When CEO Jason Liberty discusses Royal Caribbean Group’s competition, 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 premium land-based resorts.
“We spend almost no time thinking about our cruise competitors,” Liberty told Skift. “We think of ourselves as an experience company. We’re competing directly with places like Orlando and Las Vegas. We are competing with Taylor Swift concerts.”
In other words, Liberty is positioning the world’s second-largest cruise operator as a provider of Instagrammable vacation activities that happen to take place at sea.
Liberty is executing a strategy that challenges long-held assumptions about cruise industry performance ceilings. But not everyone is on board.
“There is a view that [the company] is close to the top of the mountain in terms of pricing, market share, and margin,” wrote Deutsche Bank analyst Chris Woronka in a report this year.
Liberty told Skift that the skeptics have been proven wrong before. During the pandemic, some doubters questioned if consumers would ever cruise again.
“Today, the propensity to cruise is much, much higher than what it was pre-Covid,” said Liberty, who steered the company through Covid as CFO before becoming CEO in 2022.
More Pricing Power
Recent numbers are strong.
- The company’s ships are running at 98% occupancy.
- The group forecasts that its net yield — a key industry metric — will be nearly 11% this year. (Net yield is the money remaining per available passenger cruise day after variable expenses, such as commissions to travel agents.)
Over the past decade, Royal Caribbean has become more cost-efficient by building bigger ships. While cruise vacations historically were often sold at roughly a one-third discount to land-based alternatives, that price gap has narrowed.
Over time, Royal Caribbean has been packing more people on ships, which has cut its costs per passenger, while also getting travelers to spend more per trip, boosting profit margins. It now believes its offerings are comparable to land-based resorts but about 20% cheaper, which should help it keep luring new customers.
“Some ships, such as the new Icon of the Seas, are already achieving price points in keeping with the upscale resort options at Disney World,” wrote William Blair analysts Sharon Zackfia and Zach Riddle.
Bigger ships also add opportunities to charge more for more features and amenities. “When you talk to the consumer, they really look at the experiences we deliver very much on par with land-based [leisure offerings],” Liberty said.
Liberty said Royal Caribbean has shed dated stereotypes about cruise ships being filled with senior citizens or people looking for discounted 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 been expanding its guest acquisition into wealthier demographics:
- Royal Caribbean brand: $125,000 median household income
- Celebrity Cruises: $150,000 median household income
- Silversea: $250,000-$500,000 household income range
“Wealth Transfer”
Liberty noted a broader consumer shift from buying stuff to experiences. He also cited a “flight to quality,” where financially resilient consumers are paying up 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 have them wait for an inheritance.
This trend is particularly strong in the company’s Royal Caribbean brand, effectively creating a pipeline of future customers while maintaining its Boomer business.
Side Bets on Shorter Cruises
Royal Caribbean is also deploying shorter cruise itineraries — an intriguing side bet.
For example, the company has deployed Utopia of the Seas on new 3-to-4-day Caribbean routes instead of traditional weeklong itineraries. Executives see shorter cruises as an “on-ramp” to attract first-time cruisers with only 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 has seen increased use of its Starlink internet service for remote work on Fridays and Mondays — effectively extending vacation periods for professionals with flexible arrangements.
Making Private Destinations
While short cruises have historically commanded lower yields, the company is betting that new destinations can change that math. Royal Caribbean is creating “private destinations” — islands and ports that the operator fully runs.
These controlled environments allow Royal Caribbean to capture more customer spending while maintaining greater quality control over guests’ experiences.
Royal Caribbean opened its first private destination in 2019. “Perfect Day at CocoCay has been a game-changer,” Liberty said. It will host 3.2 million guests this year.
The strategy addresses several priorities at once: It draws younger travelers with tighter budgets, drives pricing power, and creates barriers to entry that generic beach destinations can’t match.
However, in the cruise sector, the tide can turn quickly. Will Royal Caribbean sustain premium pricing as competitors enhance their offerings, too? Carnival alone plans to spend $600 million on its own private destination.
Climate Change Considerations
Skeptics raise concerns about how environmental regulations could raise costs, hurting yields.
Liberty responded that Royal Caribbean has already reached its carbon intensity reduction goals ahead of schedule, having retired 20 ships for environmental purposes.
Additional retirements are expected as regulations tighten toward the end of this decade. But Liberty believes a steady pace of investment in more energy-efficient technologies won’t escalate into ballooning expenses.
Supply Constraints as Strategic Advantage
The industry has a history of overbuilding until yields crack. While Liberty emphasizes “moderate capacity growth,” the company still adds expensive new ships.
When asked about this, Liberty pointed to what he called natural industry constraints that prevent oversupply:
- Limited shipyard capacity to build more ships
- Environmental regulations forcing older ship retirements
These factors should keep industry-wide capacity growth around 3% a year.
Liberty said this modest pace of supply increases should help support “moderate yield growth” of roughly 3% to 5% a year. A 1% yield improvement translates to about $120 million in revenue.
The Overtourism X Factor
Some analysts wonder if cruise lines will hit a ceiling in the destinations they can serve. Local residents near popular cruise points, such as Venice and Juneau, Alaska, have recently protested cruise lines.
“When you do the math on the concentration of tourists in these different locations, the reality is it’s really not the cruise ships,” Liberty said. “It’s really Airbnb and Vrbo rentals.”
Yet Liberty acknowledged that some people perceive that the big cruise ships are to blame.
“So we’re diversifying the ports we go to,” he said. “Just the Royal Caribbean brand alone has got 100 different projects going on to diversify, and the group is building private destinations.”
A key assumption in Liberty’s strategy is that consumers will remain willing to pay more for premium leisure travel than previously assumed for years to come.
“We don’t think we’re close to the mountaintop,” Liberty said.
Cruise and Tours Sector Stock Index Performance Year-to-Date
What am I looking at? The performance of cruise and tours sector stocks within the ST200. The index includes companies publicly traded across global markets including both cruise lines and tour operators.
The Skift Travel 200 (ST200) combines the financial performance of nearly 200 travel companies worth more than a trillion dollars into a single number. See more cruise and tours sector financial performance.
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