|BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE|
Carnival Isn't Shipshape These Days
First, onboard fires. Now, investors are fleeing
Last September, Larry Clark took his wife, Sarah, for a four-day cruise aboard the Tropicale, a Carnival Cruise Lines ''fun'' ship, to celebrate their 30th wedding anniversary. But what the Clarks experienced was anything but fun. After leaving Cozumel, the ship's engine room caught fire. With the engines shut down and the toilets broken, the ship went adrift in the Gulf of Mexico. Finally, when an engine was fixed a day later, the ship returned safely to Florida--two days late. Carnival offered Clark a refund and voucher for a free cruise but the Lake Alfred (Fla.) salesman demurred. ''It was a cruise from hell,'' he says. ''We may take another cruise, I just don't know that it'll be on Carnival.''
Ouch. Long regarded as the star performer of the cruise industry, Miami-based Carnival Corp. (CCL) suddenly is sailing in choppier seas. In the past year, the cruise operator has been plagued by three fires and technical problems aboard its ships and a string of lawsuits from stockholders. On top of that, the company is dealing with higher fuel costs and softer pricing brought on by a glut of new ships that's hurting margins throughout the entire cruise industry. That spate of bad news has knocked down Carnival's stock price--scuttling two planned acquisitions.
MYSTERY FIRE. The news got worse in March when Carnival CEO Micky Arison warned Wall Street that earnings for 2000 will grow by a mere 8% to 10%--roughly half the pace of recent years. He said earnings for the second quarter would be slightly lower than the year-ago period, when the company reported earnings of $203.3 million. In 1999, Carnival earned $1.03 billion on sales of $3.5 billion.
Even before the warning, investors were abandoning ship on a spate of bad news: Since late January, the company's share price has plunged by more than 50%, to around 25. ''The company has suffered from several pieces of bad news, all unleashed in a very short period of time,'' says Dean Gianoukos, a leisure analyst at J.P. Morgan & Co.
Carnival's plunging stock price leaves it without any currency to snap up related businesses that were supposed to build its customer base. In late February, the company pulled the plug on a $775 million stock deal to acquire Fairfield Communities, a leading time-share developer, which Carnival was counting on to feed it new cruise customers. A few weeks after this deal fell through, Carnival backed off a plan to jointly acquire, with Star Cruises, NCL Holding, the parent of Norwegian Cruise Line, when the partners couldn't agree on how to run Oslo-based Norwegian. The deal would have given Carnival an even larger share of the North American market.
Besides these failed deals, Carnival has been hurt by onboard fires and technical problems. The company denies any negligence, but it has hired a marine audit company to conduct an exhaustive audit--the first ever--of all its ships, crews, equipment, and procedures. What caused the fire aboard the Tropicale last September is still a mystery to the company. ''We don't know, and our consultants don't know,'' says Carnival Chief Operating Officer Howard S. Frank. The U.S. Coast Guard has yet to issue a final report on its investigation of the incident. Still, the company is facing several shareholder lawsuits claiming Carnival failed to disclose severe safety, maintenance, regulatory, and operational problems in its fleet. Management says the company reported incidents as they occurred and that the suggestion that they could have anticipated the problems is absurd.
BOOMER TIME? But perhaps the biggest hurdle Carnival faces is overcapacity in the industry. Carnival alone is bringing on a cadre of 15 new amenity-filled ships, boosting its fleet to 61. With other cruise lines also adding to their fleets, the number of available beds has jumped by 12% this year. But historically, passenger volume has grown at only about 8% annually. Carnival argues that with the baby boomers now approaching their peak cruise-vacation years, the industry has lots of room to grow beyond the 6.5 million people who will book a cruise this year. ''What is important to us is that we're building over the next five years $6.5 billion worth of new ships,'' says COO Frank. ''We're going to continue to grow our business, and we're going to grow it profitably.''
Not everyone is convinced. Thomas J. Huber, manager of the Dividend Growth Fund at T. Rowe Price, sold his fund's Carnival holdings earlier this year because of worries over the capacity issue. ''The concern is on the return on investment coming down,'' says Huber. ''Are the returns there?''
SHORTER AND CHEAPER. In the short term, Carnival is filling its berths by slashing prices. After years of rising prices in the industry, this year the cheapest fare for a seven-day Caribbean cruise on Carnival Cruise Lines is $549, down from $599. Discounted tickets for the same cruise have gone for as low as $389. Even if Carnival fills its ships, the increased capacity seems sure to drive down its net yields, or revenue per passenger. After rising for several years, operating margins fell slightly, to just under 27% last year.
Carnival is unleashing a host of tactics to lure new customers. Its flagship Carnival Cruise Lines, the biggest of its cruise operators, is adding a variety of shorter and cheaper voyages as a way to expand the market. To draw from a bigger geographic area, the company is adding new ports, including Galveston, Tex., Newport News, Va., and even New York City, in addition to its traditional ports in Miami, San Juan, and Los Angeles.
While shorter cruises and lower prices might attract first-time cruise vacationers, Carnival is working to guarantee repeat customers on its six cruise operators--which range from the mass-market Carnival Cruise Lines to the premium Holland America and luxury Cunard Line. To keep customers coming back to the Carnival family, the company recently introduced discounts from 20% to 50% for past customers to travel on its other cruise lines.
Carnival is gambling that its flashy new ships with their luxurious amenities and balconied, ocean-view cabins will entice new customers to try out a cruise. Still, the trick for Carnival seems to be coming up with a winning marketing strategy that will persuade the Clarks to come aboard again for their next wedding anniversary.
By Aixa M. Pascual in Miami
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Carnival Isn't Shipshape These Days
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