Business / Case Analysis

Case Analysis

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Autor:  anton  05 October 2010
Tags:  Analysis
Words: 923   |   Pages: 4
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The cruise industry is under a bit of a makeover. Due to economic conditions and shifting demand, the cruise line industry is looking for new ways to attract cruise vacationers while maintaining the market that already exists. There are numerous ways to go about this. Royal Caribbean is being creative in its methods. Generally, Key West is one of the most frequented ports of call. However, as Phillips (2005) states The Sentry is canceling 26 port calls next year, and the Rhapsody of the Seas normally goes every week while next year it will only go every other week. RCL has had the same schedule for a long time and now they want to try other things. This is a sign of things to come. Royal Caribbean can no longer rely on old methodology to be successful. Where are these ships going to go if they are not going to Key West?

According to Stevenson, there is an increasing demand for more “drive-to” locations. This means that people do not really wish to fly to the port where their cruise is leaving from. They’d rather drive to a closer port to go on a cruise. Some of the ports of call that are increasing in demand are New Orleans, New York, San Francisco and more in the Northeast (Stevenson, 2005). Royal Caribbean needs to expand to these markets. As of now, Royal Caribbean does service these markets. However, there seems to be much more demand for these cities. These cruises will offer an abundant amount of fun-activities to do on board. There will be: a splash deck for kids, and bungee trampolines that send guests soaring into the air (Blenkey, 2005).

It is not cheap for a cruise line to expand its fleet. Royal Caribbean has been increasing capacity for quite some time. Because of this expansion, RCL increased revenues by 10.3% (Oza, 2005). RCL has been fairly aggressive in doing so. These ships are very expansive to build. According to www.clearstation.com, RCL has a high LT debt-to-equity ratio (1.31) compared to the industry average (.69). This means that the company relies more on creditors for financing rather than the owners. In order to continue to expand RCL will have to issue more stock or continue to pay extremely high interest expenses. Currently, 49% of the company is owned by one family. These owners have worried about diluting the stock price. However, issuing new stock is going to be necessity in the future to continue the fleet expansion.

It will be necessary to issues more stock because North America is not the only market where Royal Caribbean needs to expand. Stevenson (2005) implies that some European and Asian markets are emerging as prime for expansion. Royal Caribbean is expanding to some of these markets. By offering full English breakfasts, more draft beer and slot machines that take sterling Royal Caribbean International preparing to launch on ship year round in the UK (TTG, 2005). However, by taking one ship and devoting it to this area, there is need for expansion. With Royal Caribbean already nearly maxed out, there is need to raise capital for expansion. RCL plans on continuing expansion, but plans on scaling back expansion in the near future. RCL should raise capital to continue expansion for a longer period of time.

It is also expansive when the ships are not maintained as they should be. There are many regulations regarding these ships. As with any other regulation, there are fines for failing to comply. In the past Royal Caribbean has had some trouble concerning this. In 1998, RCL had to enter into a plea agreement for five of its vessels for discharging oily bilge waste near San Juan Harbor in Puerto Rico and falsifying oil record books. This criminal plea cost RCCL $9 million and required it to implement an ECP. The following year, RCCL pled guilty in six federal jurisdictions to fleet wide practices of discharging oil-contaminated bilge waste and hazardous waste. This plea cost RCCL another $18 million (Grasso, 2005). That is a total of $27 million. This was a costly mistake that RCL cannot make again.

One reason that RCL cannot afford these mistakes is because of their relatively low net profit margin. There is no room for error. Because of high fuel costs, RCL has had some very high operating expenses. Does a company have to just take it on the chin when it comes to high fuel costs? The answer is no. RCL should hedge against these high fuel cost, locking into contracts when fuel is expected to increase will help in lowering fuel costs. Fuel costs in the fourth quarter were up 25%, $16.3 million, from last year. Royal Caribbean said it expects fuel costs to increase 8% in 2005. In 2004, RCL hedged 32% of its fuel costs. However, the only hedged about 15% of its fuel costs this year, which will translate into about $16 million in added costs (Wall Street Journal, 2005).

REFRENCES

Blenkey, Nicholas. Marine Log. New York: Feb 2005. Vol. 110, Iss. 2; p. 23

Grasso, Jeanne.. Marine Log. New York: Feb 2005. Vol. 110, Iss. 2; p. 56

Oza, Herma. Private Placement Letter. New York, Ny, 2005

Philips, Christie. Knight Ridder Tribune Business News. Washington: Mar 2, 2005



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