Team 6Group Project

Todd AhmadiThana KittisathanonDana CarlsonKwaku GyabaahJessica QuickPeter Maharaj

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Come Back To The Sea

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Cruise Industry AnalysisIndustry Origin: 1960sMajor Players: Carnival Cruise LinesRoyal Caribbean Cruises Ltd.Norwegian Cruise LinesIndustry Size: 36 companiesMarket Share: Carnival (42.2%)Royal Caribbean (22.1%)Norwegian (12.4%) Single Brand Cruise Lines (23.2%)

Cruise Industry Analysis 1990-2020: 6.55% compounded annual growth rate projection for worldwide passengers carried2015-2017: 22 new ship builds added to cruise industry fleet $3.6B expected annual revenue yield from shipbuilding expansion planPassenger demographics (74% of passengers earn > $60K)

Cruise Industry Growth StrategyIncrease of local ports Increase of destinations and consumer driven, on-board/on-shore activities Diversified ship portfolio offerings Ship builds with increased capacitiesRapid international expansionNorth American increased market penetration (cruise taken by only 24% of U.S. population)

Company Background InformationMardi Gras ship: Carnivals first successful passenger shipIPO (in 1987) issuance of 20K Common StockRoyal Caribbean Cruises Ltd. (RCL) was conceived by three shipping companies: Anders Wilhelmsen & Company, I.M. Skaugen & Company and Gotaas Larsen in NorwaySong of Norway: RCLs first successful passenger shipShip building innovation: RCLs market differentiatorFounded19721968Industry Rank12IPO19871993Total Fleet10642Acquisitions94First Ship BuiltMardi GrasSong of Norway

Company Business ModelsSingle-industry firms, no diversification & uses different brands to appeal to different customers and experiencesRevenueTicket salesOnboard & shore activities 25% - Total RevenuesRevenueTicket salesOnboard & shore activities 25% - Total RevenuesSong of Norway: RCLs first successful passenger shipShip building innovation: RCLs market differentiatorDataRevenues$15,456MM$7,959MMTicket11,548MM$5,722MMOnboard/Tour$3,808MM$2,237MMExpenses$10,624MM$5,305MMCommissions$2,303MM$1,314MMFuel$2,208MM$924K

Company Revenue StrategiesKey Stats:Carnival increased ship investment activities from $40B in 2012 to $42B in 2013RCL partially attributes its $143.7MM increase in onboard revenue to its ship revitalization projectsCustomer focus: MillennialsCustomer focus: Baby BoomersPurchase/lease several ports Increased presence w/ foreign travel agencies 10 new ships to be operational in the next 3 yearsVessel Revitalization Program16 ships upgraded over last 3 years adding latest innovations and featuresExpansion strategy: Asia and new portsExpansion strategy: Latin America, Europe and Australia

Company Opportunities & RiskOPPORTUNITIESRISKSDrive more vacation customers onto cruise vessels - (only 20% of US takes cruises) Fluctuation in fuel prices, exchange rates, and interest rates.Increase number of vessels and vessel capacityCapital and time for new ship builds.Capitalize on emerging international markets Latin America/ Australia (RCL) and Asia (Carnival)Ship accidents and onboard health related issues, and other common risksGreater focus on the generational customer--Millennials (Carnival) and Baby Boomers (RC)Non-US based company By-Laws and Articles of Incorporation are governed by Liberia *

* Specific to RCL

Reflection of Opportunities & Risks in Financial Reports Use of hedging instruments / derivative instruments (interest rate, currency, & fuel price risks)Emphasis on Shipbuilding (Carnival) vs. Ship Improvements (RCL)2012 Pullmantur Goodwill Impairment of $385.4MM - Led to a net income of only $18.2MMSeveral major vessel incidents (Novovirus, Propulsion/engine issues, Costa Concordia)Increased 2013 revenues by 3.5% (to $7.9B) , ticket prices & onboard spending (28% RCL vs. 23% Carnival)2.5% decrease (from $12,158MM to $11,658MM) in total revenues between 2011 and 2012.Grew passenger capacity by 0.8% which boosted revenues to $44.6MM & increased operating expenses

Accounting Practices

Carnival and Royal Caribbean both use GAAP and IFRS accounting principles for their financial statements and reporting.Net Cruise Revenues Net revenues x ALBD (Available Lower Berth Day)Net Yield Net revenues x APCD (Average Passenger Cruise Days) Constant Dollar BasisApply one foreign exchange rate for the fiscal year Goodwill Evaluation and Impairment Evaluation of goodwill in two-step test using discounted future cash flow modelDepreciation/Amortization useful life of 30 years with 15% residual values Depreciation/Amortization useful life of 30 years with 15% residual values

Measurement of Company Success Profit MarginsFiscal year 20136.97%5.95%Fiscal year 20128.44%0.24%Fiscal year 201112.11%8.05%Return on AssetsFiscal Year 20132.72%2.36%Fiscal year 20123.34%0.09%Fiscal Year 20115.02%3.06%

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Measurement of Company Success YEARNI /EBTEBT /EBITEBIT /SALESSALES /AVG. ASSETSAVG. ASSETS /AVG. EQUITYROEFiscal Year 2013101%79%9%39%163%4%Fiscal Year 2012100%79%11%40%163%5%Fiscal Year 2011100%85%14%41%163%6%Fiscal Year 201395%58%11%40%228%5.56%Fiscal Year 201225%9%10%39%239%0.22%Fiscal Year 201197%67%12%38%236%7.33%

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Group Question What do cruise companies do to show protection against passenger claims, litigation and voyage disruptions? Health Claims including onboard illnessLitigation and Settlement(s)Reserves for financial obligations

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AnswerAnalysis: both cruise lines account for financial liability in their balance sheets, under other long-term liabilities.Recommendation: more information for shareholders on protection of investment. Recommendation: additional details in financial notes on insurance policies and cash reserves.

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