Royal Caribbean’s Premium Push: CEO Strategic Interview

When CEO Jason Liberty discusses competition for Royal Caribbean Group, he doesn’t mention Carnival Corporation. Instead, the CEO is name checking Orlando and Las Vegas.

This is because the CEO’s strategy is to steer Royal Caribbean Group towards competition with premium land-based resorts.

“We don’t think much about our cruise competitors,” Liberty told Skift. “We think of ourselves as an experienced company. We compete directly with places like Orlando and Las Vegas. We’re competing with Taylor Swift concerts.”

In other words, Liberty is positioning the world’s second-largest cruise operator as a purveyor of Instagrammable vacations that take place at sea.

Liberty is pursuing a strategy that challenges conventional wisdom about the cruise industry’s performance ceilings. But not everyone is on board.

“The view is that (the company) is close to the top of the mountain in terms of pricing, market share and profitability,” Deutsche Bank analyst Chris Woronka wrote in a report this year.

Liberty told Skift that skeptics have already been proven wrong. During the pandemic, some doubters wondered whether consumers would ever take cruises again.

“The propensity for cruising today is much higher than it was pre-Covid,” said Liberty, who led the company through Covid as CFO before becoming CEO in 2022.

More pricing power

The latest figures are convincing.

• The company’s vessels operate at 98% capacity.

• The group forecasts its net yield – a key industry metric – will be nearly 11% this year. (Net profit is the money left over per available passenger day of a cruise after variable expenses such as travel agent commissions.)

Over the past decade, Royal Caribbean has become more profitable by building larger ships. While cruise vacations have historically often been sold at a discount of about one-third compared to land-based alternatives, this price gap has narrowed.

Over time, Royal Caribbean began carrying more people on its ships, which lowered costs per passenger and also forced travelers to spend more per trip, resulting in higher profits. The company now believes its offerings are comparable to those of land-based resorts but are about 20% cheaper, which should help it continue to attract new customers.

“Some ships, such as the new Icon of the Seas, are already reaching price levels in line with upscale resort options at Disney World,” wrote William Blair analysts Sharon Zackfia and Zach Riddle.

Larger vessels also provide the opportunity to charge extra for additional features and amenities. “When you talk to consumers, they really value the experiences we provide on par with the ground-based (leisure offerings),” Liberty said.

Liberty said Royal Caribbean has moved away from outdated stereotypes about cruise ships filled with seniors or people looking for discounted travel. About half of Royal Caribbean’s guests now are millennials or younger—people who never saw The Love Boat in the 1970s.

The company is also expanding its guest attraction to wealthier segments of the population:

• Royal Caribbean brand: median household income $125,000
• Celebrity Cruises: Median Household Income of $150,000
• Silversea: Family income range from $250,000 to $500,000.

“Transfer of Wealth”

Liberty noted a broader consumer shift from buying things to experiences. He also referred to a “flight to quality,” where financially stable consumers pay for a reliable, premium experience.

Meanwhile, wealthy baby boomers are covering the cost of vacations for large families through what Liberty calls “active wealth transfer.” The idea is to spend money on your family now, rather than making them wait for an inheritance.

This trend is particularly strong in the Royal Caribbean brand, which is effectively creating a pipeline of future customers while retaining its booming business.

Additional rates for shorter cruises

Royal Caribbean also offers shorter cruise routes, an intriguing side bet.

For example, the company rolled out Utopia of the Seas on new 3-4 day Caribbean itineraries instead of traditional week-long itineraries. Executives see shorter cruises as a way to attract newcomers with only long weekends left, especially younger travelers.

For shorter weekend cruises, the rise of remote work has been an unexpected tailwind. What’s funny is that Liberty said his company has increased the use of its Starlink internet service for remote work on Fridays and Mondays, effectively extending vacation periods for professionals with flexible schedules.

Creating private destinations

While shorter cruises have historically delivered lower returns, the company is betting that new destinations could change that math. Royal Caribbean creates “private destinations” – islands and ports that are entirely managed by the operator.

This controlled environment allows Royal Caribbean to capture more customer spending while maintaining greater control over the guest experience.

Royal Caribbean opened its first private destination in 2019. “Perfect Day at CocoCay was a game changer,” Liberty said. This year it will welcome 3.2 million guests.

The strategy addresses multiple priorities simultaneously: it attracts younger travelers on a budget, drives pricing and creates barriers to entry that mainstream beach destinations can’t match.

However, the situation could change quickly in the cruise sector. Will Royal Caribbean maintain its premium prices as competitors also expand their offerings? Carnival alone plans to spend $600 million on its private sector.

Climate change considerations

Skeptics have expressed concern that environmental regulations could lead to higher costs and lower yields.

In response, Liberty said Royal Caribbean had already met its carbon reduction goals ahead of schedule by retiring 20 ships due to environmental concerns.

More retirements are expected by the end of this decade as regulations tighten. But Liberty believes the steady pace of investment in more energy-efficient technologies won’t translate into bloated costs.

Supply Constraints as a Strategic Advantage

The industry has a history of overbuilding until profitability falls. Although Liberty emphasizes “moderate capacity growth,” the company is still adding expensive new vessels.

When asked about this, Liberty pointed to what he called natural industry constraints that prevent oversupply:

• Limited shipyard capacity to build more ships

• Environmental regulations require the decommissioning of old ships

These factors should keep industry-wide capacity growth at around 3% per year.

Liberty said this modest rate of supply increase should help support “moderate yield growth” of about 3% to 5% per year. A 1% increase in yield would translate into roughly $120 million in revenue.

X-factor of overtourism

Some analysts wonder whether cruise lines will hit a ceiling on the destinations they can serve. Local residents near popular cruise destinations such as Venice and Juneau, Alaska, have recently protested against cruise lines.

“When you consider the concentration of tourists in these different places, the reality is that they are not actually cruise ships,” Liberty said. “It’s actually Airbnb and Vrbo rentals.”

However, Liberty acknowledged that some people believe large cruise ships are to blame.

“So we are diversifying the ports we enter,” he said. “The Royal Caribbean brand alone has 100 different projects to diversify and the group is building private destinations.”

A key assumption in Liberty’s strategy is that consumers will continue to be willing to pay more for premium travel in the coming years than previously thought.

“We don’t think we’re close to the top of the mountain,” Liberty said.