Royal Caribbean - Private Resorts (Part 2)

Earlier this year we wrote a previous post on Royal Caribbean’s current private island – Perfect Day at CocoCay.  This topic is worth revisiting because the three major ocean cruise lines (CCL, RCL, NCLH) are working on meaningful new investments in their private resort portfolios.  We think these private destinations are game-changing for the cruise industry, allowing the sector to attract more fun-seeking, beach-going vacationers with these amazing destinations.

Let’s look at a sample of what they’ve got coming.

Carnival is going to open Celebration Key in summer 2025. 

This multi-phase, $600 million project will be able to welcome nearly 4 million guests annually by 2028. 

Norwegian Cruise Lines is spending $150 million to build a two-ship pier on its existing private island, Great Stirrup Cay.

The biggest investor in private destinations – by far – is Royal Caribbean.  They have several projects in the pipeline:

1. Royal Beach Club at Paradise Island (Bahamas)

2. Royal Beach Club at Lelepa (Vanuatu)

3. Royal Beach Club at Cozumel (Mexico)

4. Perfect Day Mexico

And possibly more. 

These projects take many years to design, approve, and develop.  They are significant investments, but they also offer significant returns.  This post will share some of our thoughts and analysis on these opportunities. 

Excellent Returns on Investment

The major cruise companies have held a collection of private islands for decades, but it wasn’t until recently that these became a huge draw for guests.  Most of the private islands offer simple island amenities – a beach with chairs, maybe some snorkeling, maybe some light activities, etc. 

These destinations are getting a major facelift and upgrade.  They are coming in different varieties, but they include but are not limited to:

• Rentable cabanas

• Adult-only areas and beach clubs

• Pools

• Activities like water parks, ziplines, etc.

• Premium dining

We are going to zoom in on RCL for this post because they have more live data. 

First, let’s revisit some of the financial details that we learned from Perfect Day at CocoCay.  RCL has told us that:

1. Guests that visit Perfect Day at CocoCay spend an average of $100-150 per day.

2. Itineraries that visit CocoCay generate a 10-20% premium for the whole itinerary. 

We’ve refined some of our estimates over time to triangulate on the returns from these projects.  We lay out the details that we know today and some that are estimates (red) that have yet to be confirmed. 

Source: Recurve Capital LLC Estimates

 We can see some pretty incredible returns at the bottom of this spreadsheet.  Each has over 100% return on total investment costs (incremental gross profit vs. total investment).  However, there are some caveats to this:

1. Perfect Day at CocoCay may have delivered exceptional yield improvements because it was the first of its kind.  Future developments might not garner the same premiums. 

2. Some of these itineraries will be stitched together and may not generate compounded benefits as this would suggest.  For example, perhaps RCL will offer “Royal Beach Club” itineraries which visit CocoCay (Hideaway Beach), Nassau (RBC Paradise Island), RBC Cozumel, and Perfect Day Mexico.  Stacking visits may not generate 30%, 45%, or 60% premiums. 

The opening and release of this resort capacity will allow RCL to attract about 10 million guests to its private Caribbean destinations annually (and more after future expansions).  The project in Vanuatu suggests there could be additional private destinations in other high-volume parts of the world where experiences and relaxation and fun activities – not cities – are the main attractions.  There is chatter that RCL will develop something in Haiti, but given the instability there, we’ll have to wait and see.

These private destinations are disciplined capital investments that accomplish multiple goals simultaneously:

(1) Most importantly, they improve the NPS of their itineraries which broadens the appeal of the brands and the region.  Nassau was one of the lowest-rated destinations, but the addition of Royal Beach Club will improve it.  Cozumel also is one of the lowest-rated destinations, and the Royal Beach Club there will improve it.  CocoCay before the Perfect Day redevelopment was a beach with some lounge chairs and basic food options; now it is the highest-rated destination in the Caribbean for RCL.  These are a beach-goer’s version of “Disneyland in the Caribbean,” featuring water sports, pool/beach-related activities, rentable cabanas, party areas, and more. 

The Caribbean used to be the region where old ships took passengers around the islands on cheap fares, especially during the non-peak periods for the industry.  Strategic investments combining these private destinations with highly rated new hardware have changed the earnings power of the Caribbean region. 

Caribbean cruises primarily address the neighboring drive-cruise markets, i.e. they source demand from customers living within a reasonable driving distance from major home ports along the gulf coast (e.g. Galveston, New Orleans, Tampa, Miami/Ft. Lauderdale, Orlando/Port Canaveral, etc.).  South Florida has been the epicenter of the cruising market for a long time, but Royal Caribbean has ambitions to grow other parts of the gulf coast with its investments in Perfect Day Mexico and Royal Beach Club Cozumel.  On the map below, we can see how the addition of the Mexican destinations offers accessibility to Galveston, New Orleans, and Tampa.  I apologize for the polygons.  Yellow polygons are shown to demonstrate the target ports that will travel to Cozumel (including Royal Beach Club) and Perfect Day Mexico.  Of course, longer itineraries from Miami or Port Canaveral may also visit those destinations.

Source: Recurve Capital LLC Estimates, Google Maps

 RCL claims the gulf coast markets offer the same demand opportunity (affordability x desirability) as the more mature Florida/Georgia drive-cruise markets, but currently run at half the penetration levels.  If RCL can bring appealing and unique “Disney-like” beach vacations at a great value to customers, it may be able to move the needle and benefit from long-term demand tailwinds as penetration rates converge (and thankfully, penetration in Florida continues to grow).

(2) The financial returns are outstanding, as noted above.  A ship like Icon of the Seas had a price tag of >$2 billion and direct ship debt of ~$1.6 billion at 3.5%, i.e. the “equity check” was about $400M.  That ship is said to generate a high-teens ROIC before corporate overhead.  18% = $360M of incremental gross profit, a 90% return on the equity check. 

RCL’s private destinations do not benefit from favorable ECA funding, but the return on the “equity check” is superior nonetheless. 

(3) Private destinations improve the demand for all ships in the region, including older ones.  Higher demand necessarily translates into higher pricing since all ships sail full.  That higher pricing enhances the returns on all those ships.  The cruise industry’s unique ability to move its hospitality assets around the world allows it to optimize fleet-wide returns.  The addition of more private destinations will boost revenue, margins, cash flow, and the financial ratios for the holding companies – especially RCL. 

(4) Private destinations expand cruise companies’ vertically integrated experiences to new levels.  This allows them to price, package, bundle, and promote in a more deeply integrated way.  Knowing they can bring millions of customers to a single destination allows these companies to invest in innovative attractions and amenities that otherwise might look risky to companies running similar assets without the guaranteed supply of customers every day.  This also applies to the attractions integrated into the ship experience, like Icon’s aqua theater.  Unique attractions generate customer excitement and expand the addressable market for the product.  It is no longer a vacation format just for Boomers.

Conclusion

Regular readers know that we at Recurve love to find vertically-integrated companies building new and unique capabilities that are disruptive to their end markets.  It may not be obvious to casual observers, but the cruise industry is bringing significant investment and innovation to the vacation market.  The old ways of thinking about the industry should be updated to accommodate for their demand-expanding efforts like their private resorts.  In a supply-constrained industry, excess demand generated by the industry flows through as higher pricing.  We see many years of above-average pricing trends – especially for RCL – as new innovations are released into the vacation market.