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Royal Caribbean: Surviving the Economic Headwinds on the High Seas

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Thanksgiving has come and gone and black Friday is here, but higher prices consumers have paid for gas and air travel to visit family and friends are not likely to go anywhere fast.

Airfare prices are up roughly 7% this Thanksgiving compared to last year, according to Hotwire.com President Clem Bason due to a lower sales volume as a result of the stymied economy. As for Christmas air travel, those prices are expected to jump to 5-10% above 2010 levels. Meanwhile, airlines have cut back on the number of flights offered, translating into a more crowded traveling experience and more delays.

The average price of gas is down a bit from the beginning of this year to $3.32, according to AAA's Daily Fuel Gauge. But prices are up $0.45 from the same time last year.

Surprisingly these higher travel costs have not prevented people from getting out of town. This Thanksgiving roughly 45 million Americans were expected to take to the road, air or rail, reports the WSJ. That's the highest number since the beginning of the Great Recession, which began in 2007.

Ahead of the busy travel season, The Daily Ticker caught up with chairman and CEO of Royal Caribbean Richard Fain on Celebrity Cruises newest fleet member, Celebrity Silhouette. Even in these tough economic times, the company has been able to maintain growth and solid bookings.

In the most recent quarter Royal Caribbean beat analysts expectations and reported a 14% rise in net income year-over-year. Ticket sales increased to $1.73 billion from $1.52 billion and onboard revenue sales rose $47.6 million to $587.7 million.

Fain tells us that the outlook for 2012 bookings remains "strong." But the company lowered earning expectations for the rest of this year due to fuel costs and the strengthening dollar.

Surviving Economic Headwinds on the High Seas

So what's the key to their success?

"It is the tremendous product that we offer at a price that almost everybody can afford. It is so much better value than any other vacation," says Fain, who has headed up the company since 1988 and spent more than 25 years in the shipping industry. "We can offer that value and still make money because we have built these ships to be efficient…and because we have a crew who work incredibly hard…to provide the best cruise vacations is what sells the cruise and that's what allows us to continue to be successful even in this current economic environment."

But like most companies today, Royal Caribbean does face a handful of economic headwinds, including government uncertainty, foreign exchange rates, high unemployment and higher prices for food and fuel. (See: D.C.'s Partisan 'Ping-Pong' Game Hurts Consumers, Business: Royal Caribbean CEO)

"We are not counting on much in the way of tailwinds from economic growth in fact we are really expecting to be facing headwinds and we are gearing our business so we can be successful while facing those headwinds," Fain says.

To deal with oil price fluctuations in particular the company has an elaborate hedging strategy and has also outfitted a number of its Celebrity ships with solar panels, energy-efficient lighting and glass and is now using hull design technology to make some of their ships more efficient.

Celebrity Solstice was the industry's first ship to use solar energy and it outfitted with the capacity to generate enough power to operate approximately 7,000 LED lights. Today four of the Celebrity cruise ships have solar technology installed on them, including Celebrity Silhouette.

The Future of Cruising: Domestic and National Growth

Fain remains cautious in making predictions about the future in today's political and economic environment. On the Q3 earnings call at the end of October, he said the following:

"This is the point in which we would normally say, let's look forward and begin to make predictions about 2012. However, no management can witness the political stalemate on both sides of the Atlantic or the deterioration of consumer confidence in spending without being concerned about how those factors will develop over the coming months and year," he said. "So far, we've seen surprisingly little slowdown due to those pressures. Some impact is already being felt, but not at the level one would expect based on the economic statistics or the media coverage. But all this makes us more cautious than usual in making predictions about 2012."

Despite his guarded words on specific expectations for next year, he is optimistic about the opportunity for growth.

"We are still a relatively young industry," says Fain, "In the United States, for example, less than 20% of Americans have ever tried a cruise and people who do try it, love it."

But the potential for growth is not limited to just the U.S., the cruise industry has huge potential to grow overseas in Europe, Asia and South America. If fact, Fain tells us that , "by next year more than half of our cruise passengers will come from outside the U.S."

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