Norwegian Cruise Line is just fine with third place.
In the cruise industry, big can be downright awful financially, says Kevin Sheehan, president and chief executive of Norwegian (NCLH). The third-largest cruise operator has a diminutive fleet—just 13 ships, with two more on order—that helps keep the focus on holding the line on prices.
Most large cruise lines consider their product an underpriced bargain for vacationers, yet prices reliably fall as the industry strives to fill every berth on every voyage. Getting people on the boat is key to selling them alcohol, upscale dining, shore excursions, and additional items with healthy profit margins. At Norwegian, on-board spending accounts for nearly one-third of revenue. Carnival (CCL), the industry leader, has more than 100 ships—and filling them all makes it harder to keep prices firm.
“That’s why we have 22 quarters of (earnings) growth,” Sheehan argues. The Miami-based company carried 1.6 million cruisers in 2013 and its net yield, a metric that measures customer revenue over available cruising days, was nearly $184 per passenger last year—$5 more than Royal Caribbean’s and more than $16 above that of Carnival.
Sheehan intends now to boost return on capital from 7 percent to 14 percent over the next few years, aided by the newer, larger ships. Across the industry, new ships command a price premium to older ones in a fleet, though a large build in berth capacity this year in the Caribbean has led to choppy pricing for many lines, including Norwegian. The company will receive its 14th ship, Escape, in October 2015, followed by Bliss in early 2017. Each will carry 4,200 passengers.
Norwegian also has developed an exclusive luxury section atop its ships: the Haven, where high-spending cruisers can seclude themselves with butlers and separate spas and dining spots. A 5,700-square-foot, three-bedroom villa—complete with baby grand piano—is available on some ships. Such sections, which exist on rival mass-market cruise lines, tend to be enormously profitable because they command super-premium prices.
Part of Norwegian’s strategy to attract new cruisers calls for turning its ships into hotels for high-profile events. In February, Norwegian’s newest ship, the Getaway, was docked in Manhattan and became the Bud Light (BUD) Hotel during the Super Bowl. “If there was such a metric as return on exposure in the cruise industry, this event would have set the bar,” Sheehan told analysts during Norwegian’s last quarterly conference call. The company also docked its Norwegian Jade in Sochi for a month to serve as a hotel during the Winter Olympics.