| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| THE CORPORATION
For Carnival, Few Icebergs on the Horizon Cruises are hot, and Carnival(CCL) is riding the crest of the wave The mammoth cruise ship christened the Ecstasy is a far cry from the staid liners of Grandma's day. Start with the wall-to-wall neon in its casino and the peacock blue Rolls-Royce permanently parked in an indoor promenade. Then there's that World Championship Wrestling bout the ship hosted in May. Even docked, the Ecstasy isn't laid-back: On a recent Friday morning in the Port of Miami, 2,000-plus passengers from one Caribbean cruise are barely ashore before the next group, bound for a four-day tour, climbs aboard. By 1 p.m., three hours before cast-off, the new passengers are already on the Lido deck sipping fruity drinks from yellow cups emblazoned with the exuberant ''Fun Ship'' logo. ''I feel like I'm on the Love Boat,'' one giggles. The hectic pace says a lot about Carnival Corp., the Miami-based operator of the Ecstasy. Chief Executive Micky Arison and his team have built the world's largest cruise line with new ships, acquisitions, and innovations. But if good marketing and exuberant consumer spending have gone a long way to helping Carnival grow, much of Arison's success comes from applying efficiency to cruising. Taking advantage of low taxes and wages available to ships registered outside the U.S., they've driven the cost of sailing down to $200 or less per person per day on their largest liners. ''It's rolling up your sleeves and going to work,'' says Arison, 49, who along with his family owns 40% of Carnival. Now Arison is betting $5 billion on extending the franchise even further. With eight ships on order, Carnival will increase capacity 44% in four years. But competitors also are building like mad. The industry is expected to add 10% more bunks each of the next three years, in line with 10.5% growth in '98. To justify its investment, Carnival will not only have to stay out ahead of those other lines. It also has to steal vacationers away from attractions like Disney World and Las Vegas. ''Their biggest challenge is continuing to market the cruise vacation as a viable vacation alternative,'' says Tom Huber, an analyst at T. Rowe Price(TROW) who follows the company for its mutual funds, which hold 2.4 million shares. As yet, there is little direct evidence that cruise lines are stealing business from theme parks and casinos. But there's no mistaking who Carnival is targeting with those Kathie Lee Gifford ads: baby boomers entering their prime cruising years. Investors love Carnival so far. Sales grew at an average annual pace of 12% over the past decade, to $3 billion last year. Net income rose 33% per year on average, to $836 million. The stock has climbed ninefold in the past 10 years, handily beating the Standard & Poor's 500-stock index' 306% gain. In March, Carnival steamed to No. 33 on the Business Week 50 list of best performers. EUROPE AHOY. Still, there are clouds here and there. A sell-off sent the stock from 53 1/2 in early April to about 41 today, partly because Carnival announced that the war in Kosovo would hurt its Mediterranean business. But long-term, investors like Carnival's plan to expand in Europe, a relatively untapped market. Analyst Robin M. Farley of BT Alex.Brown(BT) expects net income to grow 17% this year, to $974.5 million, on 20% higher revenues of $3.6 billion. Anyone betting on Carnival is betting on Arison. The CEO since 1979, Arison runs it very much like a private company. Of Carnival's 16 board members, 11 are members of his family, Carnival executives, or execs who do business with the company or the family. Also, Arison sits on the Carnival board's compensation committee, which determines how much he, as CEO, should be paid. Arison says he's considering stepping off the committee after labor unions criticized the practice. But he defends the board composition as ''in the shareholders' interest.'' Investors seem willing to look the other way. ''It's the Arisons' company, that's true,'' says Ralph Wanger, manager of the Acorn Fund, which holds 1.5 million shares. But ''their record is one of the best in any industry.'' Credit a culture that focuses on competition. Sales meetings in Las Vegas drive home that on-board casinos are one of Carnival's big moneymakers. Other ideas lifted from land resorts include a smoke-free ship, the Paradise, and Carnival's vacation guarantee. If you don't like the cruise, Carnival refunds the unused portion and flies you back. Arison says he follows one simple rule: fill every bunk every trip. Recently, that hasn't been a problem. With each new ship, and each added level of convenience, demand has climbed. ''We've moved cruising from an elitist vacation for old people and their parents to a mainstream vacation,'' gloats Robert H. Dickinson, president of Carnival Cruise Lines, the largest of Carnival's five lines. Last year, while most U.S. companies struggled to maintain pricing, cruise lines were able to raise prices--in Carnival's case, by 6%. LUXURY LINE. Still, some argue that cruising has to run out of steam sometime. Jim Cammisa, publisher of the Travel Industry Indicators newsletter, estimates that only 10% of Americans spend $1,500 on vacation in a year, the cost for a couple to cruise for four days. Heightening Carnival's risk is its big bet on future growth. Along with the ships it has on order, it has been buying other lines. To pay for it all, long-term debt rose 54% last year, to $1.6 billion. Arison's goal is to become a one-stop cruising shop. To that end, he bought the high-end Cunard Line last summer for an eyebrow-raising $500 million. The troubled owner of the Queen Elizabeth 2 and four other aging ships firmly establishes Carnival in the luxury market, which charges customers up to $800 per day. But the high end is the hardest place to make a profit, travel industry execs say, with more crew per passenger and complicated itineraries. Still, Carnival has some major advantages over its rivals. The company is incorporated in Panama, and many of its ships are registered in Liberia. That allows Carnival to escape duties on liquor, often its biggest shipboard moneymaker. And Roderick K. McLeod, a onetime Carnival executive who now runs a division of U.S.-flagged American Hawaii, estimates that he pays at least 25% more than foreign-flagged vessels to comply with U.S. wage and other labor laws. Carnival also skips U.S. corporate income tax on most operations. Over the past three years, it paid just $19 million in income taxes on $2 billion in operating income. By contrast, Las Vegas rival Mirage Resorts Inc.(MIR) paid $278 million in federal taxes on $813 million in operating income. So far, the most vocal critics of foreign flagging have been congressmen from ship-building districts and some unions. But don't expect immediate change, since it would raise protests from corporations and port cities. Low costs, rising prices--not a bad combination, if you can manage it. Small wonder that Carnival is pushing like there's nothing but open water ahead. By Nanette Byrnes in Miami _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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