Royal Caribbean’s New CEO Talks Profit, Debt, and Consumers’ Post-Covid Mindset

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There are signs that the cruise industry, which took a beating earlier in the pandemic, is finally starting to recover. Royal Caribbean Group (ticker: RCL), for instance, recently said that operating cash-flow turned positive in April and that it expects to turn profitable in the second half of this year following two straight calendar years of heavy losses. The stock is down about 9% so far this year, ahead of the S&P 500’s 13% loss. Although the Omicron variant hurt cruise bookings late last year and early in 2022, demand for cruising has been picking up since then. Barron’s spoke this past week with Jason Liberty, 46 years old, a longtime Royal Caribbean executive who became the cruise operator’s CEO in January. Here is an edited version of our conversation.

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Barron’s: How did you get into the cruise industry?

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Liberty: I spent the first 8½ years of my career with KPMG, and Royal Caribbean was a client. I was on the advisory side, focusing on consulting. One day, Richard Fain, who was Royal Caribbean CEO at the time, called me into his office and said he wanted me to head up the audit group. I had some auditing experience, but I was more on the advisory side, or consulting. I took the job and joined the company in 2005.

Liberty, shown at a cruise conference in Miami last month, says pent-up demand and consumers’ pandemic savings are driving ‘onboard passenger spending at levels we’ve never seen before.’

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Eva Marie Uzcategui/Bloomberg

What’s the biggest change you’ve had to make transitioning from chief financial officer to CEO?

The external activities that are nonfinancial-related are probably the biggest change for me. However, Richard [Fain] and the board had a succession-planning process. They had been grooming me for many years. And so while I held the CFO title, I was also responsible for several of our brands, among other responsibilities.

Richard Fain, whom you succeeded as CEO at the beginning of this year and remains chairman, ran the company for more than 30 years. What did you learn from him?

Richard is an industry icon. I worked with him for half of his tenure at Royal Caribbean, and I was his right hand for many years. He created a set of brands and ships and culture that is exceptional, and I feel like I have a high level of responsibility to carry it on and bring it to the next level.

There are at least two very critical parts of his DNA that really positioned the company for incredible success. One is that he completely transformed the cruise ship. His vision, design, and attention to detail around our ships is one very important area of ​​interest for him. It was exceptional and changed our company and the industry. The second thing is his relentless pursuit of continuous improvement. Every day, no matter how the day went or how good something came out, we would immediately revisit it and ask ourselves how we can we do it better next time.

To survive the pandemic, Royal Caribbean more doubled its long-term debt load to about $20 billion. How did you approach that?

In terms of how we managed our balance sheet through all of this, relationships matter. We have an excellent relationship with our outside bankers. And that gave us access to affordable capital early on, and that’s why, for example, the stock-dilution story is different between us and our competitors. When the pandemic began, the capital markets had basically shut down. But our relationship with our bankers gave us the breathing room we needed so that we could get access to the capital markets and then reopen, versus having to bring in very expensive capital.

Could you sum up how business is trending so far this year?

We are starting to get passenger load factors of 75-80%, at which point you start to generate a lot of cash. When you get to about a 90% load factor, you start to generate profit. Historically, that line of profitability can be lower, roughly 80%. But we have a lot more debt now. Prior to the pandemic, our annual interest expense was about $300 million or $400 million. Now it’s about $1.1 billion or $1.2 billion. We will burn that off in the coming years. And then this business quickly returns back to the pre-Covid profitability levels.

What are you seeing for cruise bookings and prices?

Our pricing has been up versus 2019 levels for quite a while. Now what you’re seeing is that the volumes are coming back and passenger loads are moving up to what they were prepandemic. So pricing has been up. That’s a little bit of a reflection of a customer that has a lot of pent-up demand for travel and is also sitting on a lot of cash. We’re also seeing onboard passenger spending at levels we’ve never seen before.

How are you addressing the recent spike in oil prices, which in turn increases your fuel prices?

We are about 55%-hedged on fuel prices. Higher fuel prices is not something you can really pass along to the customer. You have to find other offsets that don’t impact guest experience—a more efficient supply chain, looking at fuel consumption, and keep getting more efficient as a company, for example.

How do things look for Royal Caribbean’s business for the rest of this year and into 2023?

As far as Covid goes, the US consumer and North American consumer have moved into an endemic mindset. So we feel pretty good about things from a Covid standpoint. Ukraine and how that could impact Europe and how that could impact inflation—the cost of that is something that are watching. For the most part, the US consumer and the European consumer have regained their momentum since the beginning of the war in Ukraine. We focus on customer savings, which are really strong, and consumer leverage, which is very light.

Thanks, Jason.

Write to Lawrence C. Strauss at [email protected]


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