Online Extra: Full Steam Ahead for Carnival

CEO Micky Arison talks about how the cruise-ship giant regained speed following the post-September 11 doldrums
The BusinessWeek 50

Long regarded as the star performer of the cruise industry, Miami-based Carnival Corp. found itself in choppy waters just a few years ago. In 1999 and 2000, Carnival (CCL ) was plagued by three fires and technical problems aboard its ships, as well an industrywide glut of new ships coming onstream that knocked down profits for the whole sector. Then the terrorists attacks on September 11, 2001, hit the cruise industry just as hard as they hit the airlines, as travelers were afraid to board the planes that would ferry them to their cruises.

But Carnival has recovered from those crises. In the past year, its profits rose 25%, to $2.6 billion, on a healthy 17% increase in revenues. Investors, who bailed out en masse earlier this decade, have been scrambling back on board: In the year ended this past Feb. 27, Carnival's stock rebounded by 95.7%. That recovery earned Carnival the No. 46 ranking in this year's BusinessWeek 50 list of America's top-performing companies.

BusinessWeek Atlanta Bureau Chief Dean Foust recently spoke with Carnival CEO Micky Arison about the company's comeback. Edited excerpts of their conversation follow:

Q: Carnival has had a remarkable turnaround in the past year -- profits up, stock up 95%. How did you do it?


I think our resilience to the hits of [September 11] and the Persian Gulf and Iraq wars -- which was probably the worst period for leisure in general -- was due to a number of things. No. 1 is the value of our vacation products. They're just great vacations, great value, and by bringing the price down, the value that was created was even greater. There's also the perception of security.

[No. 2 was] the ability to bring our ships closer to our guests. On many cruises, people were able to take a vacation without going to an airport. Clearly, we demonstrated in the 2001-03 period that we're resilient to economic hits, terrorist hits, as well as military conflict. We have continued to operate at very high load factors, with good margins. We weren't able to grow our earnings the way we would have anticipated if we hadn't had those hits, but we did outperform the rest of leisure.

Q: You're actually the only leisure company on the BW50 this year.


We're the only leisure company that withstood those hits the way we did. We're the only leisure company, I think, in the world [whose debt is] rated in the A categories by Standard & Poor's and Moody's.

So we're uniquely positioned, and clearly if we can withstand the hits, we can withstand the good times even better. If we have some relative quiet in the geopolitical sense, we're very, very optimistic that '04 and '05 can be great years for us.

Q: As I remember, you were doing whatever it took to fill those berths.



Q: Even if it meant reductions in pricing.



Q: The goal was, what, to be at 100% of capacity?


In the quarter ended on November 30, 2001 -- in other words, the quarter in which the September 11 event occurred -- we still operated at 98% load factor. And remember, during that period there were many airports and airplanes on the ground that couldn't service cruise ships.

Q: How much do you do to get to know your customers better? Some companies are known to do exhaustive customer-research focus groups, data mining. How much of that does Carnival do?


From our point of view, I don't think that's a major issue. On any given evening, we're serving dinner to 130,000 people, we're entertaining 130,000 people -- and they're giving us feedback.

All of our brands are well-attuned to getting customer feedback and reacting to it. And I think by our ships' management and shore management of the various brands being very open to talking to their guests, understanding their guests' needs and desires, that we continue to give them the value and exceed their expectations.

There have been a lot of changes. Look today at the level of our spas that are offered on the ships compared to three to five years ago. We offer a far greater choice of food and beverage product, from casual cafés -- almost a Starbucks-like experience -- on the ship to the very top steakhouses in New York [in response to] that re-interest in the steakhouse kind of environment for dinner.

Q: You closed your deal for P&O Princess Cruise in 2003. How's the integration of that merger going?


To a great extent, we've let the business units and the brands operate autonomously. We take synergies, where appropriate, through areas like purchasing, but not a lot of back-office consolidation. We have reorganized a little bit -- focusing our European group into one business unit and our British-U.K. group into another. Then of course we've got Princess, Carnival, and Holland America, our three largest U.S. brands.

We're very pleased with our progress. We hit all our internal synergy targets to date. The brands are all performing very, very well. In our recent 10-K [filing with the Securities & Exchange Commission], we said that bookings were up 59%, year-over-year. And that's across all geographies and all brands. So we're very, very pleased with the way the whole process worked and the level of cooperation between the various brands.

Q: Did you try to share any "best practices" among the different divisions?


We have literally hundreds of synergy teams. But we didn't have to do a lot. The onboard-revenue group would find that Princess Cruises was doing something that was more effective in gaining more onboard revenue than something that [another unit was] doing, and so they immediately switched to that practice.

Carnival has successfully run its own internal casino operations for years and was doing better than Princess. So, Carnival Casinos took over the operations of the Princess casinos. It was done because every brand manager is incentivized by his own performances, so when he can take advantage of a best practice, they tend to jump on it quickly.

Q: What are going to be your big initiatives for 2004? You recently launched the Queen Mary 2.


There are a lot of things. We're at the peak right now in building new deliveries for the various brands. Clearly, Queen Mary II was a huge undertaking for the Cunard brand, with great visibility for Cunard and for the rest of the cruise industry.

And all of our brands are really at a peak cycle -- 2003 and 2004 were really the peak of our new building program. We're taking delivery of ships -- large ships -- every three or four weeks until the middle of the year. So, there's a great deal of focus on that.

At the same time, Carnival Cruise Lines has stepped up significantly in terms of network television advertising. So we're in the middle of a lot of stuff, with significantly higher marketing budgets in a number of companies because their capacity has increased quite dramatically over the last two years. The company is up 35%, capacity-wise, over a two-year period. And we're absorbing that capacity very well.

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