Speed and efficiency rule every aspect of modern life. With so much information online, anyone can plan a vacation and fly to any destination with an itinerary that matches their interests, schedule, and budget. With the commoditization of air travel, the destination matters far more than the journey.
People in first class share the same sentiment as people in economy - everyone wants to maximize time at the destination and minimize the time spent getting there. The travel industry has adjusted to this change as resorts, tour guides, agencies, hotels, and even airlines who now compete on how fast they can get you to where you want to go. Yet there remains one business who continues to insist that the journey is just as important as the destination.
That is the cruise ship. Maritime travel is a difficult sell in the 21st century: a flight from New York to Barcelona takes 8 hours whereas the same route by ship would be 8-10 days. The advantages of air travel in efficiency and speed are so significant that cruises know they can’t rely on ocean views to get customers.
As a result, cruises are more than just floating hotels that serve food. To reduce conflict with airlines, cruises strategically specialize in routes to remote tropical destinations that fit the fantasy of sea travel like the Carribean, Bahamas, South Pacific, and Ibiza. They also offer just about every recreational activity on planet earth to not just help pass the time, but to make the journey so excessively stimulating that passengers have no excuse to be bored.
Cruise ships these days boast restaurants, bars, bowling alleys, water parks, Broadway musicals, basketball courts, mini-golf, comedy shows, waterfalls, swimming pools, rock climbing, ice skating, casinos, movie theaters, go-karts, spas, nightclubs, laser tag, and arcades. Throw in unlimited drinks where adults can get hammered every morning and bottomless French fries and endless pizza that kids can gorge on every night in a transient, low-stakes environment, it makes sense why cruises lean on spectacle and excess for mainstream appeal. Beyond the on-board extravaganza, cruises are traditionally most popular with older travelers.
Over 50% of cruise passengers every year are between the ages of 50-70 plus. Elderly retirees not only have the time and money, but also value the low-stress and convenience that cruises uniquely provide. On a cruise, you get to visit many destinations and countries in one trip.
You don’t need to deal with repacking luggage, checking into different hotels, and commuting to airports. You get a private room to call home for the entire trip and the boat serves as a one-stop-shop for everything that you would need - dining, exercising, lounging, shopping, and entertaining. When you get to your destination, you get some time to explore on your own but everything off-shore can and will be arranged if you don’t want to plan anything.
Thanks to James Cameron, people are familiar with cruises and have a solid baseline for what the experience would be like, short of crashing into an iceberg. Yet despite high awareness and nearly 3 decades after the release of Titanic, cruises remain a niche market with low penetration. In 2019, the airline industry carried 4.
5 billion passengers on 42 million flights. In comparison, there were 29 million cruise passengers which was a record-high for the industry. Over 50% of passengers who ride cruises every year are Americans.
Even if we add up all the passengers that come from Asia, Europe, South America, and the Middle East, the rest of the world combined doesn’t match the volume of customers from North America. By these numbers, cruises are very much an American phenomenon - but even then, it’s reported that only a third of Americans have ever gone on a cruise. Industry insiders promote these stats every year stating that cruises are a uniquely fast-developing, underpenetrated market with significant potential.
The collective belief is that continued investment in on-board innovation in food, rooms, entertainment that no one would think possible on a ship like roller coasters, ice skating, go-karts, water parks, and 4D movie theaters will help move the needle, bring in more passengers, and strengthen the value prop for travelers of all ages - not just the elderly. The cruise industry is an oligopoly run by 3 players - Royal Caribbean, Carnival, and Norwegian Cruise Line. In this episode, we’ll cover the business of cruises and dive into these 3 companies who each have their own strategy and go after travelers at very different price points.
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Go to aura. com/MBA to protect you and your family online. Out of the three major players - Carnival is the most commercially successful.
Before the pandemic, Carnival grossed $20. 8B in 2019, which was over twice the amount of revenue of Royal Caribbean and over three times as much money as Norwegian Cruise Lines. Throughout the pandemic, Carnival has maintained its lead with $12B in sales versus Royal Caribbean's $8B and Norwegian's $4B.
Carnival is the largest cruise company in the world but its success is not just a case of having more ships than its competition. Cruises were historically positioned like the Titanic as luxury voyages for sophisticated travelers. Carnival was the first company to throw that script out the window, undercut its competition, optimize for volume, and design for simple affordable fun over high-end excess.
Rather than appealing to the elderly traveler, Carnival targets younger demographics. The company has wielded hip marketing for decades to reshape the perception of cruises from serious, classy, posh multi-week commitments into simple, casual, rowdy, affordable fun for a few days. With taglines like “The Fun Ships” and “Fun for All”, Carnival’s message is to not take cruises so seriously.
The company will happily bundle food and entertainment into your ticket so you walk away with the best deal and Carnival’s reputation holds as the party boat with the lowest prices in the industry. Carnival’s volume and value approach has been successful as the company carries the most passengers with over 12M passengers every year compared to Royal Caribbean's 6M and Norwegian's 2M. Cruises make money in two ways - the first and primary revenue stream is ticket sales.
Cruise tickets aren’t charged by entry, rather, they’re priced and presented like hotels where passengers pay a nightly rate for a specific room that lasts for the entirety of their trip. The rate depends on room type - if it’s a suite, if it has a balcony, if it’s on the upper deck, what section of the boat it’s on with middle being the most desirable along with the number of guests, length of the trip, and destination. The ticket locks down your room, grants access to certain amenities, and is the biggest cost in any cruise trip.
The second main income stream is the sale of onboard goods and services. Cruise ships operate like airports, concerts, nightclubs, and movie theaters as venues where customers have no choice but to pay ridiculous markups for basic goods. The same way that flight passengers, ravers, and moviegoers are stuck paying $4-6 for soda or $8-10 for popcorn, cruise ships do the same with a significantly broader range of products over a longer period of time and on customers with deeper pockets and greater appetite to spend.
While tickets include access to most amenities and entertainment, cruise ships separately sell beverages, essentials, Internet, spas, merchandise, photo shoots, laundry services, casino credits, arcades tokens, spirits, diamonds, candy, beauty products, watches, shore excursions, jewelry, and art. While theaters, concerts, airports, and nightclubs can only monetize for the few hours in which their guests remain in their venues, cruise passengers are stuck on their boats for days or weeks at a time. This enables cruise ships to continuously monetize passengers around the clock for anything and everything.
Once you’re onboard, the goal is to get you to keep spending. If you don’t like the price for a drink, Wi-Fi, sunscreen, or sunglasses, well, too bad. What’s on the ship is your only option until the boat arrives at its destination.
It’s an interesting extreme compared to airports, which generally maintain some facade of competition with multiple vendors. If you don’t like what’s being sold at one place, you can always try a different store or terminal. In comparison, cruise companies own and operate nearly every single store in their ships - not just the ones selling drinks and souvenirs, but also the casinos, gift shops, candy stores, laundromats, spas, jewelry stores, spas, restaurants, and even shore excursions.
This way, the cruise directly captures every dollar on every on-board sale in full for themselves with no competition. The few shops on cruise ships that are run by external vendors must pay up a percentage of their gross sales - so the cruise company still nets in every transaction. The house always wins and that is very much true in the world of cruises with high markups, broad cross-sell opportunities, and on-board monopolies.
Carnival’s value strategy means that they include most of the food and amenities into their tickets. Carnival passengers can feast on unlimited tacos, burritos, chicken sandwiches, noodles, stir-fry, barbeque, soft-serve, pasta, pizza, fries, and burgers from the mayor of Flavortown all-day, every day on the boat for no added cost. There are some la carte options but for budget-conscious travelers, the free inclusion of copious and endless comfort food in an already-cheap ticket makes Carnival an irresistible deal.
While food is included, beverages are not. If you want soda, beer, juice, cocktails, or wine by the glass, you’ll have to pay separately or buy packages - unlimited soda and juice at $10 a day or unlimited alcohol at $60 a day. And you don’t get to choose which days you want unlimited drinks - despite being presented as daily rates, these packages are all-or-nothing expenses that are charged in one lump sum based on the total number of days in a trip.
Now that we’ve covered the two ways in which cruises make money - tickets and sales of goods & services onboard, we can understand how Carnival’s strategy fuels its commercial performance. Carnival’s revenue has exceeded over $10B every year from 2010 to 2019. Passenger tickets are the largest income stream and make up the majority of Carnival’s revenue, accounting for nearly 75% of the company’s revenue every year since 2010.
Because of the company’s value orientation and generous bundling, there is less passenger demand for onboard goods and services. Sales of onboard goods and services are still a respectable income stream, having grossed nearly $5B every year from 2010 to 2019 and representing on average 33% of Carnival’s annual revenue. Between 2010 and 2019, the average Carnival passenger spent a total of $1,529 per trip - so that’s the ticket and onboard purchases combined.
The total spend of Carnival passengers has remained consistent year over year in the past 13 years even during the pandemic. We can see just how much Carnival values volume over margin. The average cost of a Carnival trip in 2022 was $1580, which is only a dollar less than the cost of a trip in 2010.
For context, $1 in 2010 was worth $1. 34 in 2022 - so despite a 34% decrease in dollar value, Carnival is charging the same prices today as it was 12 years ago. The interesting story is that the average passenger spend on Carnival was going down even before the pandemic.
In the period between 2010 and 2017 where spend per passenger dropped from $1,581 to $1,443, Carnival carried more than 3M new customers. The number of passengers on Carnival cruises grew from 9. 1 million in 2010 to 12.
4 million by 2017. The average ticket cost steadily decreased from $1,211 in 2010 to $1,096 by 2019. Onboard spend remained consistent for nearly 8 years, hovering at $350 per passenger.
Every $1 that a passenger spent on a Carnival ticket translated to an additional $30 cents of spend onboard. If lowering prices while bundling food means a better chance of bringing in new passengers and getting existing ones to come back, Carnival will happily do so. Cruise ships are built from scratch and are customized to each company.
If you want ice-skating rinks, basketball courts, rooms here, restaurants there, and pools over there - these are all things that must be built in during the construction of the ship and cannot be tacked on after. New cruise ships cost roughly a billion dollars, over twice the cost of the new Boeing 747. And while a Boeing 747 can be built in 2 months, a cruise ship can take anywhere from 3-5 years from order to completion.
Cruises are so niche and so prohibitively expensive that Carnival’s fleet of 26 ships makes it the current industry leader at scale. Carnival also offers the most homeports in the United States, which reinforces appeal with budget-conscious travelers. Carnival passengers can drive to a port of departure nearby rather than shelling out extra for a separate plane ticket just to get on the boat.
Despite low passenger volumes and costly assets, cruise companies surprisingly enjoy great bottom lines. Carnival’s annual operating margin, which one might predict to be in the single digits as a value play in a niche market, hovers in the mid-teens at 15%. A 15% annual operating margin is higher than that of American Airlines, nearly double of United Airlines, and on par with the most valuable airline in the world in Delta.
If Carnival is simple, affordable, casual fun, Norwegian Cruise Lines is the opposite in elegance and sophistication at a premium. NCL believes that marketing, not cost, should drive demand. If customers want a good deal, then they should book early - but prices should always go up, not down.
NCL ships are designed with a modern and reserved aesthetic that contrasts from the rowdy backyard pool party vibe of Carnival. Norwegian cruises are more general-purpose with a broader range of dining and entertainment options to appease all generations. For the young, NCL provides go-kart racing, teen lounges, dance parties, laser tag, and water slides.
For the older crowd, they offer musicals, spas, casinos, live music, acrobatics, and long outdoor promenades that stretch up to a quarter of a mile to enjoy the ocean view from. Despite leaning upscale, NCL makes every effort to message that they’re not pretentious or uptight. There’s only so much space on a ship.
The average cruise carries between 2,000 to 4,000 passengers and the crew alone is another 500-1000 bodies. If all 3,000 passengers were to eat dinner or attend the same show at the same time, the traffic and crowds would be catastrophic. Cruise companies avoid this very problem by controlling passenger flow through time slots and seat assignments.
NCL throws this tradition out the window with “freestyle cruising” - where their passengers can dine whenever and wherever they want with no dress code. While Carnival centers on basic comfort foods, Norwegian puts greater emphasis on dining innovation to drive margin and onboard spend over volume and value. NCL ships feature a diverse range of specialty foods and restaurants that passengers would not find on other cruises - grilled ribeye and truffle fries, sea bass and ratatouille, veal shank and risotto, Brazilian barbeque, sushi, lobster, crab, tapas, teppanyaki, and gelato.
These restaurants are not bundled into tickets and are not the standard grab-and-go or endless buffets. Each dish is made and charged to order and Norwegian offers no packages for unlimited dining. The dining package that passengers can purchase for their trip is a set of limited credits that values each meal at $30-50 per person, not including tip.
When it comes to accommodations, NCL’s rooms are not as spacious as Carnival’s. But Norwegian makes up for smaller room sizes with greater diversity. A single NCL ship has over 35 different types of rooms.
By offering so many room types, the company can sell tickets at a wide range of price points without relying on discounts and flash sales - from a barebones, 135-square foot, interior cabin with no windows for the budget solo traveler to a multi-room suite for a family that wants to splurge. To emphasize comfort and elegance, Norwegian also sells exclusivity and privacy at a price. The Haven is an exclusive area on NCL ships which have rooms and amenities sectioned off from the rest of the passengers.
There are only a few rooms available at the Haven and they’re more expensive - but travelers who choose to live at the Haven get to enjoy private pools, courtyards, lounges, bars, restaurants, hot tubs, and a personal butler. You get to stay away from the usual crowds, loud noises, and long lines with this smaller “cruise within a cruise” experience as regular passengers cannot enter The Haven. While NCL’s strategy is to lead with quality, the company knows it cannot cater exclusively to an upscale audience without offering some value - especially as cruises are still a niche activity.
Rather than matching Carnival’s low prices or giving away lots of food for free, Norwegian runs a promotion called “Free at Sea. ” Free at Sea enables the company to maintain higher ticket prices, deliberately complicates the shopping experience so travelers don’t just immediately settle on the cheapest option, and lets customers still feel like they’re getting a deal when they go with Norwegian. Anytime you book a NCL cruise, you get a lineup of free perks in Free Wi-Fi, Free Shore Excursions, Free Specialty Dining, and Free Unlimited Open Bar.
If we take a closer look at the fine print, the bundling is not as generous as the headline would suggest. Free Specialty Dining doesn’t mean you get to eat veal and lobster every night for free - rather, it just means 2 free meals for the duration of your trip. Once you’ve spent those credits, the only way to enjoy more would be to buy more meals or pay the bill.
The Free Wi-Fi only lasts for 150 minutes. The Free Shore Excursion is a one-time $50 coupon. The only perk that seems to live up its billing is the Free Unlimited Open Bar, but even then, it has limits.
If you order any drink over $15 during your trip, the difference is charged to your account. NCL has 17 ships in its fleet, making it the smallest player by capacity. With higher ticket prices and an upscale target market, Norwegian carries the fewest travelers out of the Big 3 and has seen the slowest growth in terms of passenger volume.
In 9 years where Carnival grew by over 3 million passengers, NCL grew by just 1. 3 million. While Carnival pushes costs down to drive volume, Norwegian has been pushing spend up in order to compensate for low volume - and the two strategies clearly work in their own ways.
The average total spend of a Norwegian passenger in a single trip grew by nearly 70% from $1,433 in 2010 to almost $2,400 by 2019. While the price of Carnival tickets went down by a hundred dollars, the price of a Norwegian ticket increased by over $600 per passenger. Norwegian follows the same high markups of basic onboard goods and services that Carnival does but to even greater levels.
A standard Wi-Fi package that supports audio and video streaming costs $20 a day on Carnival. On NCL, the exact same service and plan costs $40 a day. Carnival charges unlimited alcohol at $60 per day while the same package on NCL is charged at over $100 a day.
Even the go-karts are charged at $15 per ride per passenger. Since most things on Norwegian ships are not actually free, are not bundled in the ticket, have higher markups, and are charged per use, it’s no surprise that NCL boasts the highest onboard spend per passenger in the entire industry. The average Norwegian passenger spent $427 on purchases of onboard goods and services in 2010 and was spending over $700 by 2019.
Every dollar that a passenger spent on their ticket translated to 40 cents of additional revenue onboard. Sales of onboard goods and services have contributed on average 30% of Norweigan’s annual revenue and has grown from a $600M to a $2B revenue stream. Despite a modest increase in passenger volume, the continuous increase in prices and passenger spend have fueled NCL’s top-line growth.
The company tripled its overall revenue from $2B in 2010 to over $6B by 2019. The stronger margins also translate to better profits for Norwegian with an average annual operating margin of 17% and has reached as high as 20% on good years. In every niche, there is always room for someone to corner the high-end market.
In the case of Norwegian, there are clearly a sizable chunk of customers out there who value the specialty restaurants, onboard sophistication, and exclusivity enough to pay such a premium. Royal Caribbean is the last mass-market cruise line and the most well-known out of the Big 3. From a pricing standpoint, Royal Caribbean sits between Carnival and Norwegian - it’s not as expensive as NCL but also not as cheap as Carnival.
From a positioning standpoint, Royal Caribbean occupies the middle ground between upscale, modern, elegance and rowdy, cheap pool parties. The company’s priority has been on onboard innovation above all else and constantly pushing the envelope on entertainment. Royal Caribbean boasts amenities like the largest and deepest swimming pool at sea with 30-foot diving platforms, the biggest waterpark with headfirst slides, the tallest waterfall, the most elaborate water coaster, a 82-foot tall dome, and even a 40-foot long surf simulator.
The fun continues indoors, where Royal Caribbean ships are decked with bumper cars, escape rooms, skydiving simulators, carousels, bungee trampolines, and even a slide that drops you down 10 decks on top of all the conventional amenities. The live shows are not just the standard Broadway musicals and comedians, but also feature divers, aerialists, and synchronized swimmers. Royal Caribbean’s value prop is that while they don’t have the fancy dining of Norwegian or the affordability of Carnival, they’ll give you adventure, adrenaline, thrill, and excitement that no one else can.
This has helped Royal Caribbean establish a more vibrant atmosphere compared to other cruise lines as these amenities naturally attract thrill-seekers and more sociable travelers. Beyond the ships, Royal Caribbean's greatest success has been the development and construction of its own destination, CocoCay. The company has invested $250 million dollars to turn an island in the Bahamas into its own private resort to take passenger monetization to record levels.
As we covered earlier, cruise ships continuously monetize passengers for anything and everything when they’re on the boat - but when the ship docks, those same passengers are no longer physically available to be monetized once they disembark. The shore excursions are decent money but cruise lines really want to milk every single dollar possible from passengers. From a psychology standpoint, it makes sense that all passengers are generally more cost-conscious, more cost-aware when they’re on the boat.
No one wants to blow all their money on stuff onboard at sea and everyone saves up in order so they can go all-out at the destination. For Royal Caribbean, having their own private island and resort as the destination means that they don’t lose out on the greater earnings on land. CoCoCay is where the adventure and monetization reaches even greater heights with water parks, zip lines, pools, balloon rides, clubs, restaurants, shops, bungalows, and cabanas.
And of course, some of these are free and some are not. Because Royal Caribbean owns every part of this resort and land, including the sand and trees, the company can once again sell and charge anything it wants. While all cruises mark ups to the goods and services they sell onboard, those prices must remain in a reasonable range relative to its competition.
In the case of CoCoCay, there’s really no comparable. When a Royal Carribean cruise arrives at CoCoCay, passengers are essentially walking from one monopoly on water into an even more aggressive monopoly on land. For instance, Royal Caribbean charges between $1,500-4,000 just to rent a cabana for a day.
The rental cost of a cabana can be just as much, if not more, than the cost of the cruise itself. This is why there is no public pricing available for CoCoCay - prices for island amenities are only revealed upon booking and fluctuates daily. CoCoCay serves over 10,000 guests every day who are all brought to this single destination from various Royal Caribbean ships around the world, enabling true economies of scale for the company.
The company’s passenger volume sits in between Norwegian and Carnival as the company has grown from carrying 4. 5 million passengers in 2010 to 6. 5 million by 2019.
Spend on Royal Caribbean cruises is marginally higher than Carnival as total spend per passenger grew from $1,472 in 2010 to $1,671 by 2019. Ticket cost per passenger on Royal Caribbean average only $100 more than Carnival. Onboard spend is slightly higher on Royal Caribbean as the cruise line boasts a wider assortment of specialty restaurants like Johnny Rocket’s and fewer complimentary options.
While contributions from sales have hovered in the low 30% range for Carnival and Norwegian, Royal Carribean’s onboard sales have hovered in the high 30’s thanks to revenue generated from CoCoCay. The company’s top-line sits between its two rivals at $8-10B in annual revenue. With marginal differences in spend and pricing, Royal Caribbean's bottom line is in the same ballpark as Carnival with an average annual operating margin of 14%.
The final fascinating bit is how cruise companies keep their operating expenses low. As we touched on earlier, each single cruise ship requires a crew of 500-1,000 workers to keep everything running smoothly in sailing the boat, entertaining guests, cooking food, cleaning up, and running the attractions. To have a large workforce - tens of thousands of employees who must be fed, clothed, housed and are stuck on a boat away from home for months at a time, these workers must be well compensated.
The reality is that they are - just not by Western standards. Cruise payroll accounts for less than 25% of the total operating expenses across all three companies. In the various companies that we’ve covered over the past three seasons, labor costs in other industries are consistently 35% or higher.
The simple answer is offshoring. Royal Caribbean doesn’t have a single US-based employee on their ships. Instead, the vast majority of the shipboard workforce are people from the Philippines, Indonesia, and India.
These international workers, who make the artificial environment and manufactured magic of cruises come alive for passengers, are paid on average just $14,400 a year. On Carnival, the annual wage for a shipboard employee is $25,762. Norwegian, which emphasizes its greater service with smaller crew to passengers ratio, pays the highest at $26,125 per worker per year.
These labor costs are further offset by the automatic 18-20% daily gratuities that each cruise company charges each passenger based on their room type as a prepaid line item during booking. This doesn’t include the tips that are tacked on whenever a passenger uses an onboard service like ordering a drink, eating at a specialty restaurant, or getting a massage. Cruises are a fun business in not just how they monetize travelers, but also in the way these 3 big companies attempt to differentiate themselves from each other.
The reality is no moat lasts long in this industry. The only barrier is cost and each company is always trying to one-up each other and achieve differentiation in the most amusing and bombastic of ways. Upon seeing the success of CoCoCay, Norwegian and Carnival have started investing to transform their own islands into new, modern resorts.
The funny thing is all three of these companies have owned islands in the Bahamas since the 20th century, but two of them never bothered to develop such land until a third paved the way. It’s easy to poke fun at cruises from afar as big, lumbering, lifeless, artificial environments populated by seniors and Americans so hooked on consumption that they’re not satisfied riding roller coasters, watching musicals, eating mediocre food on land - they have to do it all on a big boat at sea in the middle of nowhere. But given that cruise profits are stronger than airlines, the strategies can be so diverse in such a niche market, and the conversion of passengers into cash cows, it’s clearly a business worth learning about and from.
It’ll be another decade before we’ll be able to tell who has won - but for now, it’s a three-headed race between low-end, value-oriented simplicity built on free food and cheap booze, mid-end extravagance and razzle dazzle, and high-end elegance and opulence.
