Batten Down The Hatches And Rev Up The Jacuzzis

Seas haven't exactly been calm lately for cruise-ship operators. Earlier this year, the gulf war jangled the nerves of travelers, deep-sixing cruise bookings. Nor did the recent recession leave folks with the wherewithal to whoop it up on the high seas. Now, cruise ship operators are fighting a bruising discounting war. And the industry's image took a plunge when a Greek liner, the Oceanos, sank off South Africa on Aug. 4. How is it, then, that the industry's lord of the seas, Carnival Cruise Lines Inc., continues to sail blissfully along?

By cruising with a young crowd, for one thing. Carnival Chief Executive and Chairman Micky Arison, 42, has successfully tapped into 25- to 39-year-olds--a demographic group once given short shrift by cruise lines. The typical $2,000-plus, two-week cruise has long been marketed to well-heeled middle-aged and elderly couples. But Arison has used a clutch of quickie package deals--such as a three-day, $399 trip--to win over new and younger vacationers. Now, he's eager to build up the company's fleet, which sails under the Carnival, Holland America, and Windstar names.

The Miami-based line's success lies, in great part, in savvy marketing. It has been unusually skillful in overcoming cruising's image as a seagoing slumber party for the shuffleboard set. "Even in good times, the industry has not done a good job in consumer awareness," admits Robert Mahmarian, executive vice-president at rival Costa Cruise Lines. "Carnival is one of the exceptions."

Carnival has certainly brought some pizzazz to the business. Its advertising campaign features the perky cabaret singer and talk-show host Kathie Lee Gifford prancing about the discos and sun decks of a Carnival steamer. And its newer ships, with splashy names such as Fantasy and Ecstasy, boast neon lights and indoor whirlpools under skylights.

Arison will use Carnival's clout to extend its industry's lead. Since the line's founding in 1972 by Micky's father, Ted--who retired as chairman last year--it has steamed ahead. Carnival now enjoys a 26% share of passengers in the $5 billion cruise-ship market (chart). Later this year, the Arison family--which owns 82% of the voting stock--hopes to raise $218 million in a 7.85 million share offering that will be used mostly for acquisitions and debt repayment.

GOOFY IDEA. Carnival almost pulled off a nifty deal in April with its $372 million bid for Premier Cruise Lines Ltd., a Cape Canaveral (Fla.)-based line that operates off Central Florida and has an exclusive marketing deal with Walt Disney Co. Premier's appeal to young families attracted Carnival, but the deal collapsed after both sides squabbled about price.

Even so, Carnival has hardly lost momentum. Its passenger count has jumped 20% during the first six months of the fiscal year, ended May 31. Carnival's average occupancy level is an astounding 103%--achieved by fitting more than two people in a cabin--vs. the industry's 90% average. Investors are pleased: After dipping to a low of 11 3/8 last October during the gulf tensions, Carnival's stock is now back at the mid-20s level it was trading at earlier.

Which isn't to say that Arison hasn't hit a reef or two. Back in 1989, Carnival built the sprawling 1,550-room Crystal Palace Hotel & Casino in Nassau, Bahamas. The $250 million fuchsia- and lavender-colored resort has been hit hard by a 20% downturn in Bahamian tourism. It lost $21 million last year and will probably lose another $10 million this year, figures Arison, who has said he may sell the resort once it breaks even.And while Carnival has kept its passenger count growing, its reliance on discounts--such as 2-for-1 deals on its $519, four-day cruises--has been costly. Although sales were up 10%, to $673.9 million, during the first half of 1991, profits fell 7%, to $73.9 million. For the year, Carnival should turn in earnings of $213 million, up 3%, on revenues of $1.5 billion--a 15% improvement. Also, its spending spree on new ships--by 1994, it will add four to its fleet, for a total of 20--has boosted long-term debt to $1.1 billion, or 50% of total capital.

Because of the upcoming stock offering, Arison isn't talking, but analysts don't rule out another run at Premier. Buying cruise lines is a thrifty alternative to paying about $300 million to build a ship from scratch. Arison also has a shrewd eye: His 1988 acquisition of Holland America Line Inc. looks like a winner.Meanwhile, the industry outlook will likely brighten in coming years. Passenger counts should increase by 10% or so a year, while capacity growth eases. Come the upturn, Arison may be able to extend his lead in the cruise business, leaving rivals floundering in its wake.

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