Norwegian Needs You to Spend Another $4 Per Day on Your Cruise
The cruise industry often turns to new ships as a sure way to boost sales. Gleaming vessels command premium prices and create a steady pipeline of innovations—bumper cars! water slides!—to tempt vacationers. But those new ships leave their buyers saddled with debt, and filling the additional berths can put pressure on prices.
Norwegian Cruise Line's new chief executive, Frank Del Rio, sees this arms race as one of the industry's biggest problems. He aims to goose bigger profits from his existing fleet rather than springing for new ships. He wants to kick the industrywide addiction to discounts. Above all, he hopes to pry just a little more money from his passengers. For an additional $4 per day from everyone, Del Rio says the company will meet its stated goals of doubling per-share income and return on invested capital within the next three years.
Squeezing out a further $4 per day may sound trivial. “My Starbucks coffee this morning cost me more than that,” Del Rio told investors this week. A couple on a weeklong cruise would need to spend about $56 more total to meet his goal. “I don’t think that’s impossible. We’re going to try to do it.”
Start with drink prices. Norwegian is planning a 6.7 percent increase on March 1, its first since 2010. A soda will cost $2.25, 15¢ more; a beer will rise a quarter, to $3.50. The company expects that this effort alone will increase sales by $10 million per year. Another involves tweaking itineraries across the Norwegian fleet to put more ships in regions of higher demand and boost “per diems,” or how much a passenger spends each day for a cruise. “Organic growth is something that has been discounted for way too long, and we plan on bringing it up to the forefront,” said Del Rio.
Norwegian acquired Prestige Cruise for $3 billion last September and added two premium lines—Oceania Cruises and Regent Seven Seas—to its portfolio. Three months later, Norwegian Chief Executive Kevin Sheehan decided to leave the company, and directors tapped Del Rio, then Prestige’s CEO. Del Rio first made waves in the cruise industry as the co-founder of Oceania in 2002, launched with $14 million that included most of his family’s savings. Six years later, the private-equity firm Apollo Management bought Oceania for $475 million. An additional Apollo purchase, Regent Seven Seas, was combined with Oceania to make an upscale cruise line named Prestige. (Apollo now owns about 25 percent of Norwegian, whose shares have gained 97 percent since the firm took the cruise company public in January 2013.)
Norwegian executives boast that the trio of brands has no product overlap, describing the Norwegian-Oceania-Regent collection as “good, better, and best offerings.” Del Rio said in an interview that his company has more growth potential than its larger rivals, Carnival and Royal Caribbean. From Norwegian's perspective, upscale travel has captured far less market share in its industry than have other categories such as luxury cars and designer fashion, leaving room for growth in that rarefied demographic. In the cruise world, the luxury segment—all-inclusive ships with fewer than 1,000 berths—represents less than 3.5 percent of total cruise capacity in North America, according to Norwegian's data.
Even with his focus on getting more money from existing passengers, Del Rio has no aversion to adding new ships. Norwegian is scheduled to take a half-dozen by 2020, including four for the Norwegian brand. The first—the 4,200-passenger Norwegian Escape—will become the largest in the fleet when it arrives in November. Norwegian's Regent line will also receive its fourth vessel, Seven Seas Explorer, in July 2016. The company calls Explorer the most luxurious cruise ship ever constructed, with a lavish Regent Suite that covers nearly 3,900 square feet and includes two bedrooms, a Steinway grand piano, and a private “spa retreat.” A glass-enclosed sitting area will also offer 270-degree views over the bow of the ship. Passengers who book that suite will also receive a private car and chauffeur in each port of their voyage.