Carnival Corporation
Big profits on the high seas.
Carnival Corporation & PLC has been taking people around the world for over 40 years ago. Founded in 1972, Carnival Cruise Line began as a single trip from Miami to San Juan on a second hand ship. After years of growth, Carnival has 10 different cruise line brands and over 100 ships. It has over 100,000 employees and serves about 10 million customers a year.
Carnival states, “Our mission is to take the world on vacation and deliver exceptional experiences through many of the world’s best-known cruise brands that cater to a variety of different geographic regions and lifestyles, all at an outstanding value unrivaled on land or at sea.”
Their business model consists of taking passengers, who exist at many different price points in many different geographies, on enjoyable vacations. Once a passenger is on board, Carnival has the opportunity to “up sell” customers with alcohol, specialty restaurants, casinos, and shore excursions. Typically, 80% of the total revenue comes from selling tickets and the remaining 20% comes from these additional purchases.
Carnival Corporation has been very successful at segmenting the market with their cruise brands. While their largest brand, Carnival Cruise Line, is known as “The Fun Ships” and caters to families and cost conscious customers, they have many other options available for passengers. Seabourn provides an ultraluxury vacation on a small and intimate ship. Costa, based out of Italy, is Europe’s largest cruise line. There is also a dedicated cruise lines for both the UK and Australia
Carnival has done an excellent job of cruising to a diverse set of ports to satisfy customer demands. For example, Princess Cruises sails to Asia, Africa, North & South America, Australia, the Mediterranean, and the Caribbean. Not only does Carnival Corporation capture a large and diverse set of market needs, this operational strategy is beneficial because of the seasonality of certain destinations. The Mediterranean/Europe is more desirable in the summer months and the Caribbean is more desirable in the winter months. This model allows Carnival Corporation to provide vacations where there is the most demand year round. By utilizing a model that allows flexibility in the vacations they provide (what part of the world they sail in and the exact ports of call), they can maximize the price they charge for a ticket.
Similarly, Carnival has a dynamic pricing policy that encourages customers to use their ships year round. Ticket prices are highest around holiday times and much lower during non-peak demand. Ticket prices might be hundreds of dollars more for traveling during Christmas week than during the second week in January. This strategy ensures that the maximum number of passengers are on each ship for each voyage.
Carnival does an excellent job of minimizing costs. While their headquarters are in Miami, the company is incorporated in Panama, and each of their cruise ships are registered in countries outside of the US. These two decisions have a number of tax and wage benefits. Because the ships aren’t registered in the US, they do not need to comply with minimum wage laws and are able to hire unskilled labor for certain jobs on board the ship. This helps the company maintain profitability and allows them to provide great value to their customers.
By bundling a customer’s accommodation and food together, Carnival is able to provide customers with great value and a fantastic experience. By booking a cruise, customers have the knowledge that they are booking a vacation that is semi all inclusive. There is always a wide variety of food options for different tastes and you are able to expect a certain level of quality. The cruise lines have extensive data on how much food to order for their preset menus. This allows for highly efficient ordering. Additionally, Carnival can capture additional revenue from alcohol sales.
Operationally, Carnival has to meet the needs of a small, floating city. Feeding thousands of passengers a day, ensuring their safety, and providing entertainment is no easy task. Perhaps no job is more impressive than turning the ship over between cruises. When a cruise gets to the port of debarkation, all the customers must get off the ship. Several hours later, a new set of customers gets on the ship and the week’s activities repeat itself. All new food must be brought on board and the ship must be fueled and cleaned. By having turning over the ship in the same day, they are able to maximize the number of trips that each boat takes in a given year.
No other cruise company has the scale that Carnival Corporation does. With a 47% market share, they are by far the largest player in the cruise industry. Carnival utilizes a number of tactics to profitably take passengers on cruises. Segmenting the industry, up selling customers, utilizing dynamic pricing, and effectively executing on key operations are a few ways that they ensure their business model works. They would not be able to be dominant if their operational and business models didn’t align well.
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References
http://qz.com/63678/one-of-the-secrets-to-carnival-cruises-unsinkable-business-model-free-coast-guard-rescues/
http://phx.corporate-ir.net/phoenix.zhtml?c=140690&p=irol-index
www.princess.com
http://www.usatoday.com/story/travel/cruises/2012/12/11/why-are-cruise-ships-registered-in-foreign-countries/1760759/
http://marketrealist.com/2015/01/carnival-boasts-largest-market-share-cruise-passengers/
Very interesting post. It is incredibly impressive that they are able to turn over these ships in just one day. The biggest thing I would be interested in knowing more about is how they manage the supply chain for food/drinks and how they control inventory management? I am wondering if they plan “port stops” around the amount of food/drinks/water they are able to hold on the ship (until they need a re-supply) or have they configured the ships to be able to store for a given length. In order to minimize costs associated with spoilage and incredible warehousing fees near ports, I wonder if they have created cheaper distribution centers near port cities. A company like Carnival must have an incredibly developed international logistics planning department to control for all of these different types of operations.
Knowing how long it takes disembark a ship with thousands of people, I wonder how Carnival has managed to control the variability in this portion of the process to ensure there is adequate time to turn the ship-over?
Thanks again for an interesting post!
This is fantastic… thanks so much for sharing! It’s almost unbelievable how much these cruise line companies have been able to fit onto a single vessel – they really are ‘floating cities.’ In order to stay competitive, it seems like these lines constantly have to offer the newest ships, more entertainment locations, better food options, etc. to differentiate themselves against competitors (after all, there are probably only a limited set of locations to dock in).
I wonder how this competitive ‘necessity’ in Carnival’s business model ultimately impacts its operating model, since it requires extremely high fixed costs to build or update these ships. Does Carnival conduct this construction in-house? When do they decide to do this construction, since removing one ship from their fleet would likely lead to significant gaps in their offering (for instance, one route that cannot be sailed for several months)? It seems like this decision would likely have major impacts on their revenue (unless they renovate while in operation?), yet would be a necessary one amidst the numerous cruise lines that exist. Would be interesting to understand more how the business thinks through these decisions and how they re-allocate ships to routes during these times.
Thanks for the interesting post, Icahn! The cruise industry is absolutely fascinating from an operations perspective. You raised a lot of interesting points about where they must excel in order to succeed. Maximizing asset utilization of those expensive ships is critical to profitability – I like how you pointed out the ability to move geographies and use dynamic pricing in order to fill the ships at anytime of year. Given the time that it takes to design and build a new ship, it must be an enormously challenging industry from a capacity planning perspective. That is, determining how many additional beds should be added to the global cruise market several years from now, given what we believe about the future economy and customer preferences in travel. From my experience cruising, the other component of the operating model that stood out to me was the repeatability of tasks and specialization of staff. For example, in the dining experience, there is a division of labor such that one employee does drinks, another food running, another clearing, etc. so that the tasks are done with utmost efficiency and little variability.
It would be fascinating to dig into the details of the tasks, scheduling and supply chain coordination that goes into turning around a ship in one day.
Scott, thanks for the post! We could use your keen eye when we plan our next hostile take over of a company.
Cruise lines are bullish on the future of the economy and the cruise industry as a whole. The amount of people taking cruises has been growing each year. This is due to a number of factors, including new geographies, better ships, and more activities aboard ships. Additionally, more young people are cruising than ever before. Individual cruise lines need to be constantly developing new ships to meet this demand and so they can retire their ships when they become too old. It would go against a premium cruise line’s business model to operate a very old ship. There is such a large market out there, I don’t think these large cruise lines are having troubling filling ships.
I love the comment about the specialization of staff – you’re absolutely right. Running one of these large ships is incredibly complex and everyone has their job. While I don’t know the specifics on all the jobs on board, I do know a large portion of the crew is cross trained so they are able to deal with emergency situations. This cross training helps keep customers safe on board!
Scott, I was so interested in your question about capacity planning that I set up a phone call with the CFO of Carnival Corp, David Bernstein, to discuss it. He had a few very interesting thoughts:
The total global cruise capacity is only 250,000 beds. This is such a small piece of the overall tourism market, there is plenty of room to grow. Las Vegas alone has 150,000+ rooms.
The cruise industry is healthily growing.
There are only a few ship builders capable of building a cruise ship. Even if you had the $1B it costs to build a ship, you’d have to wait until about 2021 to get it built. This restricts the growth of the industry and has made sure that supply doesn’t out pace demand.
The Chinese are starting to cruise in huge numbers. Last year, Carnival Corp had about 500,000 Chinese guests. This year it will have about 1 M Chinese guests. Any capacity growth is easily soaked up by the growing Chinese market.
He also mentioned that his largest concern is the macro tourism climate. For example, any large scale terrorist attach has huge implications for the cruise industry.
I hope these thoughts were helpful!