ROYAL CARIBBEAN CRUISES

SWOT Analysis

SWOT ANALYSIS

RCC is the second largest global operator of cruise ships and holds a market share of
about 35% in the oligopolistic North American cruise market. The company may face
a considerable decline in its earnings due to increasing fuel prices.

Strengths Weaknesses
Dominant business position Increasing expenses

Strong brand recognition Low efficiency

Consistent increase in revenues Inadequate presence in high growth European market

Opportunities Threats
Favorable demographic trends Weather conditions

Marketing alliances Severe competition

Improved cruise passenger traffic High fuel prices

Strengths

Dominant business position

RCC is the second largest global operator of cruise ships measured by capacity and
market capitalization. The company controls 35% of North American capacity. It has
29 cruise ships with about 60,000 berths. The company has a market capitalization of
$9.6 billion. The strong business position provides the company with a competitive
edge over its peers.

Strong brand recognition

The company enjoys strong brand recognition in the industry. Royal Caribbean
International was named Best Overall Cruise Line (by Travel Weekly), Best Large
Ship Design, Best Caribbean Itinerary, and Best Family Cruise in 2003. In the 2003
Condé Nast Readers’ Choice Awards, Celebrity Cruises was selected as the Best
Premium Brand in Industry. The company’s seven celebrity ships ranked among the
top nine in Best Large Ships category of Condé Nast Traveler awards. The company
owns strong brands and has cultivated a positive reputation among customers.

Consistent increase in revenues

Royal Caribbean Cruises

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SWOT Analysis

The company has witnessed a continuous increase in its revenues since 2000. Its
revenues increased at a compounded annual growth rate (CAGR) of 9.7% over the
period 2000-2003. Furthermore, RCC is expected to increase its revenues by 20.6%
in 2004. The company has consistently increased its revenues over the years amid
changing market conditions.

Weaknesses

Increasing expenses

The company has been experiencing an increase in expenses for the last three years.
Its total operating expenses increased at a CAGR of 10.9% over the period 2001-
2003. Its marketing, selling and administrative expenses increased 19.3% in 2003 as
compared to 2002. RCC experienced a CAGR of 10% in its total operating expenses
over the period 2001-2003. The disproportionate increase in expenses as compared
to revenues has reduced the company’s earnings.

Low efficiency

Efficiency, as measured by revenues per employee, is low for RCC ($125,177) as

compared to industry average ($191,956). Furthermore, the company’s net income
per employee was $13,457 as compared to industry average of $38,654. The
company lags behind its competitors in terms of efficiency.

Inadequate presence in high growth European market

Despite its strong market position, RCC does not have significant presence in higher-
growth European markets where its peers operate. The company lost its bid to buy
P&O Princess Cruises to its competitor Carnival Corporation in 2002. P&O Princess
Cruises has a significant market share in Europe. The company is at a disadvantage
to its competitors in terms of market share in the high growth European cruise market.

Opportunities

Favorable demographic trends

Leisure travel (and cruising in particular) is well positioned to benefit from favorable
demographic shifts. The overall population is estimated to increase by 23 million
through 2010 in the US (representing a 0.9% CAGR over the period 2004-2010). In
addition, the 82 million baby boomers are believed to generate higher levels of income
and spend more on recreation and leisure than any other population segment.
Consumers in the 45-64 years age category represent the fastest-growing segment of

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SWOT Analysis

the population through 2010 with a CAGR of 2.7%. This segment’s personal
consumption patterns also show a bias toward recreation and leisure. Demographic
trends favor the company’s growth in the coming years.

Marketing alliances

As the cruise ship industry continues to grow, there are increasing demands on cruise
lines to provide more varied onboard services and visit more exotic harbors.
Remodeled interiors and increased deck space are also required to keep ships
competitive. The company has several brand partnerships that enhance the quality of
its onboard services in terms of attracting customers. These brands include Johnny
Rockets, Ben & Jerry’s ice cream, Seattle’s Best Coffee and Cova Cafe Milano. There
is an immense potential for the company to grow its revenues from onboard services
through such marketing alliances.

Improved cruise passenger traffic

There has been a recovery in passenger traffic on cruise lines since 2003. Cruise
lines carried 2.3 million passengers on North American cruises in the first quarter of
2004, reflecting a 13.6% increase compared to the same period in 2003. Increased
consumer spending due to the economic recovery in the US is the main reason for
improved traffic on cruise ships. The company is well poised to benefit from these
favorable trends.

Threats

Weather conditions

The company operates in an industry which inherits risk of unfavorable weather

conditions. For instance, Florida experienced four major hurricanes in 2004
successively. Such unfavorable events could force the company to delay or change its
schedules or sometimes cancel its journeys. The company’s business is considerably
exposed to weather conditions.

Severe competition

RCC operates in the vacation market and cruising is one of the many alternatives for
people choosing a vacation. The company competes not only with other cruise lines,
but also other vacation operators which provide leisure options including hotels,
resorts and package holidays and tours. RCC faces significant competition from
players with greater resources. The 2003 merger of RCC’s close competitors,
Carnival Corporation and P&O Princess Cruises created a formidible opponent. The

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SWOT Analysis

combined companies have a wide portfolio of cruise brands and stronger financial
flexibility and greater access to capital markets than each previously had individualy.
Such factors further intensify competition for the company within the cruise vacation
market.

High fuel prices

Global oil prices are at high levels (more than $55 per barrel in October 2004) and are
expected to rise further. Oil prices have increased by about 60% since the beginning
of 2004. RCC uses approximately 7.5 million barrels of oil each year, which implies
$50-60 million (estimated) of extra costs to the company if oil prices stay at such high
levels. Increasing fuel prices pose a significant threat to the company’s margins if the
company is not able to pass on these higher costs to its consumers due to intense
competition in the industry.

Royal Caribbean Cruises

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