Sea Change: What's on the Horizon for Royal Caribbean's Richard FainPublished: April 30, 2008 in Knowledge@Wharton
Richard Fain is chairman and CEO of Royal Caribbean Cruises, the Miami-based global cruise company that operates 36 ships under the Celebrity Cruises and Royal Caribbean International brands, among others. He joined the company in 1981 as an outside director and became chairman and CEO in 1988. He spent 13 years before that at Gotass-Larsen Shipping Corp., a London-based owner and operator of cargo ships. Knowledge@Wharton asked him to update us on the cruise business. Below is an edited transcript of the conversation.
In addition, Fain gave a presentation as part of the Wharton Leadership Lecture series, during which he offered his views on leadership, innovation and such challenges as rebuilding beaches ravaged by hurricanes, recycling bottles and cans at sea, and remaking the unused wall of a ship into a recreation site.
Knowledge@Wharton: As an employee of Wharton, I'm very curious about the fact that companies, and hopefully educational institutions, are now using cruises to hold business meetings, seminars, new product introductions, even conventions. What's your take on that part of the business? Is it growing and what kind of feedback do you get from companies doing this?
Fain: Actually, it's interesting because that is one of the fastest growing parts of our business. For us, it has two particular attractions: One is that it's the highest revenue earner in our business, which I find fascinating. And, two, it has the highest satisfaction.... The audience enjoys itself, and the [organizers] can keep them all together. In addition, participants have the opportunity to do the meetings that they need to do, but they have [the experience] in such a wonderful atmosphere. For us, it's a business that we're really working to expand. It's close to 15% of our business today.
Knowledge@Wharton: I know that the old image of cruise passengers has changed. It used to be that they were older people who stuffed themselves as much as they could and played shuffleboard all day. Now, you have things like rock climbing, inline skating, water parks and even surfing on the ocean. What are some of the newest things that are available to cruise passengers?
Fain: Well, there was this old image of cruising, which was that it really appealed -- and I would never say this -- but, there were people who used to say that "Cruising was only for the newly wed and the nearly dead." That never was a fair representation. In fact, our average passenger last year was age 42. Our income level is very much Middle America. We're looking at a family income between $50,000 and $75,000. So we're not looking for little old ladies in tennis shoes. We're looking at the average American.
One of the reasons why we offer so many of these exotic activities is not only because it's fun to do and the people who do it love it, but also because you can't very well have the stereotype that this is an older [person's] sedentary vacation and yet still see people surfing on board, rock climbing, or ice skating, or [attending] the professional shows that we do. So, it not only helps because people enjoy it, but it helps break those old stereotypes.
Knowledge@Wharton: What are some of the other demographics? You said that 42 is the average age. What about men versus women, singles versus married, business travelers versus vacationers. You said 15% of your business is now from companies, but what are some of the other demographics?
Fain: It's very much a cross-section. If you took a snapshot of the United States and you took a snapshot of our passenger base, it would be remarkably similar. Fifty-one percent are female, 49% are male. Married people are a large percentage of the population [as are] children, family groups and growing multi-generational groups. So children, their parents, their grandparents, etc. are all in one group.
Historically, we haven't done as well attracting minority groups. So that is something that's been growing very quickly. Latinos have been one of the fastest growing minority segments that we have been going after. African Americans have been an ethnic group that traditionally we haven't been as successful appealing to. That's [now] growing fairly quickly.
There is also a large growing group of people with disabilities who are finding that the ships offer unique access. In fact, we just took a group of more than 3,000 deaf people on one cruise. Everybody had said, "You can't do that" -- but it was wildly successful. We do a lot in appealing to different demographics, but basically they are across the board. Almost any interest group and any age demographic group that you can think of will be there.
Knowledge@Wharton: Have you been able to capitalize on the fact that people are fed up with flying? I think it was one columnist who recently said that "Going on an airplane is like being held hostage." Have you been able to get some of those travelers over to the cruise ships? Also, what about land-based vacations -- are you competing more with them?
Fain: We have always competed with other types of vacations, but we can be very successful, I'm happy to say. In fact, if you take a cruise and if you survey people who have taken a cruise and a land-based vacation, 94% say that the cruise is as good or better than the land-based vacation. Satisfaction levels are terrific.
One of the advantages of cruising is that is does eliminate a lot of the hassles of traveling. You don't pack and unpack; you pack once and that's it. Most of our people still fly to our destinations, but they don't have to. One of the interesting things is that 60% of the American population now lives within driving distance of one of our ports of call. If you want, you can drive. But if you fly, it's only one flight and you are there, and you eliminate a lot of the hassle once you are there.
Knowledge@Wharton: Federal Reserve chairman Ben Bernanke used the word "recession" this week for the first time.
Fain: I know. It pains us.
Knowledge@Wharton: The obvious question is: Is your business hurt by the economic turmoil and what do you do to counteract that?
Fain: Well, it has to be affecting all businesses and it has to be affecting all of us. Of course the economic situation is also hurting us indirectly because the downturn in the U.S. economy is partly to blame for the impact on the U.S. dollar. That affects many of our costs, including our fuel costs, which are horrific.
But the interesting thing is how well cruising has held up. You would expect -- because many people think of cruising as a luxury, a discretionary expenditure -- that those are the first things that have to go. The fact is that during the last couple of years, we are looking at increased bookings and increased pricing. We have grown about 10%. We have raised our pricing.... We have filled all of that extra capacity and raised our prices about 5% on average. While nobody says that they are recession proof, I think that we are proving to be recession resistant.
The reason for that seems to be two things: One is that cruising or vacationing is something that most people no longer consider a luxury, but a necessity. The other thing is cruising is still too cheap. It is still cheap in relation to other vacations. The result is that you can take a cruise. If you look at it, it's probably cheaper than what your alternative would be.
Knowledge@Wharton: I know that it's a very competitive business. Carnival is still the largest cruise line.
Fain: But not the best.
Knowledge@Wharton: Not the best, just the largest. How do you make sure that when people think of taking a cruise, they think of you first?
Fain: That is a marketing question, but also I think that people underestimate the importance of word of mouth and the importance of the service to accomplish that. I actually joined this company 20 years ago. I remember being asked when I was joining, "You know, Richard, I took a cruise and the service is so amazing. How do you, or how does your company, create such amazing levels of service and standards of satisfaction?" I had said at that time [20 years ago] that "I don't know, but I intend to find out."
And 20 years later, I'm still shocked at the men and women who work so hard. We have about 45,000 of them who work day in and day out, long hours, long weeks. It is hard work -- and they still convey absolutely that they are enjoying themselves, that they like doing it and are successful at it. In terms of getting more people to come and in terms of getting people to come on a Royal Caribbean, Celebrity, Asamar or Pullmantur cruise, the way that we do it is: We simply offer better satisfaction than others in our competitive set.
People consider their vacations highly. They think about them and they talk about them; and people come back and tell their friends about them. In each of our competitive markets, in each of the segments that we focus on, we aim to provide the best quality product in our competitive set. That's how we continue to get more guests and more profits.
Knowledge@Wharton: I suspect that more and more cruise passengers are bringing their cell phones and their laptops, etc., on board. Is that creating a problem in terms of disruption or is it just a bad idea for people to do this when they're on vacation?
Fain: On the one hand, it's a bad idea because you really are on vacation and we all wish that we could just get away from the office and enjoy ourselves. But [work] is a fact of life. My job isn't to think whether this is good or bad; it's what people want. The fact is that people want it and so we have to provide it. On most of our ships, and shortly on all of our ships, your cell phone will work just as if you were walking down the streets of a different city. If you flew to London, your cell phone would still work. It is the same thing. You don't have to connect anything and you don't have to sign up for anything. It just works. I'll leave it to others to decide whether that is good or bad. But it's what our customers demand and therefore it's what we provide.
Knowledge@Wharton: There have been reports in the last year or two about health problems on some cruise ships, mainly stomach viruses. Is this something that your company has needed to worry about in terms of perception about the health and safety of going on a cruise, or are these problems now behind the industry?
Fain: We have to worry about them.... The primary concern is always the health and safety of our passengers and crew, and so we put great effort behind that. In addition, you have to worry about the perception, because the perception often differs from the reality. I mentioned that when it comes to cruising, people's general perception that cruising is sedentary is wrong. Some of the early publicity on the stomach flu outbreak was also misleading.
It is true that we have stomach flu on cruise ships. It is actually the second largest illness in the United States. So something that affects some 20 million Americans also affected several hundred cruise passengers. But I think that by being upfront about it and by being clear with the facts, working with the Centers for Disease Control and others -- I think that we have been fairly successful in [making] people understand that you can get sick on a cruise ship and you can get sick at home and bring it on to the cruise ship.
You're probably safer if you get it at home and bring it on the cruise ship because we're better able to take care of you. I think that we've done a pretty good job of educating the public that in point of fact, cruising is safer than probably most of the other things that you could be doing.
Knowledge@Wharton: You mentioned, in an earlier conversation, that you hved been on 10 full cruises while you have been working at the company. This of course sounds wonderful, except that you're probably working during these cruises, or at least you can't relax. What is your biggest management challenge aside from having to go on these cruises?
Fain: I have the best job in the world; there's absolutely no question about it. I work for a wonderful company. I work with people I respect and admire. You can't get a better job than what I have and I enjoy every minute of it. One of the perks is that you do get to go on a cruise and my family loves it. I feel a little bit like I'm in a fishbowl -- so I may not like it as much -- but I still enjoy it.
The big challenge has always been, and will continue to be, getting the best people, keeping them motivated and having them feel that they have good jobs and that they are enjoying it. This is because if they don't enjoy what they do, they can't provide the kind of service.... If there is one thing that differentiates cruising from almost any other vacation you have... I said one thing, but I'm going to give you two. One is choice; you can do almost anything that you want to on a cruise ship, so you get more alternatives to choose from. And, the second thing is that you will get a level of service that you are not used to in almost any other [activity] that you may be doing.
Knowledge@Wharton: My last question to you is: If I took a cruise this year, I would find a certain number of activities, services and places that I could visit. But, say I took a cruise in three or five years; what would I find that is going to be different? What's new that is going to be coming up that hasn't quite hit the industry yet; what new service, what new type of place -- what's the hot new thing coming up in cruising?
Fain: Our mantra at Royal Caribbean is "Continuous Improvement." There's no such thing as perfection in any human endeavor. You constantly get better, you constantly learn. Our best inspiration for the future is what our guests say they are looking for.
We're constantly on the look-out for what they're doing in other places, what we can imagine that they can do. Let's face it, who would have imagined five years ago that somebody would want to go rock climbing or surfing on a cruise ship? And yet, the popularity of those is just overwhelming. I think that you will continue to see more and more destinations that you can go to and more and more interesting places.
The cruise offers such a wonderful way to see places -- and to see them in an interesting and non-threatening way, less hassle, none of the security lines, none of the packing and unpacking that you would do if you tried to do this some other way. You will see more places to go and you will continue to see ... new and different things.
We recently announced that our newest ship has a lawn club. You can play croquet on real grass. There are none of these putting greens on fake grass; you'll do it on real grass. We have a glass blowing operation in conjunction with the Corning Museum of Glass. So, as broad as your imagination is, I think that the cruise industry will try and satisfy it.