Bloomberg News

Carnival’s Accidental CEO Plots New Course for Cruise Line

November 25, 2013

Carnival’s Accidental CEO Plots New Course for Cruise Line

A tourist takes a photograph from a designated viewpoint close to Carnival Corp.'s Carnival Legend cruise ship docked at Lisbon Port in Portugal. Photographer: Mario Proenca/Bloomberg

Arnold Donald had been on the board of Carnival Corp. (CCL:US) for 12 years when, in June, he got a call from the cruise company’s lead director, Stuart Subotnick.

It was an offer to succeed Micky Arison as Carnival’s chief executive officer, and Donald was incredulous.

“Okay, what’s the call really about?” Donald replied.

Donald’s skepticism was understandable. Arison, the son of Carnival’s founder, had run the company for 34 years. The world’s largest cruise operator was in crisis. Its Costa Concordia ran aground near the Italian coast in 2012, killing 32 people. That was followed by more incidents this year, including a fire aboard the Carnival Triumph in February that tarnished the company’s image with cable-news video of passengers stranded at sea. Donald, 58, pondered the decision for two days.

“I had to think about whether I was the right person at this time for Carnival,” Donald said in an interview with Bloomberg Television. “I wanted to make certain that I was aligned with the board and then with the leadership team to make the positive changes that we need to make going forward.”

Since taking over on July 3, Donald has been implementing changes that include a $700 million investment in shipboard fire prevention and back-up power systems, a new marketing campaign and an effort to get Carnival’s 10 cruise lines to collaborate and become more efficient.

“We started out with a few ships,” Donald said. “We grew to a fleet. And now we have an armada. We have huge opportunities to take advantage of our scale, in terms of creating demand and creating new revenue.”

High Expectations

Carnival shares have gained 4.1 percent on Donald’s watch, a sign that some investors are getting behind his turnaround plan. Yet the stock remains more than one-third below its 2004 peak, a reminder of how much reputation repair he has left. Since July 2, Carnival has lagged the 10 percent gain of Norwegian Cruise Line Holdings Ltd. (NCLH:US), and a 29 percent advance for Royal Caribbean Cruises Ltd. (RCL:US) Carnival rose 0.5 percent to $36.30 at the close in New York.

A New Orleans native and son of a carpenter, Donald grew up in the segregated South, attending an all-black, boys high school that pressed its students to excel. “Three times a day they would say, ‘Gentlemen, prepare yourself, you’re going to run the world,’” he remembered.

After earning a mechanical engineering degree from Washington University in St. Louis, Donald joined chemical maker Monsanto Co. (MON:US) in 1977. He supervised the company’s Roundup weed killer business, before leading a group that purchased Monsanto’s Equal sweetener operation in 2000.

Image Makeover

“When Arnold took on a job, he figured out what had to be done and he got it done,” Richard Mahoney, a former Monsanto CEO, said in an interview. “He was demanding, not rude. People liked working for him.”

Carnival was already deep into a public-relations makeover when Donald ascended to CEO. After the Triumph incident, which left 3,100 passengers without enough food or working toilets for four days, the company introduced a “vacation guarantee,” promising to refund money and fly guests home if they’re not happy with their cruise, according to Gerry Cahill, CEO of the Carnival brand.

In September, the company introduced a $25 million advertising campaign, its largest in five years. Carnival solicited stories from customers, and more than 30,000 responded. The resulting “Moments that Matter” spot is a montage of their home movies taken on ships.

“This marketing campaign is very different than anything we’ve ever done before,” Cahill said. “We said, ‘Let’s let our guests tell our story for us.’”

Recruiting Agents

Among Donald’s first steps was a five-year look-back with management at each of the company’s brands, which include Princess Cruises, made famous by the 1970s-80s television series “The Love Boat,” and Cunard Line, the 173-year-old British brand that’s home to the Queen Mary 2. Donald also met with travel agents to repair relations that frayed in recent years.

Carnival had previously sought to boost profit by automating the booking process, directing customers and agents to its online systems. That effort reduced commissions and complicated reservations by adding numerous classes of fares.

In the past few months, Carnival has simplified its fare structure, made enhancements to its travel-agent website and created a new bonus program for salespeople.

“Carnival had been sort of aloof, but now they’re coming back,” said John Maguire, founder of Cruisedirect.com, an online travel agency.

Buying Power

Donald is also trying to win over more travelers who haven’t cruised before by appealing to guests who like outdoor sports or charity work. Examples might be to drop guests off in places where they can build a house in Haiti or go backpacking.

“I think there might be opportunities, given today’s purpose-oriented generation,” Donald said. “Each of our brands caters to a particular type of psychographic.”

Donald’s also looking for ways the cruise lines can work together, such as in obtaining space at ports. Now, each line negotiates separately. Together they could get better locations and pricing, he said, and have more flexibility to offer variations in routes.

Carnival took another step in this direction Oct. 4 when Donald announced that Stein Kruse, the president and CEO of the Holland America and Seabourn lines, will add Princess to his responsibilities. Princess’ former CEO, Alan Buckelew, was promoted to chief operations officer of the company, where he’ll oversee information technology across the lines.

Brand Discount

A focus on collaboration will lead to greater sharing of customer data, opportunities to sell higher-priced packages at premium brands and more standardization of quality and safety, according to Timothy Conder, an analyst with Wells Fargo Securities.

“That being said, we believe it will likely be 2015 before legacy ship retrofit issues are behind and brand reputation rebuilding along with improved operating approaches begin to bear fruit,” Conder said.

In addition to the direct cost of about $50 million for the Triumph incident, the Carnival line has been forced to discount prices to fill its ships. The average cost of a Carnival brand cruise is down 15 percent this quarter from a year earlier, and 9 percent for voyages scheduled for the first quarter, according to Barclays Plc.

‘Ad-Hoc Stabs’

The discounts come at a price, and Donald’s changes have yet to result in revenue growth. The company lowered its 2013 earnings forecast three times, warning in September that it may lose as much as $17 million this quarter, and said its advance bookings were down through the first half of 2014.

Jeffrey Sonnenfeld, a management professor at Yale University who previously served on the board of Norwegian Cruise Line, said Carnival’s board erred in choosing Donald, who lacks cruise experience, and should have explored other candidates. He doesn’t believe the steps taken so far will win back customers.

“Their ad-hoc stabs in the dark aren’t going to rebuild the fabric of trust that’s been unraveled,” Sonnenfeld said. “These guys have treated the business cavalierly.”

Donald, who is aiming to accelerate the turnaround, said he has “the freedom to do what needs to get done.” Ultimately, he said, customers will be the judge. If he succeeds, “shareholders will be happy and no one will care how I got this job.”

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net; Carol Massar in New York at cmassar@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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Companies Mentioned

  • CCL
    (Carnival Corp)
    • $36.83 USD
    • 0.40
    • 1.09%
  • NCLH
    (Norwegian Cruise Line Holdings Ltd)
    • $32.9 USD
    • 0.15
    • 0.47%
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