With new cruise ships, Disney looks to sea to boost growth
Cruise ship comparisons of the Disney Dream, Magic and the Royal Caribbean's Allure of the Seas. (Orlando Sentinel staff / January 1, 2011)
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The Disney Dream, a 130,000-ton ocean liner with room aboard for 4,000 passengers, is the first of two new cruise ships Disney is building at a combined cost of more than $1.8 billion. Together, the Dream and the Disney Fantasy — which will debut in spring 2012 — will increase the company's capacity at sea by nearly 150 percent.
Disney has big expectations for the cruise expansion, a business that has proven immensely profitable for the company since it launched its cruise line 12 years ago. Disney's two existing ships, the Magic and Wonder, have generated better returns than any of the company's recent theme-park investments; in some years, they have churned out higher profits than the Disneyland Resort in Anaheim, Calif.
Analysts at Goldman Sachs predict that, as it adds the new ships over the next two years, Disney Cruise Line will be responsible for a quarter of the overall profit growth in Disney's $10.8 billion-a-year parks-and-resorts division. Once the Dream and Fantasy are sailing from Port Canaveral, those analysts and others expect Disney's cruise revenue will reach $1 billion a year.
But to get there, Disney will have to navigate around a number of potential shoals.
The company will have to guard against erosion on its two existing ships as fans flock to the state-of-the-art Dream, which will feature such industry firsts as a "water coaster" that extends over the side of the ship and interior cabins outfitted with virtual portholes that provide real-time views of the sea. And it faces stiffening competition for family cruisers from larger operators who have begun outfitting ships with popular children's characters such as Dora the Explorer and Shrek.
Disney declined to make executives available for interviews for this report. But in a prepared statement, Walt Disney Parks and Resorts Chairman Tom Staggs said: "We're in a period of exciting growth at Disney Parks, and the expansion of Disney Cruise Line is a key component of our strategy. Adding two new ships allows us to take our special brand of family cruising to the next level while also providing the flexibility to offer Disney vacations in new markets and destinations."
Cruising has become a lucrative venture for Disney.
People both inside and outside the company say the first two ships, which cost an estimated $760 million combined and can carry approximately 2,600 passengers each, have far exceeded internal profit projections since launching in the late 1990s. Their performance contrasts sharply with big-ticket theme-park investments that Disney has made over the same period — such as Disney California Adventure in Anaheim, Walt Disney Studios at Disneyland Paris, and Hong Kong Disneyland — that have failed to meet expectations.
Among the reasons they have been so profitable: Disney's ships sail fuller and command higher prices than do other cruise ships. Because Disney carries so many families with children, its ships average three people per stateroom, according to analyst research, compared with two per cabin on other major cruise lines. And thanks to the combination of limited capacity and a globally recognized family-entertainment brand, Disney can charge more than other cruise lines. Prices for state rooms aboard the Dream are currently 78 percent higher than similar cabins on Carnival Cruise Line ships and 60 percent more than on Royal Caribbean International ships, according to Goldman Sachs.
Disney also would appear to have plenty of room to grow: Even after the Dream and Fantasy set sail, Disney will account for just 3 percent of North American cruising capacity, according to UBS Investment Research.
Experts expect the Dream to be an immediate hit. "Despite marketing costs, new cruise ships typically generate high margins at once, as they benefit from a novelty factor and more premium rooms," Goldman Sachs analyst James Mitchell wrote in a recent research note to clients.
Expanding the brand
But the appeal of the cruise business for Disney extends beyond bottom-line returns.
Disney Co. President and Chief Executive Officer Bob Iger has called the ships "global ambassadors" that can introduce the company's characters and brands to new markets, and seed demand for future theme-park visits or other company products. Executives have said sales of Disney Vacation Club time shares, for example, are particularly strong aboard the cruise ships.
And cruise ships, unlike theme parks, are mobile; if travelers stop booking certain itineraries, Disney can send the ship somewhere else. Already, Disney executives have suggested eventually sending ships to far-flung ports in Asia or in Hawaii, where the company will later this year open an 819-room hotel and time share.
Still, smooth sailing is by no means assured. Among the biggest challenges: Ensuring that the new ships do not cannibalize bookings from the older ones.
In hopes of blunting any erosion, Disney will use its new ships to sail the familiar three- to seven-day Caribbean voyages out of Port Canaveral while sending the older ones to new locations. Two days after the Dream arrives at Canaveral, the Wonder will depart for a new home on the U.S. West Coast, where it will offer sailings from the Mexican Riviera to Alaska. And Disney is widely expected to send the Magic to Europe permanently once the Fantasy arrives in Florida next year.
But the new markets, too, could prove troublesome. A potential red flag was raised earlier this year when Disney reported soft bookings for a series of European sailings aboard the Magic.
To make Europe work as a permanent home, experts say Disney will have to better market its cruises to European vacationers — rather than relying on North Americans traveling abroad — during the slower "shoulder seasons" that precede and follow the peak summer period.
Big boats, big competition
At the same time, larger cruise operators are making a bigger play for Disney's core, family audience. Norwegian Cruise Lines, for instance, struck a three-year deal last January with Nickelodeon to add the television networks' popular characters to a pair of ships sailing Caribbean itineraries.
An even greater threat may be Miami-based Royal Caribbean Cruises Ltd., the industry's No. 2 cruise operator behind Miami-based Carnival Corp. Just last month, Royal Caribbean launched its first ship featuring characters from DreamWorks Animation films such as Shrek, Madagascar, Kung Fu Panda and How to Train Your Dragon. It plans to add the characters — who appear in everything from character breakfasts to stage, water and ice shows — to three more ships this year, including the Port Canaveral-based Freedom of the Seas.
"We expect to see a nice lift with summer bookings once we really get out and start marketing the fact that this is on all four ships," said Betsy O'Rourke, senior vice president of marketing at Royal Caribbean International. She added, "Unlike Disney, it is not a sole offering. You can come on one of our cruises and, frankly, have no interaction with a DreamWorks character. Which is really not true with Disney."
For Disney, a bigger fleet also brings with it greater exposure to fuel prices, which are notoriously volatile and which have bedeviled Disney recently. Two years ago, Disney was forced to take a $40 million write-down when a fuel-hedging contract soured as prices fell. The company stopped hedging in 2010 — only to see rising prices pull down the cruise line's profits.
Jason Garcia can be reached at firstname.lastname@example.org or 407-420-5414.