Cruising For A Bruising? Micky Arison built the world's biggest and most profitable cruise company. But he has never navigated seas quite this rough.
(FORTUNE Magazine) – When college dropout Micky Arison became president of Carnival Cruise Lines in 1979 at the age of 30, his team embodied the party atmosphere advertised on its "fun ships." A hundred or so employees--from the sales director to the pest-control guy--would crowd into his 900-square-foot apartment on Saturday nights to carouse. "We had wild parties, a really good time," Arison says, leaning back in a leather chair in his Miami office, three buttons of his crisp blue shirt undone to reveal a deeply tanned chest. "The world is more complex now. There's more to worry about."
That's for sure. For one thing, there's the challenge of running what has become the world's largest cruise-ship company, Carnival Corp. The venture that Micky's late father, Ted, founded in 1972 now has 37,200 employees and six lines, from low-priced flagship Carnival to luxury Seabourn and Windstar. Last year the group had revenues of $4.4 billion and an industry-crushing net profit margin of 23%. In April it completed a $5.5 billion acquisition of Britain's P&O Princess, the world's third-largest cruise company, with revenues last year of $2.5 billion. The newly combined corporation has 13 cruise lines, 65 ships, and a 43% global market share. Such growth has helped the 53-year-old CEO--who owns about 35% of the combined company--amass a personal fortune of more than $5 billion.
But Arison's worries these days are much bigger than the routine ones that come with steering a corporate behemoth. The foundering economy and fears of terrorism and SARS are pummeling the global travel business. Outbreaks of Norwalk virus on three Carnival ships last fall and environmental-regulation violations have bruised the company's reputation. But so far Carnival and other cruise lines have managed to stay profitable, in part because they are all incorporated outside the U.S. (in Panama, in Carnival's case), enabling them to avoid U.S. corporate taxes and labor laws. But as travelers have grown reluctant to book cruises in advance, the lines have been forced to slash ticket prices dramatically, by as much as 50% from pre-Sept. 11 levels. The average price of a cruise is the same as it was in 1999, and analysts don't foresee an increase until 2005.
All this comes at a particularly bad time for Arison's company: It is stuck with boatloads of new capacity. Between them, Carnival and P&O have launched 11 new ships since 1999, and they have committed to adding 20 more over the next two years. Carnival Corp. alone has invested some $6 billion in the 13 ships it has ordered, many of which are supersized models that can carry up to 3,000 passengers. The combined company's total number of onboard beds will rise by 17.6% this year and another 16% in 2004. That's one reason Carnival's once-soaring stock dropped from $34 in May 2002 to $20 last March (it has since risen to $29). For Arison, this is the roughest sailing of his career.
If you've never been on one of the Carnival ships that made Arison rich, picture the razzle-dazzle kitsch of Las Vegas on a 2,124-passenger, 14-story, 88,500-ton vessel more than three football fields long. The Carnival Legend, for example. Passengers boarding in Fort Lauderdale gawk at the glass elevators in the eight-story-high Colossus Atrium, the wrought-iron snake chairs in the Medusa nightclub, the $3 million sound-and-lights system in the glittery multilevel theater. Blackjack tables? Clothing stores? Water slides? All here. It's a theme-park-cum-mall at sea.
That isn't everyone's idea of fun, of course. But it appeals to enough slivers of enough demographics, from retirees to twentysomething singles to middle-class families with kids, that Carnival Cruise Lines alone carried one-third of all North American cruise-ship passengers last year (and accounted for the majority of Carnival Corp.'s revenue). A trip on the Legend, which plies the Caribbean for eight days at a stretch, costs as little as $75 a day per person. But once aboard, passengers are confronted with nonstop opportunities to spend. The Legend offers every conceivable add-on, from massages ($100 per hour) to golf lessons (starting at $80) to meals at a reservations-only supper club ($25 extra per dinner).
To keep ticket prices affordable, Arison imposes tight cost controls. Carnival saves on ship design and construction by standardizing its fleets down to the bedspreads and barstools. There are no rock-climbing walls or ice-skating rinks, common on ships of rival Royal Caribbean. "They're too expensive," says Carnival Cruise Lines president Bob Dickinson. For years Dickinson refused to put shampoo or conditioner in the cabins because he calculated it would cost the company $2 million to $3 million a year. He began stocking the amenities in 1999 only after Procter & Gamble and Unilever agreed to supply them free. "At the end of the day," says Lehman Brothers analyst Felicia Rae Kantor, "this is a cost-based industry. The one with the lowest costs wins."
Arison's pack-'em-in approach helps too. Despite the troubles hanging over the industry, the Carnival line managed to run at more than 105% occupancy last year. How? The industry defines 100% occupancy as two people per room, and by equipping cabins with fold-down bunk beds on which parents can stash kids, Carnival can squeeze four guests to a room. Passengers pay less per person, but Carnival gets more bodies that will spend money once aboard.
Arison is so competitive that he embarked on a vicious 18-month battle for control of P&O Princess after No. 2 cruise company Royal Caribbean had arranged to buy it. (He had already earned Carnival the nickname "Carnivore" in the 1980s when his drive for low prices helped put two shipyards out of business.) Industry insiders say Arison couldn't stand letting P&O go to Richard Fain, Royal Caribbean's CEO. Nor can he bear to let go of the losing Miami Heat basketball team, even though he admits he "doesn't particularly love owning it." After inheriting his father's 60% stake in the team in 1990, Arison bought out his two partners and invested millions more. "I do it for my kids," he says. "And, well, I hate to lose."
That attitude runs in the family. Ted, a tenacious Israeli immigrant who ran a cargo-shipping concern his own father had founded, partnered with a Norwegian ship owner in 1966 to create Norwegian Caribbean Cruises. It started off with a refurbished 11,500-ton European car ferry, the Sunward, which sailed the Caribbean. Starting at age 18, Micky ran the ship's bingo games and helped with shore excursions while intermittently attending the University of Miami.
The partners had a falling out in 1971, leaving Ted without a ship. He promptly rounded up new investors and bought an aging 27,000-ton ocean liner he dubbed the Mardi Gras. Because the ship was so weary, he couldn't get away with charging the high prices that the retiree crowd usually paid. So he decided to target younger passengers who wanted to spend less. He named the venture Carnival Cruises. "We didn't have a lot of capital," says Arison, who had signed on as a sales representative, "so we designed it to be more like a vacation on land. And more fun."
But Carnival's early years were no party. On its first cruise in 1972 the Mardi Gras got beached on a sandbar near Miami. Subsequent cruises were dominated by a spring-break crowd even younger and wilder than the Arisons had anticipated. The company didn't turn a profit for three years. Neither father nor son flinched. "It was ingrained in me," Arison says. "As long as our pricing offers great value, we can't not succeed."
After years of steady growth and success in attracting a broader demographic, the company went public in 1987. Fueled by that IPO cash, Carnival expanded fast. In 1989--the year before Ted stepped down as CEO and named his son as his replacement--Carnival bought Holland America's four-ship fleet and its subsidiary, luxury line Windstar. In 1992, Arison bought a stake in Seabourn, which has three super-high-end yachts that carry only a few hundred passengers each. He branched into Europe with Italian line Costa Crociere in 1997. Over the next two years Arison bought out the rest of Seabourn and snapped up Cunard, the dominant line in Britain.
Along the way he resisted the urge to combine the lines' operations, leaving day-to-day decisions to their respective presidents. "I'd rather give up synergies than risk the revenue if you blow the brand," Arison says. "And as long as the company has scale, we won't need every penny of synergies." Observes Manfred Ursprunger, former CEO of Renaissance Cruises: "Arison is less hands-on, and it works."
Then came Carnival's acquisition of P&O. It was a near miracle of antitrust regulatory approval: Carnival convinced the Federal Trade Commission and the European Commission that its combined 43% global market share wouldn't enable it to control prices. It was also a personal victory for Arison. Carnival had made numerous overtures to buy P&O. But in November 2001, P&O unexpectedly struck a deal to merge with Royal Caribbean instead, which would have created a new No. 1 cruise company. Offended, Arison and his team spent months wooing P&O shareholders, convincing them to delay voting on the merger and running out the clock on Royal Caribbean's expensive poison pill. Then Arison swooped in with a better offer, creating a single company listed on both the British and U.S. stock markets, owned 74% by Carnival and 26% by P&O. By and large, analysts are enthusiastic. "This acquisition," says Lehman's Kantor, "is going to [give Arison] more scale and more power with shipyards and suppliers."
But Carnival's newly gargantuan size poses a dilemma. The company's success has been based in part on a decentralized structure and Arison's nonhierarchical management style. Carnival expects to save $100 million a year by consolidating purchasing for the combined company. But to save even more money, Arison is considering such un-Carnival moves as pooling reservations teams and sales and marketing departments from the different lines. "We're going to have to take a whole new look at our organizational structure," says chief operating officer Howard Frank.
Another problem for Carnival is what to do with all its new capacity at a time when demand--measured by advance bookings--is down. The key to filling berths, of course, is cutting prices. That's what Arison did after Sept. 11, until, he says, "at some point we hit a price level where the value of the cruise overtook the fear." That price is now shockingly low. A seven-day Caribbean cruise in an ocean-view room on the Carnival Victory sells for $1,500 a person, down from $2,100 just a year ago.
How much further is Arison willing to cut prices? Simple: as much as it takes to run his ships full. Explains COO Frank: "If they sail empty, we're not making any money on the fixed costs of building and running these ships. And if the ship is full, the guests have more fun, the crew is happier because they get better tips, and we hook more people on the idea of cruising." But that strategy may not save Carnival's bottom line. First-quarter earnings sank 2.1%, to $127 million, and the second quarter doesn't look any better.
To lure much-needed customers, Arison is doing everything that he can to calm their fears. He has already steered ships away from potential trouble spots--moving Costa's routes to the western Mediterranean and Nordic Sea, and eliminating transatlantic and eastern Mediterranean cruises. To lessen his customers' dependence on airlines, which some perceive as targets for terrorism, Arison has increased the number of domestic ports from which his ships sail, from ten to 18 over the past four years (he'll add two more this year). Industry expert Jay Lewis says that 52% of the population in the continental U.S. now lives within 250 miles of a Carnival port.
Arison points to several reasons why he expects his company to prevail. Even though Carnival's margins for the first quarter fell two percentage points from the year-earlier quarter, they were still 7.4 percentage points higher than Royal Caribbean's. The company's strong balance sheet, which shows $12.5 billion in assets and only $3 billion in long-term debt, gives it room to cut prices even further. And while Carnival's new fleet of supersized ships may seem like a liability now, it minimizes per-passenger costs by generating significant economies of scale.
Will those financial advantages be enough to keep Arison's Carnival partying? Over the long run, perhaps. But for now, the hangover is a doozy.