Royal Caribbean remains confident in China

Two trends are
emerging in China, where the cruise industry is putting many of its new ships
in the next two years.

The first is that
yields are flattening, suggesting that the low-hanging fruit in the new market
has been plucked already. The second is that cruise lines are building a better
direct relationship with Chinese customers.

These trends were
evident in Royal Caribbean Cruises Ltd.’s earnings call last week, when analysts
spent much of their time grilling Royal executives about the China results.

In the past two
years, industry capacity has more than quadrupled, RCCL chairman Richard Fain
said. The market now represents 9% of RCCL capacity, more than Alaska.

Given that trend, it isn’t surprising that
yields are dropping. The pressure is highest in Shanghai, where cruising is
year-round and many of the new vessels are homeported.

The lower yields
follow a familiar pattern in the cruise industry, where as markets mature the
revenue growth comes from increased volume at decreasing yields, or marginally rising
ones.

“As we add more capacity in, that improves our
revenue and that improves our profitability and that’s how you should see us
continuing our strategy,” RCCL chief financial officer Jason Liberty said.

And although they are off from their highs,
the revenue yields on China cruises are above RCCL’s fleetwide average,
executive said. 

A second trend in China, at least for RCCL,
is that there is an outreach beyond the wholesalers that dominate the
distribution there. New this year is a television campaign in Tianjin and
Shanghai appealing directly to Chinese vacationers to try RCCL.

The line said that the longer it sails
there, the more information it has about customers in its database. Over time
that gives RCCL and other lines better information about how to tailor and
price their products, and about what Chinese customers want.

Wall Street analysts remain wary that lower
yields might cause RCCL to pull back on its growth in China, bringing capacity
back into markets like the Caribbean, potentially undermining prices. 

“When you look at supply, obviously, we tend
to get at times anxious because more capacity is coming into the market,” Royal
Caribbean International president Michael Bayley said. 

But he added that cruising has barely
scratched the surface of the enormous market for outbound Chinese tourism. “So
our commitment is quite strong to the development of China in the future as a
marketplace.”