Royal Caribbean Business Model

Royal Caribbean operates cruise ships. This is a perishable good, so that unsold capacity cannot be recovered at a later date, once the ship departs. The revenue mix includes the fare paid for passage, and the onboard purchases while include alcohol, shore excursions and other incidentals. Royal Caribbean is one of the world's largest cruise companies, and operates a number of different brands, serving different target markets -- Royal Caribbean is the mainstream brand and Celebrity is the upscale brand. Premium ships are nicer vessels, with more experienced staff, and greater attention paid to the menu and the entertainment options.

Reducing costs is another means by which companies in the industry earn profit. Cruise companies have high fixed costs associated with their vessels. Thus, controlling variable costs becomes an important profit driver in the industry. Most of the revenues are sold as a package, so once onboard passengers receive their food and a lot of different entertainment options without additional cost. Thus, the company needs to ensure that the patrons receive what they perceive to be good value for the price they pay. This emphasizes the need for economies of scale, especially in the mainstream market. In the premium market, cost control is less necessary because prices are higher and the customers are somewhat less price sensitive. That said, the vessel still represents a high fixed cost, and unused capacity is a critical issue.

The cruise company therefore looks at a few different variables in their operations. These include fare revenue per cabin, other revenue per passenger and total revenue per passenger, and total cost per passenger. The ships run 365 days a year, so these metrics need to be gathered constantly, and adjustments made while the vessel is still operating. Thus, there is significant incentive to fill the vessel, while at the same time doing so profitably.

Travel Agents

Travel agents are critical to the marketing of cruises. There are a few reasons for this. First, the cruise demographic skews older, and that market is comfortable with using travel agents. Where younger generations might go online, the cruise market still relies fairly heavily on travel agents to help search for the best cruise deals. The agent therefore works with the customer to outline a number of different cruise options, and a company like Royal Caribbean wants to be in that conversation.

The other major reason that travel agents are important in the cruise business in particular is that cruise clients have travel needs before and after the cruise. Thus, a cruise is typically the showpiece of a larger package of travel products. People will typically fly to the onboarding port, spend a night or two in a hotel prior to boarding, and then fly home after they disembark. In some cases, travel agents may work with the cruise company to set up charter flights, to and from more remote locations where they may not be many commercial flight options. An example would be taking one of the Alaska cruises. They usually start in Vancouver, which is well-serviced, but end in Anchorage, which does not have a lot of direct flights -- there is usually demand for charters back to Vancouver so that people can book a roundtrip to and from their home town and Vancouver, and save money that way. Thus, cruise travel is more complex than it looks, and travel agents play an intermediary role between the travel providers and the customer, to make the total travel experience as smooth as possible, and reduce complexity.

Corporate Strategies

One of the strategies that has been used by Royal Caribbean is to leverage scale. In the mid-2000s, it began building a series of the world's largest cruise vessels, the Freedom class, as the largest ships in the world. They followed this up with Oasis class, even larger, and now Quantum class, which are slightly smaller than Oasis class. The point of having the world's largest cruise ships is twofold. First, Royal Caribbean feels that it can achieve economies of scale in its variable costs with such large ships. Second, largest vessels can have more amenities, something that improves the onboard experience. These new boats have amenities never before offered on a cruise ship, and that can be attractive to buyers. First time buyers are impressed with the variety of options, and experienced cruisers are impressed with something new. In addition, larger vessels can facilitate a better guest experience in other ways....

There can be more restaurants -- many of which generate additional revenue . Furthermore, a larger staff increases the likelihood that the company can increase the number of languages it speaks, essential to serving customers from all over the world.
IT Support of Strategies

Cost reduction is also benefitted from the scale advantages, but the company has done other things to help reduce costs as well. It looks at the supply chain as a key place to reduce costs. RCL has implemented systems that can manage the money on the ships, and the number of SKUs. Both of these are essential because there is limited port time, and the ships are never truly out of service. Working closely with suppliers is essential to ensuring that the goods are available at the right port and the right time, because there is simply no margin for error in the delivery cycle. The boats have to leave port by a designated time in order to keep their schedule, so there can be no errors on deliveries. IT systems that allow RCL to work more closely with suppliers are essential to ensuring that goods are in port at the right time. Cruise ship companies also focus their efforts on key ports that can deliver on the logistics side, using such ports as a base specifically because of their reliability.

Forecasting is therefore an essential component of the supply chain and logistics strategy. There are two elements to forecasting. First, ships have a fairly predictable demand, especially where demographics are constant. X number of passengers will consume X number of prime ribs at dinner, and there is a large enough data set to make forecasting work. But the ship is also trying to increase revenue, and if is efforts are successful, demand could increase higher than expected in the revenue areas -- a new espresso machine could double demand at the cafe for example, and the effect of such strategies needs to be accounted for in the ordering, because everything needs to be delivered in such a short window when the ship is at port.

The case also notes connectivity, for which there is a charge. As connectivity becomes more important, the company has needed to continue to invest in its online capabilities. Large ships can be tremendous traffic demands, and all of the Internet is done via satellite. Royal Caribbean recognizes the value of the Internet as a revenue-generator but must be a technology leader in this regard in order to maintain a high level of capacity and speed, even when in the open ocean.

Impact of 9/11

9/11 has a short-term negative impact on all travel business. The impact was felt for two reasons. One, new travel restrictions were put into place after 9/11 that reduced the desire of people to travel. Two, 9/11 also spurred a recession, and that also suppressed demand for cruising. The company, with its high fixed assets, needed to immediately build back the business, where bookings had fallen 50%. Several projects were either shut down, delayed or reduced in scope. IT saw a 50% total staff cut, in response to the decline in bookings and the need to reduce the cost base of the business. The company adopted a "back to basics" strategy, since the budget for 2002 did not allow for anything else. The Leapfrog project, a key component of IT strategy, was temporarily shelved at this point. The company quickly started to work on a recovery plan, including new booking technology that would help travel agents and consumers with a smoother booking process. The company was within five years launching the largest ships in the world, confident in a long-run rebound in demand. The five-year plan included timeframes for bringing back some of the projects that had been scuttled as the result of 9/11.

Recommendations relative to IT Strategy

In July 2003, the recovery is underway, but demand is still below peak levels. The IT department has three options: maintain the current expenditure level, add $8 million in infrastructure investment and the third option was to ramp up change more quickly. The third option is recommended. At this point, the company is still brining on additional Radiance-class ships, thereby increasing its capacity. But RCL is looking forward -- conservative strategies in response to 9/11 are old news and RCL needs to be forward-looking. IT has to support the growth strategy that the company is about to embark on (the case is two months before the Freedom class ships are ordered, which means that Murphy knows the company is about to greenlight the largest vessels in the industry). Murphy…