Carnival Cruise Lines Essay, Research Paper

The history of the Carnival Corporation begins in 1972, when Ted Arison set up Carnival Cruise Lines as a subsidiary of the American International Travel Service. The first ship ran aground, but Arison remained steadfast in achieving his vision of a cruise line offering affordable vacation packages to middle-income consumers. By 1977, Carnival had three ships, and ten years later, as the industry leader, the company went public. In the early 1990s, Carnival began to diversify into land-based entertainment, thus changing its name to Carnival Corp. The company is the world’s #1 cruise operator with about a third of the market.

Carnival Corporation is comprised of Carnival Cruise Lines; the world’s largest cruise line based on passengers carried, Holland America Line, Windstar Cruises and Seabourn Cruise Line. It owns 25 cruise ships serving customers worldwide and has 6 new ships under construction (EXHIBT 1). It basically has three market segments: Contemporary, Premium and Luxury.

Carnival also operates 14 hotels in Alaska and Canada and runs Holland America Westours, which markets sightseeing tours. Carnival has a 29.5% stake in Airtours, one of the UK’s largest tour operators, and is bidding for control of cruise line NCL. CEO Micky Arison and family control Carnival.

Carnival was able to increase profits through the acquisition of Holland America Line in 1988 and consequently Carnival expanded its cruise lines to a broader market, however Carnival experienced a loss of $135 million from disposal of the Crystal Palace Resort & Casino in 1991.

The company?s current strategy is to attract more repeat cruisers and new cruisers of different segments by offering different types of packages. Such differences include choice of shorter or longer cruises, a low to moderate price for affordable cruises for middle class, and longer luxury cruises for affluent classes. As part of the company?s plan, Carnival is “going global” through a joint venture with Hyundai Merchant Marine to the Asia market.

Strengths

Carnival?s strategy focused on the “Fun Ship” concept, beginning with the Mardi Gras, which targeted people of all ages. In recent years the driving force behind why a person needs to take a vacation has changed. Today vacationers look to get away from everyday stress, and opt for a stress-relieving cruise.

Carnival is considered the cruise industry?s leader, and in the past few years, Carnival has increased its market share through acquisition and joint venture. In 1988, Carnival acquired Holland America Line to expand its market share in Alaska, Mediterranean, and South Pacific. Holland America Lines (HAL) is an upscale line. It targets the older, more sophisticated cruisers with fewer youth-oriented activities and emphasizes on the beauty of the Alaskan wilderness. Furthermore, the Holland America Westours operates various tours targeting different markets. Similarly, Westmark operates a hotel business, which enables Carnival to participate in another profitable industry. Seabourn, known as the “Rolls Royce” of the industry, targets the luxury market. In terms of targeting international cruisers, Carnival has purchased 29.5% equity interest in Airtours to enter into the European and Canadian markets. Also, Carnival entered into the Asian market through a 50-50 joint venture with Hyundai Merchant Marine, one of the world?s leading marine shipping companies with knowledge of Asian Market, in order to expand its market worldwide.

Carnival and its cruise companies together operate 25 ships in the Caribbean, Alaska, and other worldwide destinations. Combined, Carnival Cruise Lines and Holland America have six new ships slated for delivery over the next three years.

Weaknesses

In the late 1980s, Carnival built the Crystal Palace Resort and Casino situated in Bahamas. During the 1990 fiscal year, the company incurred a $25.5 million loss for the operation of the

Crystal Palace Resort & Casino. In addition, because operations were not profitable and stock values decreased in early 1990, Carnival sold the resort to Bahamian government in 1991 in exchange for the cancellation of the debt incurred in constructing and developing the resort. The company took a $135 million write-off for that year. When Carnival acquired Holland America Lines, it borrowed $375 million. In order to finance the borrowing, it issued Convertible Subordinated Notes (4 1/2 percent) to raise $113 million to repay various bank loans and issued more than 5.6 million shares Class A Common stock to increase capital. And when Carnival acquired a 29.5% equity interest in Airtours for approximately $307 million, the company entered into an unsecured five-year $200million multi-currency revolving credit facility and funded about $163 million of the acquisition cost through this facility.

Opportunities.

In general, the cruise industry will continue to search for innovative ways to increase passenger volumes, on-board expenditures and ancillary revenue streams. The keys to the cruise experience appeal include the predictability of travel cost and the ease of the vacation decision. A telephone call to a single entity – and one check – will reserve a vacation, which at a minimum typically includes on-board dining, entertainment, children’s programming, accommodations, and airfare to and from points of embarkment. In addition, cruise ships have greatly improved the quality of on-board experiences with more diverse food and beverage venues, entertainment and deck activities, meeting and conference facilities, golf, tennis and gaming. In short, cruise packages now provide experiences that have historically been the land-based resort’s stock-in-trade. Cruise companies leverage opportunities to buy airfares in bulk, take the savings and pass them on to consumers. The overall price point typically looks very appealing for a cruise package vacation. While the industry once targeted the elderly or very young, it now has the entire family in its sights.

Threats

This is the identical customer that drives resort economics. In response to these competitive factors, the gap between resort and cruise ship operators is closing. The entry of resort companies Disney into the cruise market will mark a true blending of the resort/cruise vacation industry. Disney, for example will now provide “Cruise Vacation Packages,” giving guests three or four days at a Disney resort, followed by a three- or four-night cruise. Unlike many of its future competitors, however, Disney Cruise line will not offer gambling on their vessels. The entire package may be purchased by a single phone call. Carnival Resorts and Casinos and Carnival Cruise Lines, need to explore ways to work more closely together.

This section lists actions the Carnival Corporation could take in order to be more successful.

Referral Program

Begin a program where, if you recommend your friend(s) and/or family, you will receive discount. For example, if a past Carnival customer referred a customer who chose the minimum cruise package which is $249, Carnival could send the customer who gave the referral a certificate for $50 off their next cruise for each passenger they referred. The restriction could be the certificate must be used within two years. This will benefit Carnival by increasing the number of return cruisers and will combat the image of a first time cruise company.

Cost: $50 per referred customer

Benefit: Since Carnival?s gross income percentage (net income/net sales) is 27%; it would make a minimum of $67.23 (minimum cruise package = $249.00) on the referred customer, plus when the customer who receives the certificate cashes it in. Carnival will make at least $17.23 (if they choose the minimum package). Carnival will also gain the profit of the companions that the repeat customers bring along, since people rarely travel alone. In summary, Carnival will make at least $84.46 per certificate used, (this includes the cost of the certificate).

More Employee Incentives

Royal Caribbean specializes in providing incentives for employees to better their customer service. Carnival does not and as a consequence, Royal Caribbean on average has better customer service.

Cost: The average cruise line employee makes $20,000 per year. 20,000/50 weeks per year/ 40 hours per week = $10 per hour in wages. It would cost about $10 per hour per employee for Carnival to provide customer service training, assuming a current staff member could provide the training.

Benefit: Better customer services will increase the chance that a customer will return to the cruise line. It also helps to improve reputation and compete with competitors such as Royal Caribbean who offer great customer service. If this program results in any repeat customers or attracts any new customers over time, it will generate at least $67.23 per customer in profit.

Support Environmental Issues

Carnival should donate one thousandth of one percent of net income (this would be $666,050 in 1997) to the “Save the Ocean” campaign. This would make them stand out as a socially responsible company. It would also help to appease the environmental groups that are currently against cruise lines.

Cost: 1/1000 of 1% of net income

Benefit: Improved image. Decrease likelihood of lawsuit or attacks from social groups. Also, management and employees can sleep better at night knowing they have done the “right thing” since they are harming the ocean and making quite a profit by doing so.

Summary

Carnival Corporation has been a successful company thus far. It is important for every company to constantly be researching its environment in order to keep up and change with it. Carnival has demonstrated that they are somewhat aware of their environment by announcing the first smoke-free cruise ship. The above recommendations are simply more ways that the Carnival Corporation can adapt to its constantly changing environment in order to be more profitable.