customer acquisition to wealthier demographics:

• Royal Caribbean brand: median household income of $125,000
• Celebrity Cruises: Median household income of $150,000
• Silversea: household income range of $250,000 to $500,000

“Wealth transfer”

Liberty noted a broader consumer shift from purchasing products to experiences. He also spoke of a “flight to quality,” in which financially resilient consumers pay for reliable, premium experiences.

Meanwhile, wealthy baby boomers are covering the cost of vacations for extended families through what Liberty calls “active wealth transfer.” The idea is to spend the money on the family now rather than letting them wait for an inheritance.

This trend is particularly strong in the company’s Royal Caribbean brand, creating a pipeline of future customers while maintaining its Boomer business.

Side bets on shorter cruises

Royal Caribbean is also rolling out shorter cruise itineraries – an intriguing side bet.

For example, the company rolled out Utopia of the Seas on new 3-4 day Caribbean itineraries instead of traditional week-long itineraries. Executives view shorter cruises as an “on-ramp” to attract new cruisers who only have a long weekend to spare, particularly younger travelers.

For shorter weekend cruises, the rise of remote work has emerged as an unexpected tailwind. In a fun detail, Liberty said his company saw increased usage of its Starlink internet service for remote work on Fridays and Mondays, extending holiday periods for professionals with flexible arrangements.

Create private destinations

While short cruises have historically generated lower returns, the company is betting that new destinations can change that calculus. Royal Caribbean creates “private destinations” – islands and ports that the operator completely manages.

These controlled environments allow Royal Caribbean to capture more customer spend while maintaining greater control over the quality of guest experiences.

Royal Caribbean opened its first private destination in 2019. “Perfect Day at CocoCay was a game changer,” Liberty said. It will welcome 3.2 million visitors this year.

The strategy addresses several priorities at once: it attracts younger travelers with tighter budgets, boosts pricing power and creates barriers to entry that generic beach destinations can’t match.

However, in the cruise industry, the tide can turn quickly. Will Royal Caribbean maintain premium prices while its competitors also improve their offerings? Carnival alone plans to spend $600 million on its own private destination.

Climate Change Considerations

Skeptics worry about how environmental regulations could increase costs and hurt returns.

Liberty responded that Royal Caribbean had already met its carbon intensity reduction goals ahead of schedule, decommissioning 20 ships for environmental reasons.

Additional retirements are expected as regulations tighten towards the end of this decade. But Liberty believes that a steady pace of investment in more energy-efficient technologies won’t lead to an explosion in spending.

Supply constraints as a strategic advantage

The industry has a history of overbuilding until yields crash. While Liberty emphasizes “moderate capacity growth,” the company continues to add expensive new vessels.

When asked about this, Liberty highlighted what he calls the industry’s natural constraints that prevent oversupply:

• Limited shipyard capacity to build more ships

• Environmental regulations force retirement of older vessels

These factors are expected to keep industry-wide capacity growth around 3% per year.

Liberty said this modest pace of supply increase should help support “moderate yield growth” of around 3% to 5% per year. A 1% yield improvement translates to approximately $120 million in revenue.

The X factor of overtourism

Some analysts question whether cruise lines will hit a ceiling in the destinations they can serve. Local residents near popular cruise spots, such as Venice and Juneau, Alaska, have recently protested the cruise lines.

“When you do the math on the concentration of tourists in these different places, the reality is it’s really not the cruise ships,” Liberty said. “They’re really Airbnb and Vrbo rentals. »

Still, Liberty acknowledged that some people believe large cruise ships are to blame.

“So we’re diversifying the ports we go to,” he said. “The Royal Caribbean brand alone has 100 different projects being diversified, and the group is building private destinations. »

A key assumption of Liberty’s strategy is that consumers will remain willing to pay more for high-end leisure travel than previously expected in the years to come.

“We don’t think we’re close to the top of the mountain,” Liberty said.