Luxury Hotel Moguls Plan To Launch Cruise Ship Companies

During its maiden voyage from Barcelona in October, the Ritz-Carlton yacht did not feature a Broadway show, mini golf, or video arcades. It was instead jazz musicians who entertained the guests on board, as well as an art collection on board, and a shop selling Birkin handbags that cost $30,000 each. 

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Welcoming you to the world of luxury cruising.

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Marriott International Inc., the world's largest hotel group and owner of the Ritz-Carlton brand is partnering with a new wave of high-end cruise operators targeting the wealthy in an effort to enter the luxury cruising market. In spite of the fact that existing operators are struggling to repay debts incurred during Covid, and room occupancy levels are below pre-pandemic levels, new entrants are trying to take a bite out of the premium market as well. 

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As part of a venture with Cruise Saudi, a new operator owned by Saudi Arabia's Public Investment Fund, Aman Resorts, owned by real estate developer Vladislav Doronin, is due to launch in 2025. Bill Gates and Prince Alwaleed bin Talal, the billionaires who own and operate the Four Seasons, are also planning to introduce their own yachts in the near future.

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“There are 95 residential-style suites on board the first vessel in Four Seasons' future fleet that will cost $4.2 million to build each, the cost of building the first vessel in our fleet set to sail in 2025,” said Larry Pimentel, who has been appointed to lead Four Seasons' expansion into this industry. The rooms will be equipped with floor-to-ceiling windows, a terrace deck, and, according to the company, nearly 50% more living space per guest than rival hotels. 

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By offering cruises, hotel operators increase the number of places where their existing customers can use their loyalty points, which encourages them to spend more with them in the future.

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“Capturing hearts, minds, and wallets is a key component of the hospitality and leisure sector, which is one of PwC's key practice areas,” says Jeanelle Johnson, a partner at PwC. 

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Italian Billionaire

A number of industry veterans have taken notice of the new entrants into the market. The billionaire cruise magnate Manfredi Lefebvre, who is often spotted puffing on a chunky cigar, sold out of a luxury cruise operator five years ago because he was unable to secure the same financing conditions as the big operators. 

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After acquiring two Crystal Cruise ships last year through A&K Travel Group and upgrading them to luxury vessels, he is now back in business.

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“It was discussed whether we might partner with a hotel brand, but we ultimately chose to go ahead on our own and to position ourselves at the top end of the luxury sector," he explained earlier this week. "Cruises cost 60% less than an equivalent hotel vacation, and they are even cheaper now than they used to be."

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Patrick Scholes, managing director of lodging and leisure at Truist Securities, says luxury travel is recovering faster than the wider market.

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"High-end luxury is a major driver in the cruise industry or in travel right now," he said. "Everyone is trying to catch up with that trend." 

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Carnival Corp.'s chief financial officer, David Bernstein, has been watching the new entrants with interest. It is accepted by him that there will be more competition for the higher-spending customers as a result of the changes. 

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“There will be some people who have stayed at a Four Seasons Hotel and cruised with us in the past who will say 'yes, I'll try this'.”

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Balance Sheets

A large number of cruise companies are struggling to restore their balance sheets as a result of the flu pandemic which forced them to turn to the credit markets in order to stay afloat. Carnival is among the incumbent cruise operators struggling to do so.

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It is estimated that Carnival, Royal Caribbean Cruises Ltd., and Norwegian Cruise Line Holdings Ltd. have about $74 billion of combined debt, including operating leases, as a result of the turmoil. Trade Algo Intelligence estimates that the three companies have added about $44 billion to their debt loads since the end of 2019.

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With the end of cheap money, those loans will eventually need to be refinanced.

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“As we focus on executing our proven formula of moderate yield growth and tight cost controls, we continue to reap the benefits of multiple actions we have taken in recent years to improve margins,” Naftali Holtz, Royal Caribbean chief financial officer, said.

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Expansion Impact

According to Bernstein, the firm's debt levels have caused the firm to slow its expansion over the past few years because of the debt levels. The operator of the shipyard was building three to four ships a year before the pandemic hit. In the current state of affairs, the company only has one ship due in 2025 and none due in 2026, which are moves he hopes will restore the company's credit rating and make it possible for the operator to continue refinancing its ships.

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It is only recently that cruise operators have begun to edge closer to pre-Covid occupancy levels on their ships. It is expected that Carnival will have 90% occupancy in the first quarter of this year, compared to only 54% in the first three months of 2022 and they expect that it will reach 100% by summer. 

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Since the recovery is proceeding slowly, the operators, for the time being at least, are left with less revenue available to them so they can chip away at the interest payments.

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‘Chip Away’

Interest rates have dampened their recovery plans because they were still very dependent on the capital markets to fill cash gaps, and they still are.

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A decline in consumer spending could cause profit metrics at Carnival to fall short of expectations, according to Marshall Wace, a hedge fund that made money on Carnival in December.

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It was recently reported that Karim Moussalem, who runs a long/short equity strategy at Selwood Asset Management, is shorting the company.

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Several factors have combined to create a very problematic situation for the company: a growing consumer base, a stretched balance sheet, and a lack of hedging when it comes to oil prices, which I believe will be a huge problem in 2023, according to the manager of the $100 million fund. Since April, the fund has gained about 15.6%.

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As a response, the operator said that it had consistently demonstrated its resilience over the years and that people are now prioritizing experiences over things in terms of spending their money. A statement released by the company stated that it sees a very bright future for the company.

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Carnival offers a variety of options. Last summer, there were rumors that the operator would sell off a brand. 

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"Somebody called us and said they were interested, so we listened to what they had to say," Bernstein explained. “It is something we are open to, we think about it, but nobody is knocking on the door looking to buy our brand right now." 

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The ability to establish a reputation as a hotel operator, on the other hand, is a major advantage that hotel operators enjoy when they enter the industry. Moreover, they are able to tap into stronger direct sales channels from regular guests in order to help fill the boats to a greater extent if they have a stronger approach to direct sales.

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Marriott Chief Executive Officer Tony Capuano told analysts that about two-thirds of the bookings on the Ritz-Carlton cruise came this way, which was many times above what most cruise companies charge for their cruises, according to Marriott Chief Executive Officer Capuano.

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Carnival's CEO Bernstein is optimistic about the Four Seasons or Ritz-Carlton's foray into cruises, hoping to attract more future customers.

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“It is also possible that they may also say that cruising is an excellent way of traveling if they have a good time. Next time I may take my kids and grandkids along with me on a different cruise line, and perhaps the Four Seasons and Ritz-Carlton may not be the right places for me to stay."