By DYAN MACHAN
At a recent> team-building event with employees, Royal Caribbean Cruises CEO Richard Fain tripped up literally when it was his turn to play the role of a cruise-ship waiter. While carrying a trayful of dirty glasses, he stumbled, only to be saved by crew members who were playing the role of passengers. Fortunately for the boss, they caught the tray before it crashed to the floor.
Today, Fain and his company are being rescued again this time by paying customers. Just two years after the recession and financial crisis sent shares of Royal Caribbean tumbling 80 percent to $6, customers are climbing aboard two new $1.4 billion megaships, each of which can carry enough passengers to populate a small town. But the 5,700-passenger Allure of the Seas and Oasis of the Seas aren't the only boats attracting business. In 2010, Royal Caribbean International, Celebrity and the company's four other cruise lines carried a total of more than 4.5 million passengers, a nearly 16 percent jump from the year-earlier period. That and a dose of cost-cutting helped earnings more than triple in 2010. The result: Royal Caribbean shares have soared and recently approached their all-time high of just over $52 before pulling back. "People are all fired up with the nascent signs of a recovery," says Robert LaFleur, an analyst at Hudson Securities.
The Miami-based company may be sailing into calmer seas, but the water can still be a bit choppy. With 40 ships and nearly $6.8 billion in 2010 revenue, Royal is less than half the size of industry leader Carnival (98 ships and $14.5 billion in annual revenue) but carries about the same amount of long-term debt (about $8 billion). And that can be costly, with interest expense reaching $339 million in 2010. Credit-rating agencies put Royal's debt in the junk category, a not-so-healthy level that boosts the cost of borrowing. Fain says the company is working to pay down debt and return to investment-grade status "as soon as we can."
We recently met Fain, 63, at the New York Yacht Club, where he sat at a table in front of the club's curved glass windows. (No one dropped any trays, though there were a few service snafus.) Now in his 24th year as chief executive, Fain explained how he's looking overseas for growth and how an idea that at first sounded terrible turned out to be brilliant.
SmartMoney: Historically, cruises have been cheaper than vacations on land. Has the gap narrowed?
A cruise is still a better value. It frustrates me that [so many people] haven't cruised. Eighty percent of Americans haven't taken a cruise!
SmartMoney: There, there. I would say 20 percent is quite decent.
No, because 94 percent of our guests say a cruise is better than a land-based vacation. The press doesn't get a 90 percent approval rating. I don't think chocolate gets a 94 percent approval.
SmartMoney: What about outside the U.S.?
When I started my career at Royal Caribbean Cruises, 94 percent of the cruises sailed from within 100 yards of my office. In the next year or two, half of our ticket revenues will come from outside the U.S. In Europe, we're just beginning to reach the critical mass where someone is likely to recommend a cruise to a friend.
SmartMoney: Asia has the growth everyone wants. You have done little there.
It is a very embryonic market. We have already devoted one ship [out of 40] to the market.
SmartMoney: Would you rather have more ships there now?
We are getting to that point. The Chinese government in particular has made a decision that cruise tours are good for the country. They have started making investments in port facilities. [Our participation] couldn't have come much earlier.
SmartMoney: Your net debt-to-capital ratio is about 50 percent. In Carnival's case, it's under 30 percent.
Our debt-to-capital ratio is not unreasonable for a growth company that just finished a huge growth spurt. One of the characteristics of our business is that it is a cash flow intensive and capital-intensive business. Once you take delivery of the ships, cash flow quickly pays down the debt.
SmartMoney: If the economy improves, food and fuel prices go up. If it doesn't do well, you are hurt with lower ticket sales.
Obviously, we can manage that in the right way. We are experiencing a bad economy and high prices and still looking forward to record earnings.
SmartMoney: Haven't you had to participate in massive discounting?
Essentially, nobody sells anything at list price. You have to give everyone a deal.
SmartMoney: I saw you in your bathing suit surfing on board one of your ships. What's the next innovation?
I can't tell you. But I can tell you our thought process. We wanted to break these old myths that cruising is too sedentary. I asked our people for five ideas and received some of stupidest ideas I've ever heard. The least worst one was a rock climbing wall. The climbing wall turned successful beyond our wildest imaginations. In retrospect, it was one of the best ideas I have ever had.
Photograph by Jeffrey Salter/Redux for SmartMoney