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Morningstar | Royal Caribbean Comments Allay Fears of Pricing Slowdown in 2019 as Brand Resonates With Consumers

Royal Caribbean's brands continue to drive repeat business, as the innovation and quality of its vacation products remain topnotch while offering a compelling value proposition to travelers. The oligopoly in which Royal operates (with Carnival and Norwegian) is amicable, and stable pricing should be supported by rational competition, as there has been a push to maintain pricing power across all the sizable operating peers in the group in recent years. A continued focus on pricing integrity, which avoids close-in discounting, could ensure the brand remains strong and ticket prices rise in the longer term, while the evolution of onboard offerings could spur incremental revenue growth. The audience that Royal Caribbean caters to remains relatively underpenetrated both domestically and abroad. Domestically, the baby boomer demographic will serve the cruise industry well as this population cohort retires and increases its allocated leisure time. This demographic will drive demand and create a modest disruption between local demand and the supply of berths over the next decade, which should allow Royal to maintain solid North American pricing ahead. Additionally, dedication to sourcing cruisers from international markets like Asia and Europe (with lower penetration) provides more significant demand potential ahead, which will also help Royal strategically deploy supply to better match demand globally. High satisfaction rates and percentage of repeat clients imply that reaching more deeply into these underserved population bases is imperative for Royal Caribbean's demand growth over the long term. Royal surpassed the goals of its Double-Double plan in 2017, increasing ROIC and doubling 2014 EPS via revenue growth, cost control, and capacity increases. Its 20/20 Vision plan calls for double-digit EPS by 2020, however, we expect Royal should earn $10.70 in 2020, handily surpassing this goal, helped by the addition of its majority stake in Silversea. Scale advantages, capital intensity, and scarcity in building inherent in the cruise industry continue to prevent new competitors from easily entering the market and provide Royal Caribbean with a narrow economic moat.