When CEO Jason Liberty discusses Royal Caribbean Group’s competition, he doesn’t mention Carnival Corp., the company’s bigger rival. Instead, the CEO namechecks Orlando and Las Vegas.

That’s because the CEO’s strategy is to steer the Royal Caribbean Group toward competing with premium land-based resorts.

“We spend almost no time thinking about our cruise competitors,” Liberty told Skift. “We see ourselves as an experience company. We compete directly with places like Orlando and Las Vegas. We compete with Taylor Swift concerts.”

In other words, Liberty is positioning the world’s second largest cruise operator as a provider of Instagrammable vacation activities that happen to take place at sea.

Liberty is implementing a strategy that challenges long-held assumptions about the performance ceiling of the cruise industry. But not everyone is on board.

“There is a perception that (the company) is near the top of the mountain in terms of pricing, market share and margin,” Deutsche Bank analyst Chris Woronka wrote in a report this year.

Liberty told Skift that the skeptics have been proven wrong before. During the pandemic, some doubters questioned whether consumers would ever cruise again.

“Today the propensity to cruise is much, much higher than it was before Covid,” said Liberty, who steered the company through Covid as CFO before becoming CEO in 2022.

More pricing

The latest numbers are strong.

• The company’s ships run at 98% occupancy.

• The group predicts its net return – a key metric for the industry – will be almost 11% this year. (The net return is the money left over per available passenger cruise day after variable expenses, such as commissions to travel agents.)

Over the past decade, Royal Caribbean has become more cost-effective by building larger ships. While cruise vacations historically often sold at roughly a one-third discount to land-based options, that price gap has narrowed.

Over time, Royal Caribbean has packed more people onto ships, reducing costs per passenger, while travelers have spent more per trip, increasing profit margins. It now believes its offering is comparable to land-based resorts but around 20% cheaper, which should help it continue to attract new customers.

“Some ships, such as the new Icon of the Seas, are already achieving price levels in line with the exclusive resort options at Disney World,” wrote William Blair analysts Sharon Zackfia and Zach Riddle.

Larger ships also provide opportunities to charge more for more features and amenities. “When you talk to the consumer, they really look at the experiences we deliver very much on par with land-based (leisure offerings),” Liberty said.

Liberty said Royal Caribbean has done away with dated stereotypes about cruise ships being filled with retirees or people looking for discounted travel. About half of Royal Caribbean’s guests are now millennials or younger — a demographic that never saw “The Love Boat” in the 1970s.

The company has also expanded its guest acquisition to wealthier demographics:

• Royal Caribbean brand: $125,000 median household income
• Celebrity cruises: $150,000 median household income
• Silversea: $250,000-$500,000 household income range

“Wealth Transfer”

Liberty noted a broader consumer shift from buying things to experiences. He also cited a “flight to quality,” where financially resilient consumers pay for reliable premium experiences.

Meanwhile, wealthy Baby Boomers are covering the cost of vacations for extended families through what Liberty calls “active wealth transfer.” The idea is to put the money into the family now rather than having them wait for an inheritance.

This trend is particularly strong in the company’s Royal Caribbean brand, effectively creating a pipeline of future customers while maintaining Boomer business.

Side ventures on shorter cruises

Royal Caribbean doesn’t just keep building bigger and bigger ships. It also deploys smaller vessels to appeal to new customer groups and suit smaller alternative ports.

An example: The company’s deployment of a smaller Utopia vessel signals an exciting strategic side venture. It uses Utopia on new 3-to-4-day Caribbean itineraries instead of traditional week-long itineraries. The company sees shorter cruises as an “on-ramp” to attract first-time cruisers with only a long weekend to spare, especially younger travelers and people in underpenetrated markets like Texas.

For shorter weekend cruises, the increase in telecommuting has emerged as an unexpected tailwind. In an amusing detail, Liberty said his company has seen increased use of its Starlink internet service for telecommuting on Fridays and Mondays – effectively extending holiday periods for professionals with flexible arrangements.

Making private destinations

While short cruises have historically yielded lower returns, the company is betting that new destinations could change that math. Royal Caribbean creates “private destinations” – islands and ports that the operator fully operates.

These controlled environments allow Royal Caribbean to capture more customer spend while maintaining greater quality control over guest experiences.

Royal Caribbean opened its first private destination in 2019. “Perfect Day at CocoCay has been a game changer,” said Liberty. It will receive 3.2 million guests this year.

The strategy addresses multiple priorities at once: It attracts younger travelers with tighter budgets, drives pricing and creates barriers to entry that generic beach destinations can’t match.

But in the cruise sector, the tide can turn quickly. Will Royal Caribbean maintain premium fares as competitors also improve their offerings? Carnival alone plans to spend $600 million on its own private destination.

Climate Change Considerations

Skeptics raise concerns about how environmental regulations could increase costs and hurt returns.

Liberty responded that Royal Caribbean has already met its carbon intensity reduction targets ahead of schedule, having retired 20 ships for environmental purposes.

Further retirements are expected as regulations tighten towards the end of this decade. But Liberty believes a steady pace of investment in more energy-efficient technology won’t escalate into ballooning costs.

Supply constraints as a strategic advantage

The industry has a history of overbuilding until yields burst. While Liberty emphasizes “moderate capacity growth,” the company is still adding expensive new vessels.

When asked about this, Liberty pointed to what he called natural industry constraints that prevent oversupply:

• Limited shipyard capacity to build more ships

• Environmental regulations forcing older ship retirements

These factors should keep industry-wide capacity growth at around 3% per year.

Liberty said this modest supply increase should help support “moderate yield growth” of roughly 3% to 5% per year. A 1% improvement in yield equates to approximately $120 million in revenue.

Overtourism X Factor

Some analysts wonder if cruise lines will reach a ceiling in the destinations they can serve. Local residents near popular cruise destinations, such as Venice and Juneau, Alaska, have recently protested cruise lines.

“When you figure out the concentration of tourists in these different places, the reality is it’s really not the cruise ships,” Liberty said. “It’s really Airbnb and Vrbo rentals.”

Still, Liberty acknowledged that some people perceive the big cruise ships to be to blame.

“So we’re diversifying the ports we go to,” he said. “The Royal Caribbean brand alone has 100 different projects underway to diversify, and the group is building private destinations.”

A central assumption in Liberty’s strategy is that consumers will remain willing to pay more for premium leisure travel than previously assumed for many years to come.

“We don’t think we’re anywhere near the top of the mountain,” Liberty said.