Royal Caribbean’s Richard Fain: Letting People Know You Care ‘Is of Surpassing Value’

As chairman and CEO of Royal Caribbean Cruises, Richard D. Fain deals with an array of challenges that would have been tough, even five or 10 years ago, to predict, including rebuilding beaches ravaged by hurricanes, marketing vacations over the Internet, figuring out how to recycle bottles and cans at sea, and making a recreation site out of the unused wall of a ship.

“We asked a management team that we call our ‘Eagles’ to come up with some alternatives [for the ship wall]. They came up with five, and I have to tell you that each one was stupider than the last. The least stupid was the rock climbing,” Fain said during a recent Wharton Leadership Lecture, adding, “and now I think it’s the best idea I ever had.”

The rock climbing story is key to how Royal Caribbean, led by Fain for the last two decades, has not only become a premier cruise line — with more than $5.2 billion in annual revenues, second only to arch-rival Carnival — but also remade the image of vacationing at sea, by appealing to a younger and more active clientele not content merely to read books in a deck chair between five-course meals.

But the anecdote also suggests a leadership style that has propelled Fain forward: Flexible, innovative, willing to take risks, and, despite his joke, willing to share credit with others. In the case of the rock climbing wall, which became a staple of Royal Caribbean’s aggressive TV marketing pitches, Fain’s colleagues who came up with the idea were, in fact, hailed as heroes throughout the Miami-based company. That praise encouraged co-workers to come up with similar innovations, such as ice-skating and rollerblading.

According to Fain, the innovative spirit of Royal Caribbean helps him attract executives who are passionate about the job. “The kinds of people who come to our company are those who try to surpass the last guy,” he said. That recognition has helped inspire the way that Royal Caribbean treats its most valued customers as well. “We find that people in today’s world value recognition more than financial [gain], so in our passenger program we don’t offer you a financial discount on cruises,” he noted. “What we do offer you when you come up the gangway is that your card looks different from everyone else’s, and we have a party for you in which we say, ‘George has taken 37 cruises,’ and everyone applauds.” In today’s world, letting people know “you care about them is of surpassing value.”

The ‘Heart-to-Heart’

Fain clearly has quite a bit of fun overseeing Royal Caribbean — one of the key qualities he recommended for leadership. The others included focusing on the little things of day-in and day-out management in addition to the big defining moments, never losing track of long-term goals, taking ownership of any problems, and — perhaps most importantly — never getting discouraged.

That last leadership principle was driven home to him not very long after Fain — who earned an economics degree at Berkley followed by an MBA at Wharton — accepted a job with an unnamed firm in Philadelphia that came with a six-month probationary period. Fain didn’t really like that job, and at the end of his probation, his boss called him in for “what we then called the ‘heart-to-heart.’ He said he was less than enthusiastic with my job performance over the last six months and perhaps I should consider another career — such as farming.”

Instead, Fain convinced the company to do something it had never done with anyone else — extend his probation by three months, enough time to resolve his problems on the job. He said the career path that led to Royal Caribbean started with that position. “I learned that things can be tenuous, but if things don’t go well at the beginning, there is more than one path to success and more than one path to solving problems.”

It was a good lesson, because Fain, 60, spent 13 years during the tumultuous 1970s and 1980s as an executive with a large London-based cargo shipping company, Gotaas-Larsen Shipping, helping to guide it through a period when it was operating close to bankruptcy. Gotaas-Larsen not only survived, but just a year after its near meltdown, Fain was successfully pushing the firm to buy new cargo ships.

After the board of directors approved his expansion plan, the chairman moved to name the first ship after Fain’s wife, Colleen. Fain was “flabbergasted,” but then the chairman added, “Because if this idea is as stupid as I think it is, I want everybody to remember who proposed it.” (It worked.)

Fain became an outside director of Royal Caribbean in 1979, and then in 1988 was named CEO. The company was founded by Norwegian shipping companies in 1968 but experienced its greatest growth in the period after Fain’s arrival. It went public in 1993, relocated to Miami and shared in the rapid growth of the cruise industry by honing its appeal to a new and younger clientele.

Fain’s principle of never becoming discouraged was tested one more time, when Royal Caribbean aggressively pursued a smaller rival, P&O Princess, in the weeks following the September 11, 2001, terrorist attacks. The Princess line initially accepted a $3.7 billion bid from Royal Caribbean, only to see Carnival enter the fray and ultimately acquire it for $5.4 billion in early 2003. Fain acknowledged that he got caught up in the emotions of trying to do the deal but said he was able to move on from the experience — if for no other reason than necessity.

“We tried not to convey any sense of despondency. That’s hard. The good news was that we did actually have other things to do. We said that what we really need is to show that we’re better off and we’re moving ahead faster than they are,” Fain said, referring to Carnival.

For Royal Caribbean, that has meant strengthening the company’s presence in Europe, which Fain said was recently only 15% of the company’s business but is expected to grow to 40%, in part because of the 2006 purchase of a smaller cruise company based in Madrid. Royal Caribbean has also been increasing the size of its newer ships. That includes the current MS Freedom of the Seas, which made its maiden voyage for Royal Caribbean in 2006 with accommodations for 4,300 passengers, as well as a slightly larger MS Independence of the Seas this year and the upcoming Genesis class of cruise ships, which are slated to be the largest ever built.

A Recycling Problem — and Solution

The larger ships should help Fain mitigate the biggest problem facing Royal Caribbean, or any other travel-related company these days — the soaring cost of fuel. “Most of it is outside of our control, but we can still make a difference,” Fain said after his speech, noting that the company’s measures include a widespread energy savings program as well as the economies of scale offered by the larger ships. “But all that does is partially mitigate a terrible cost,” he added. Indeed, fuel costs lowered Royal Caribbean’s profits in 2007, even though its bookings increased.

In the meantime, Royal Caribbean has taken a number of other steps — in addition to reducing its carbon footprint — aimed at showing off its environmental consciousness. One of the most successful, and complicated, has involved recycling most of the millions of bottles and cans that are used on board in the course of a year. The problem, Fain explained, involved American health codes, because the bottles were considered a potential bacteria source if they were stored for the length of a typical cruise.

But Royal Caribbean devised a solution that involved constructing massive refrigerators — about half the size of the lecture hall where Fain was speaking — that stored the used bottles at a cold temperature, preventing bacteria growth while meeting the health requirements until a recycler picked them up in port.

“We take a lot of steps to reduce the environmental impact on the oceans, and so nothing basically leaves the ship,” said Fain. That also includes developing a wastewater treatment system that purifies water “to the point where the company’s engineers would feel comfortable drinking it.”

Fain said he believes that the extra effort Royal Caribbean puts into every area pays off in a high rate of return business. About 40% of its guests are new customers, while the remaining travelers are evenly divided between repeat guests and those who found other cruise lines wanting. That is critical, he explained, because in today’s market, word of mouth is becoming more important than traditional advertising. People “go to Google or to chat rooms and compare notes. Our satisfaction level is quite high.”

Many of the problems facing a 21st century cruise line CEO could never have been predicted, but Fain has been helped by his ability to go with the flow. He said that while some close colleagues worked from elaborate, mapped-out career schemes, he simply followed his own compass and made the right choices when it was necessary. “I like to think that I did what I had to do to be successful,” he noted, “but I was also very happy to be in the right place at the right time.”

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