Is It Smooth Sailing Ahead for Royal Caribbean?

Royal Caribbean (NYSE: RCL) has been steadily expanding its fleet and adding new features to existing ones. The company has also revamped its Coco Cay private island to make it more appealing to families and people looking for an active day. The cruise line has also been working to attract families and younger cruisers to its ships, partly by enhancing on-ship bars. This has worked, as the company has hit record booking levels and continues to look strong heading into the rest of the year.

In this episode, host Shannon Jones talks with Fool contributor Dan Kline. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on July 23, 2019.

Shannon Jones: Speaking of Royal Caribbean, ticker RCL, Dan, I feel like I can't go a day without seeing a Royal Caribbean commercial on the television, touting their brand-new island, touting their ships and the latest and greatest feature on their ships. This is a company, even though it's smaller than Carnival, honestly, it has been impressing me more and more. The more I dig into this company, it seems like they are firing on all cylinders.

Dan Kline: I think they've done a very smart job in targeting families. You mentioned the private island. Pretty much every cruise line owns one or more private islands. What that generally means is, it's a strip of sand, maybe there's a volleyball court, a playground, a couple of bars, usually the bars cost extra, they'll throw a barbecue, that'll be included, and it's kind of a nice beach day. What Royal Caribbean did in their Caribbean island, and they're going to be doing this to their other islands, is they put in a water park. That's an added fee. They built out five or six beaches, one of which has a lovely swim-up bar that I highly recommend. They put in the biggest pool in the Caribbean. And they added all sorts of included bars and restaurants. So, instead of just being a place you could chill on the beach for a few days, there's family activities. The water park, which is maybe $40 a ticket, is good for my teenage son, who was pretty thrilled that they had free funnel cakes and other theme park style food. Whereas I was more than happy to chill out by the bar, and the bar is included if you get a drink package, which wasn't previously the case on private islands traditionally. So, they've really made a move to make it a real value to families instead of a day where it's like, "OK, I can get the kids to the beach for 90 minutes, but they're not going to be that interested." You can get off. And you're starting to see that on the ship. The teen areas are being amplified. They're making it more fun for the whole family. The last thing they want you to do is be in your cabin. The cabins are very, very small. 180 square feet would be considered a large inside cabin. So, if you're a family of four, that's very tight. But if they can entice the teenagers to be in the teen club, and the 7-year-old is in the 7-year-old area, and Mom and Dad are in the adults-only pool, they've ramped that up, and Royal, I think, has done a very good job in carving out that fun for the whole family environment, and, while it is a drinking-heavy atmosphere, keeping things PG-13.

Jones: As a result, all the focus on the onboard entertainment and even with the private island, bookings have hit record levels consistently. Occupancy level ticked up for the third straight year, rising to 109% from 108%. This has been the case. Dan, can you explain how exactly occupancy rates can be over 100% on cruise lines?

Kline: We talked about this a little bit earlier. A ship is considered at full occupancy if all the regular rooms -- let's not consider suites, because the economics change, but every regular room has two people at it. That means, if I'm going alone, but you have two people with you, together, that's four people across two rooms. Those two rooms are both considered full. A ship might have a maximum occupancy of 4,500, but can actually sail with 5,200 people on it. Why would you want more people? More people spend more money, they gamble more. But if you leave at 100% -- and pretty much every cruise ship, aside from some of the ones that were meant for Cuba is leaving at 100% -- you can be at full occupancy.

One of the things both cruise lines do incredibly well is, once they have you they market to you extensively. On the cruise, there is very heavy incentives to book your next cruise. And you're having fun, maybe you've had a couple of drinks, it's easy to sit down and put a deposit so the vacation never ends. When you land, you start getting hit, I would say two or three times a day in some cases, if you're at a casino list and a regular list, with new offers. "Here's $100 off!" You get something in the mail, "Here's $300 off!" Once they have you, they try very hard to keep you. And in theory, that's building an audience. Maybe that will create that next generation of cruisers. If I take my kid on a cruise and he likes it, maybe when he's 25, him and his buddies will go on a cruise, though I have yet to see that. I don't see a lot of people under 30 not traveling with their parents, with the exception of, you do see some bachelorette parties.

Jones: So true. Thankfully for the Disney Cruise Line, that's the only one I've been on far, although you are pushing me highly into the direction of Royal Caribbean, so that's on my list. But Dan, if you had to choose between Royal Caribbean and Carnival, to close us out, what would be your top, both as an investor and as a traveler?

Kline: As an investor, I like what Royal has done from a marketing point of view a little bit better. I think they've staked out a very unique place as fun for the whole family. Whereas Carnival has a vague branding. As a casino patron, Royal paints it as very glitzy, even though they're not, they're $10 a hand blackjack tables. Carnival's casino mailing is like a caricature of an old lady. She sort of looks like the Shoebox Greetings old lady. I don't know who that's appealing to. If I was that age, I wouldn't want to be depicted as a caricature, but also, that's not very appealing to me as a 45 year old.

In terms of the actual cruise experience, I enjoy them both. Carnival has, I would say, slightly better entertainment in terms of the nightly major shows. They also have stand-alone comedy clubs, which I find very enjoyable. Royal, on the other hand, has wonderful smaller musicians. For example, in their British pub concept, there's usually a guitarist doing quiet covers. Sam, my guitarist friend, on The Navigator, the last ship I was on a couple of times, attracted a following. It was different than being in the big venue. They often have a funny pianist. Whereas Carnival is more on the bigger experiences. But they're very comparable. I would say it's the private island for Royal that tips it. The food is maybe a tad better on Royal in the dining room. Again, both are pretty good values. You do want to think about destination. If it's important to you to go to European sightseeing, well, that's very different than going on Caribbean or Mexican island stops, which are much more beach days or, as I said before, a collection of duty-free shops and chain restaurants.

It's not really close from an investment point. From an investment point, I like what Royal is doing better. From a travel point, it tips toward Royal, and I won't pretend that isn't it influenced by the fact that Royal has been throwing a lot of free stuff my way because I gamble, because I live in Florida. So maybe that has biased me just the tiniest of bits.

Jones: Maybe just a little bit, Dan.

Daniel B. Kline has no position in any of the stocks mentioned. Shannon Jones owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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