These billionaire luxury hotel owners plan to create cruise ship operators

By Luca Casiraghi, Olivia Raimonde and Sabah Meddings

(Bloomberg) – There was no Broadway show, miniature golf or arcades aboard the Ritz-Carlton yacht, which set sail from Barcelona on her maiden voyage in October. Guests were instead entertained by jazz musicians, an onboard art collection and a $30,000 Birkin handbag shop.

Welcome to the cruise for the rich.

The foray into luxury cruises by Marriott International Inc., the world’s largest hotel group and owner of the Ritz-Carlton, is part of a new wave of high-end operators targeting the wealthy. As existing operators struggle to pay their debts incurred during Covid and room occupancy remains below pre-pandemic levels, new entrants are looking to grab a slice of the premium market.

Aman Resorts, owned by real estate developer Vladislav Doronin, is slated to launch in 2025 in a joint venture with Cruise Saudi, a new operator owned by the Public Investment Fund of Saudi Arabia. Four Seasons, whose billionaire owners Bill Gates and Prince Al-Waleed bin Talal own yachts, also plans to showcase its offering.

“The first ship in our future fleet will set sail in 2025 with 95 residential-style suites at a construction cost of $4.2 million each,” said Larry Pimentel, who has been hired by Four Seasons to lead industry expansion . Rooms have floor-to-ceiling windows, patio decks, and, reportedly, nearly 50% more living space per guest than competing operators.

For hotel operators, offering cruises means existing customers have more places to spend their loyalty points – encouraging them to spend more on the company.

“It’s about winning hearts, minds and wallets,” said Jeanelle Johnson, Partner at PwC in Hospitality & Leisure.

Italian billionaire

The new additions have caught the attention of industry veterans. Billionaire cruise magnate Manfredi Lefebvre, who often puffs on a big cigar sold by a luxury company five years ago, was frustrated that he couldn’t secure the same loan terms as the bigger companies.

Now he’s back after buying two Crystal Cruise ships with A&K Travel Group last year, which are being upgraded into luxury ships.

“We considered partnering with a hotel brand, but we ultimately chose to proceed independently and position ourselves at the forefront of the luxury sector,” he said earlier this week. “Cruises cost 60% of a comparable hotel holiday, even less today”

Luxury travel is recovering faster than the broader market and is enticing for tour operators, according to Patrick Scholes, managing director of Loving and Leisure at Truist Securities.

“One of the biggest drivers in the cruise industry or in travel right now is upscale luxury,” he said. “Everyone is trying to get on board with this trend.”

David Bernstein, chief financial officer at Carnival Corp., has watched the new additions with intrigue. He accepts that there will be more competition for higher spending customers.

“I’m sure there will be some people who have traveled with us and also stayed at a Four Seasons hotel and will say, ‘Yes, I will try this product’.”

balance sheets

Carnival is among incumbent cruise lines struggling to restore their balance sheets after being forced to turn to credit markets to stay afloat during the pandemic.

The turmoil left Carnival, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. with debt totaling approximately $74 billion, including operating leases. The three companies have added about $44 billion to their debt burden since the end of 2019, according to a December analysis by Bloomberg Intelligence.

That will have to be refinanced at some point when the era of cheap money comes to an end.

“The benefit of several actions we have taken to improve margins over the past several years continue to show results as we focus on executing our proven formula of moderate revenue growth and strong cost controls,” said Naftali Holtz, Chief Financial Officer at RoyalCaribbean.

expansion effect

Over at Carnival, the debt has caused the company to slow its expansion, according to Bernstein. Before the pandemic, the operator was building three or four ships a year. Today it has just one ship, due in 2025, and none in 2026 — moves it hopes will restore the company’s creditworthiness and allow the operator to continue to refinance itself.

Cruise lines are just beginning to approach pre-Covid occupancy levels. Carnival expects 90% capacity utilization in the first quarter of this year, compared to just 54% in the first three months of 2022, and expects it to exceed 100% in the summer.

The slow pace of the recovery means operators have less revenue available to save on interest payments, at least for now.

‘chip gone’

Higher interest rates “really dampened their recovery plans because they were still, and still are, very heavily dependent on capital markets to fill liquidity gaps,” said Jody Lurie, credit analyst at Bloomberg Intelligence.

Hedge fund Marshall Wace, which made money from a short bet on Carnival in December, told investors that worsening consumer spending could cause the cruise line’s earnings metrics to come in below expectations.

Karim Moussalem, who runs a long/short equity strategy at Selwood Asset Management, is closing the company short.

It “has a very problematic combination of three things: consumers under pressure; balance sheets that remain very stretched; and no hedging in oil prices, which I think will be a big concern going into 2023,” said the money manager, whose $100 million fund launched in April and is up about 15.6% since then.

In response, the operator said it has consistently demonstrated its resilience and that people prioritize spending on experiences over things. “Our future looks very bright,” the statement said.

Carnival has options. Rumors circulated last summer that the operator was about to sell one of its brands.

“Someone called us and said they were interested, and we listened,” Bernstein said. “We’re open to it, we’re considering it, but nobody’s knocking on the door to buy a brand.”

In contrast, this level of awareness is one of the advantages that hoteliers have when entering the industry. Additionally, they often have stronger direct sales channels from regulars they can tap into to fill the boats.

On the Ritz-Carlton cruise, about two-thirds of bookings came this way, which was several times the rate at most cruise lines, according to Marriott chief executive officer Tony Capuano, told analysts.

Bernstein has chosen to be positive — hoping that the Four Seasons or the Ritz-Carlton will provide more future cruise customers for Carnival.

“When they’re having a great time, they might say, ‘Cruises are a wonderful way to travel. Maybe next time I’ll take a different cruise line and take my kids and grandkids, and the Four Seasons and the Ritz-Carlton might not be the way to go.

–With support from Nishant Kumar.

© 2023 Bloomberg LP

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