Royal Caribbean May Be Taking On Water

Cheers rang out and fireworks popped as Queen Sonja of Norway smashed a huge bottle of champagne against the hull of Royal Caribbean Cruises Ltd.'s newest and biggest ship, the 2,300-passenger Majesty of the Seas. The recent christening of RCC's third megaship to ply the Caribbean went off without a hitch.

Little else has gone so well lately for the Miami-based cruise line. First, in December, 1990, a shipyard fire damaged the Monarch, a Royal Caribbean ship under construction. Then, Royal Caribbean made a mere $4.3 million on revenues of $760 million in 1991, according to financial statements it filed in preparation for a sale of $125 million in bonds. Once they're sold, long-term debt of $1.1 billion will make up 73% of total capitalization. Debt service is eating away at the bottom line. Added competition will nibble more: The Majesty of the Seas is steaming straight into a projected 11.5% increase in cruise-ship capacity in 1992. Including the Majesty, 12 new ships and 11,000 new berths are scheduled to enter service this year.

Royal Caribbean's owners say they're not worried. Co-founder Arne Wilhelmsen points out that in a year marred by the recession, the gulf war, and the aftermath of the Monarch fire, RCC still posted a profit. But with 50% of the company held in a partnership controlled by Chicago's Pritzker family, Wilhelmsen has other investors to consider. Jay A. Pritzker, the family's dealmaker, says he hasn't lost patience. "I would have liked it to have been better, of course," he says. "It's not a slam dunk, but they're doing well."

RCC's rivals aren't as generous. "We were surprised" by the weak results, says Carnival Cruise Lines Inc. Chairman Micky Arison. His company did far better, earning $85 million on $1.4 billion in revenues in 1991. Says analyst Michael Mueller of Montgomery Securities: "Carnival is the low-cost producer and in this recession has done significantly better than its competitors."

MASS APPEAL. Carnival's marketing may be the key difference. Its "Fun Ships" carry the masses, while its Holland America Line Inc. handles the upscale crowd. RCC seems to want the best of both worlds--its single brand targets the upper end of the volume market. But as Robert H. Dickinson, Carnival's senior vice-president for marketing, notes, Royal Caribbean keeps its ships full only through mass-market pricing. As Dickinson puts it: "Palm Springs is looking more like Las Vegas, but they're still sending the Palm Springs message."

RCC Chairman Richard D. Fain defends his strategy. "I see absolutely no contradiction in appealing to the volume market and yet saying we are providing a quality product at a low price," he says. But Pritzker concedes that RCC faces the same conundrum as another of the family's big holdings, Hyatt Hotels Corp.: convincing consumers that a slightly higher price buys a big jump in quality.

That might be an easier message to send this year. James Parker, an analyst at Robinson-Humphrey Co. in Atlanta, expects that increased vacation spending in 1992 will keep the new boats full, though price competition will keep a lid on industry yields. Profits still may get a lift, because passenger volume should increase more than overhead.

RCC sorely needs a good year. Its interest expense added up to $59 million in 1991, and the nut is even bigger this year: More than $134 million in principal and interest payments come due. Debt coverage "looks a little skinny," analyst Peter R. McMullin of Southeast Research Partners observes.

That's why RCC is mulling a public stock offering this year. "The purpose would be to reduce leverage, not for any of us to bail out," says Pritzker. Still, the Pritzkers, whose name is synonymous with smart money, don't plan to take more of the action for themselves.

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