Royal Caribbean Cruises Ltd.
Moat: 2.5/5
Understandability: 2/5
Balance Sheet Health: 2/5
Royal Caribbean Cruises Ltd. is a global cruise company operating under several brands, offering a range of vacation experiences across various itineraries worldwide.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
Business Overview Royal Caribbean Cruises Ltd. (RCL), a global cruise company, is a complex and multifaceted business. They operate through diverse brands: Royal Caribbean International, Celebrity Cruises, and Silversea Cruises, catering to different market segments and demographics. The company’s fleet is expansive, consisting of numerous ships with a high aggregate capacity.
- Revenue Streams: RCL’s revenue primarily comes from passenger ticket sales, along with on-board revenue derived from onboard activities, including food, beverages, retail purchases, and excursions.
- Industry Landscape: The cruise industry is marked by a high degree of competition with relatively few players at the top that generate a majority of the market share. The industry has also been quite volatile with its business being severely impacted by the covid shutdowns of 2020.
What Makes RCL Different? The major differentiating factor for RCL is its various brands. Each brand is designed to attract different groups of people with different preferences, like Royal Caribbean International caters to families and group-oriented cruises, and celebrity caters to a premium or luxury market. The Company’s large and diverse fleet gives it a significant ability to cater to different markets. This fleet is also among the most modern and fuel efficient with the focus on reducing carbon footprint. They invest a lot in tech and innovation as well, to give its customers new experience. The company also has a very developed operational infrastructure of the cruise industry, and operates a global brand with wide range of cruises for various preferences and price ranges.
Financial Deep Dive RCL’s financial situation is characterized by several key aspects, all of which need to be taken together to assess the value of this company: * Revenue and Profitability: RCL generated $3.471 billion in passenger ticket revenues in Q3 2023, a 32.5% increase YoY, and $6.525 billion for nine months ended September 30, 2023, representing a 66.5% increase YoY. * The company achieved a 59.7% gross margin for Q3 2023 and a 62.2% gross margin for the nine-month period, as opposed to 24% and 22% respectively for the comparable period in 2022. * Operating income for the quarter was $1.46 billion, up from a loss of $446 million for Q3 2022. * Debt: RCL has a high debt load, with total debt as of September 2023 being $23.6 billion, and it has consistently been high for the company over the past few years. * Liquidity: The company also has around $3 billion in liquidity, in the form of cash, cash equivalents, and revolving credit facilities. However, the company also is reliant on its loans for operating and expansion activities.
- Shareholders’ Equity: The company currently has a net deficit in its total comprehensive income as of september, 2023 ($1.427 Billion) and $1.784 Billion, due to its heavy losses over the past few years.
- Operating expenses: Operating expenses increased by 28.6% to $1.85 billion in Q3 2023 compared to the year-ago quarter.
- Cruise operating expenses, particularly fuel costs, play a significant role in margins. The company’s fuel consumption increased by 29% to 3.5 million tons in Q3 2023. The company expects fuel prices to be $640 to $660 per ton in the near term.
- Capital Expenditures: RCL continues to invest in new ship construction to keep up with competition and changing preferences. It has about 28 ships on order with deliveries expected through 2028, with an approximate capital outlay of $42 Billion.
- Operating expenses: Operating expenses increased by 28.6% to $1.85 billion in Q3 2023 compared to the year-ago quarter.
Moat Analysis: RCL has a narrow moat, as follows: * Brand Recognition: RCL possesses strong brands such as Royal Caribbean International and Celebrity Cruises that have high brand loyalty and customer retention. However, competition from other major cruise lines reduces their brand power. * Economies of scale: RCL has scale advantages due to their large ship sizes and large volumes of operations. But these are not significant as the cruise industry in generally a fragmented industry, and other competitors are able to gain the scale required to maintain competitiveness.
- Switching costs: There are switching costs involved with cruising due to the time and effort in planning the vacation. However, unlike other industries, the switching cost is very small and has not led to any great degree of customer loyalty. So this moat is quite fragile.
- Low Barrier To Entry: The cruise business requires high upfront investment but has lower barriers to expansion in existing markets. So it would be difficult for companies to establish sustainable returns over time.
- High Competition: The cruise industry has been rapidly consolidating and has a few big players, making it an extremely competitive industry.
Based on these factors, I am giving a rating of 2.5 / 5. The moats do exist but are weak and fragile and the company needs constant innovation and strategies to ensure that they are maintained.
Key Risks to Moat and Business Resilience
- Industry Specific Risks: The Cruise industry is highly vulnerable to economic downturns and consumer discretionary spending. The company might see a decrease in revenues during such times.
- Global crises and political risks: Events such as global pandemics or political turmoil can severely restrict travel, thereby affecting the cruise industry and its profitability. We have seen this happen in the covid pandemic, and if another similar event happens in the future, they will most likely be severely impacted.
- Heavy debt: RCL’s high debt load can pose challenges in servicing those debts, especially with high-interest rates. A reduction in debt is crucial to maintaining financial flexibility for the company.
- Ship delivery and construction risk: The company is heavily reliant on new ship orders to drive growth, which carries the risks of construction delays or issues, and higher-than-expected capital costs.
- Fuel prices: A higher fuel cost can drastically affect the profitability of the company.
- Labor Costs: Also labor contracts, union negotiations, and wage rates for the industry in general also increase its overall expenses.
- Competition: Increasing competition between cruise companies, as well as the changing preferences of customers and their demand for different types of cruise holidays, could threaten long term returns.
Recent Issues:
- Cybersecurity attack: In 2023, Royal Caribbean reported a cybersecurity breach that impacted customer data. Although the company did not disclose exactly what data was taken, this kind of event could damage consumer trust. * Lawsuits: The company is facing several lawsuits regarding the safety and working conditions of its employees as well as for wrongful death, and the company may incur additional costs and damage to the company’s reputation, which it is trying to fight by saying these lawsuits have no merit.
- Inflation: Although the company’s revenues have increased significantly, it is seeing huge increases in its overall costs, due to various factors including, fuel, labor, maintenance, and food.
Overall, though the company has some positive factors to fall back on, like brand recognition and scale advantages, the current environment is highly challenging for the company to fully regain its long term financial stability and returns.
Understandability: RCL’s operations are complex and require investors to have some understanding of the intricacies of the cruise industry, making it a 2 on a scale of 1 to 5, where 1 is extremely easy to understand and 5 being very complicated. * Industry Complexity: The cruise industry is subject to many external factors, such as geopolitical instability, economic growth, health concerns, etc. * Accounting Complexity: Due to the high amount of debt that RCL maintains, understanding its financial statements will be more complicated than usual. * Operations and Strategy: Also, understanding the different ways these companies have been expanding, and their long-term growth goals will be tougher than a simple industry.
Balance Sheet Health: Based on the recent balance sheets of the company, its overall balance sheet health is not too impressive. Therefore, it is rated at 2/5, where 1 is very unhealthy and 5 being very healthy. * Debt and Debt servicing: RCL carries a very heavy debt burden that is going to be a considerable risk for the company, especially during an economic downturn, because it needs to provide high amounts of cash to its creditors. * Liquidity: While the company does have liquidity at present, it depends upon additional sources for financing any further development activities.
- Equity: There is currently a huge negative equity for the company, due to its losses that it has suffered over the years.
- Net Income: The company has been profitable in the recent quarters, but the heavy debt load is creating high interest expenses, thereby negatively affecting the overall income and balance sheet of the company.