Forty five years and forty ships later, based out of Miami Florida, Royal Caribbean is the second largest cruise line in the world, behind frontrunner’s Carnival. ARCH operates its ships under the brand names Royal Caribbean International, Celebrity Cruises, Pullman, Samara Cruises, and Crisis©rest De France. These fleets are competing in the maturing oligopolies and consolidated cruise industry with destinations across the globe, including: Asia, Hawaii, Alaska, the Mediterranean, the Baltic, South America, and the Caribbean.
ARCH business can be broken-down into two profitable areas; Revenue Management which involves the income that originates from booking a cabin, and Onboard Revenue constituted by non-included areas where guests spend additional dollars such as bar, onboard casino, internet services, spa treatments, gift shop, photo, shore excursions, port shopping among others. As the cruise capacity has multiplied and cruise fares have dropped, Royal Caribbean and all the major cruise lines have started to increasingly focus on onboard spending as a significant source of revenue.
At the end of 2007, the Unites States started to experience a recession phase that extended over the next eighteen months. During this economic crisis, Royal Caribbean suffered a significant drop in mostly every revenue area, which impacted enormously their stocks in the public market. Consequently, the company realized that they needed to expand their international operations abroad since this challenging situation was driven by their concentration of operations in the US market.
Throughout the following years ARCH extended the deployment of its ships to Asia, India, Dublin, South America, Australia and New Zealand, and increased the capacity for Europe. Some foreign markets have proven to have less intense competition and higher profitability. These actions were accompanied by the opening of international offices in China, Singapore, Sidney, Oslo, and Brazil. Royal Caribbean has also been able to take advantage of international supply chains and global market possibilities; sourcing its ships with quality products at a lower cost.
Likewise, in order to be ready to meet different demographics and territories demands, Royal Caribbean started a revitalization process for a significant amount of its major ships. The ships facilities have been accommodated according to the practices and traditions of the nationalities that will source the ship; e. G. The spa for ships visiting Asian territories has been accustomed according to their culture. This fleet-wide refurbishing program supports the promotional campaign slogan of “Now Our Best Ship Is Every Ship. The escalating prosperity of the global population and the rising popularity of exotic destinations have encourage Royal Caribbean to focus more and more on their strategy of international business development and expansion into emerging and high-growth markets. As a result, and in addition to the ongoing recovery of the US economy, their new ships, global destinations and itineraries, and innovative activities, Royal Caribbean has been able to drive constant growth n revenue and passenger counts; where international passengers duplicate the growth ratio of US passengers.
The cruise line industry is looking forward to a positive year of growth with a 2014 passenger forecast of 21. 7 million. To be able to meet the demand, the industry will introduce 24 new ships in 2014-2015 adding a total passenger capacity of 37,546. Royal Caribbean represents 22% of this growth in capacity with the launch of Quantum of the Seas in 2014, and Anthem of the Seas in 2015. Quantum of the Seas will be deployed to Asia, currently considered the emerging market with the highest potential for cruising revenue.
The global cruise industry continues to be the fastest growing travel sector in the world with strong consumer attention and substantial cruise line investment in a diversity of mind-blowing ships that travel to the most exotic locations in the world and offer exceptional vacation experiences. B. Discuss the main opportunities and risks faced by Royal Caribbean due to its global nature. Some of the opportunities from global perspectives would be vertical growth, such as constant improvement, close financial monitoring, reducing costs, differentiating, or horizontal growth as territorial expansion, occupying new potential niches.
Product differentiation is one of the main strategies in order to face some of the risks; however, Royal Caribbean, as well as, Carnival Corporation and Norwegian Cruises are the most visible players in this industry. It is not easy to differentiate with their huge size, economies of scale. The industry is very lucrative, has high profit margins; hence, the level of risk is extremely high as well.
Some of the risks Royal Caribbean face could be anything from tax laws and regulations, economic issues, ego-political uncertainties, terrorist activities, armed conflicts, pirates, oil spills, and even unavailability of air service and there conditions, like unusual weather, or more serious natural disasters like heavy storms, hurricanes, earthquakes. Finally, financial issues as changes in operating costs, interest rates, foreign currencies, insurance, security costs, as well as prices for fuel and other commodities, and payroll play a huge impact on the industry.
Royal Caribbean uses US dollar as its functional currency. All international transactions in foreign currencies are translated into US dollars at the spot rate. Monetary assets and liabilities expressed in foreign currencies are translated at exchange rates at the balance sheet date. In order, to minimize some of the risks, Royal Caribbean uses certain hedging instruments. The exposure under foreign currency contracts, fuel swap, and interest rates is limited to the cost of replacing the contracts in case of non- performance by the counterparts to the contracts, all of which are their lending banks.
According to the information from Royal Caribbean official documents and data, it is clear that their international primary exposure to foreign currency exchange rate risk relates to firm commitments to ship construction contracts denominated in Euros. The business enters into Euro-denominated forward contracts in order to control risks. In addition, Royal Caribbean is also exposed to foreign currency exchange rate fluctuations on US dollar value of foreign currency denominated forecasted transactions.
The company takes advantage of natural offsets of its foreign currency revenues and expenses and enters into foreign currency forward contracts for a portion of the remaining exposure related to these forecasted transactions, in order to manage this exposure. Royal Caribbean principal net foreign currency exposure relates not only to the Euro, UT also to British pound, and the Canadian dollar. The company has foreign currency forward contracts of approximately $4 billion US dollars. On average, 60% of Royal Caribbean long-term debt is effectively fixed, and the other 40% is floating.
The business enters into interest rate swap agreements to modify its exposure to interest rate movements and to manage its interest and leasing expenses. Risks associated with long-term fixed rate debt are the potential increase in fair value resulting from a decrease in interest rates. C. Discuss how the company hedged currency exposure in 2011. Discuss the sots and potential benefits of hedging currency exposure for a company such as Royal Caribbean. Hedge currency is when a company enters into a contract in order to protect themselves from any constant fluctuations.
Companies conducting international operations with customers or vendors are the ones that use hedge currency in order to reduce or even eliminate any risk they can encounter due to the fluctuation of products or currency. Royal Caribbean has plenty of hedge currency exposure due to the fact that most of their operations are overseas. In many opportunities Royal Caribbean earns revenues, identify assets, acquire abilities, and wage expenses in other currencies because they operate in three continents where different currencies are used and the U. S Dollar is not the main form of payment used.
Royal Caribbean also hedges fuel because it is highly used in the company operations and it is constantly fluctuating. As a matter of fact, Royal Caribbean cruise line has most of its business in North America and the Caribbean; however, the purchases or sales of ships are most of the times recorded in Euros. The company has two ways of closing a deal in this type of situation, one of them is through FAX exposure and the other one s by using FAX forwards in order to reduce any currency risk. For example during 2011 ARC sold Celebrity Mercury for the amount of ?234. Million, the transaction was possible because of the forward exchange contract that was used to lock the sales price at around $290 million. Some of the environmental disasters such as the turbulence in Libya and the Middle East, and the earthquake in Japan, the oil prices were set to rise once again in 2011. This was the reason why the cost of the fuel made to the top priority in risk management affecting not only Royal Caribbean but also the entire cruise line industry, where the fuel sots signify concern given by representing a major part of a ship’s expenditure.
The alteration of the oil prices has always been an unstable business, being $140 per barrel in July 2008 and dropping to $40 per barrel in November 2008 – its lowest since 1983. Because of this variation, cruises has been facing to hedge their oil purchases in order to cover themselves during both high and low periods by placing two-way bets. Nonetheless, as the economies began to emerge as the same time as the oil prices rises; some operators started to apply the fuel surcharges on travelers.
Getting into the details about the major robbers, we found that one the main issue is the company’s possibility to pay for the bunkers in advance and the results of evading payments. Cruise liners also need to guarantee the high quality of the bunkers because the poor quality of the fuel can lead to significant engine damage or failure; consequently pre- testing the fuel has become more common in recent years. Royal Caribbean Cruises was awarded as a successful hedging programmer. As they inform a gain of $4. 2 millions between the first quarters of two years in a row.
Reporting in April of 2011, a Net Income of $91. 6 millions, compared to $87. Millions in 201 0, supported by lower costs and gains from fuel-oil hedges. One of the benefits of anticipating to the rising of fuel prices, it that has about $2. 5 billions to $3 billions accessible in currency hedges for intended outflow for new ships and other factors. As the future is undecided, it seems that the majority of the responsibility could fall on the external support from energy agents and bunker merchants by providing risk management tools, and focusing on the technical and the financial qualities inside the supply chain.
Chamomile, Singapore-based bunker supplier, informed in a newsletter that roving risk management services offers joint advantages; confirming that clients can control their own risks, though the supplier itself benefits in handling risks on its physical inventory in storage. In the last few years, sometimes the counter parties have included banks that end up offering trading services and local providers, to confirm stability and suppliers that offer the best possible value for money.
It has been challenging to mention what makes for a perfect hedging strategy because of the instability of the markets. However, given the more than apathetic response to the fuel complements over the past year, it loud be predictable if more cruise operators didn’t follow the likes of Royal Caribbean in developing a related established contact in meeting growing oil prices to ensure the fundamental purpose: passenger gratification. International companies hedged their products in order to maintain a stable price throughout a period of time.
The same can be said about Royal Caribbean, they cannot have volatile prices to their service because that would make it too unpredictable for the customers to buy. In order to prevent that, they hedge on the unstable products such as oil, which is a key part of the maintenance of the ships. International companies also deal with different currency, potentially causing the company to lose money. One of the effects this has on Royal Caribbean is the cost of their ship; the ships are paid in euros, but their main source of income in in US dollar making the expenses higher.
The cruise line industry is liable to any natural disaster; it can come in the form of a hurricane when the ship is navigating in the Carbine, placing all of the passenger and creamers in danger. Or a disaster can happen in the other side of the world and by one way or another affecting the industry, like it did in 2011 when the oil prices stocked after the conflict in the Middle East and the earthquake in Japan. To protect themselves from catastrophic losses Royal Caribbean hedge the oil at a median price, in order to make them competitive with the market.
This is a way to prevent the risk of prices going up, but it can backfire if the oil prices decrease substantially and the company is paying more than what the market has it worth. That is a risk the company has to take. During 2011 Royal Caribbean hedged with their oil partners, this ended up being a great decision for the cruise company since they increase their profit from the year past. This is a perfect example of a visionary company presenting its customers with the best prices. They did this without being affected since they made four more million than the year before.
