Royal Caribbean cruise boss to TPG: High debt won't keep us from ordering new ships
Get ready to get excited again about new ships.
In an exclusive, one-on-one interview with TPG over the weekend, Royal Caribbean Group president and CEO Jason Liberty suggested the company wouldn't dial back on orders for new cruise vessels in the coming years, despite record levels of debt on its balance sheet.
While Royal Caribbean Group has paused new ship orders since the COVID-19 pandemic began in early 2020, it still plans to roll out new vessels for all its brands at a steady clip over the coming decade, Liberty suggested during the interview — which took place on the line's new Wonder of the Seas. This means new orders could be coming relatively soon.
Royal Caribbean Group is the parent company of Royal Caribbean, Celebrity Cruises and Silversea Cruises. The company also owns a partial stake in Germany's TUI Cruises and Hapag-Lloyd Cruises.
"Our ambitions are to continue to grow each of our brands in their segments, because we think the segments that we are focused on ... have a lot of runway to them," Liberty told TPG. "They are all very underpenetrated globally."
All the big cruise companies including Royal Caribbean Group took on massive amounts of debt to stay solvent during the COVID-19 pandemic, when cruising ground to a halt and the companies lost hundreds of millions of dollars a month.
Royal Caribbean Group's long-term debt during the pandemic soared to around $19 billion — more than three times the 2017 level.
To remedy the situation, cruise companies have said during recent conference calls with Wall Street analysts that their focus in the next few years would be on using their (now rebounding) profits to bring debt down to more normal levels. That has had some cruise fans worried that the days of a never-ending stream of exciting new ship debuts might be coming to an end.
But Liberty suggested to TPG that the debt paydowns wouldn't be so extreme as to leave the company without new ships in the pipeline for the coming years. Some of the profit stream will continue to be allocated to new ships, too.
Making things easier to do both things, according to Liberty: The company has "a bit of a buffer" when it comes to new ships that already are on on the way — ships that were ordered and financed before the pandemic.
Related: It's celebration time for Royal Caribbean's new Wonder of the Seas
The Royal Caribbean brand has four vessels on order for delivery in 2023, 2024, 2025 and 2026, respectively — three of which will be part of an all-new class of record-sized vessels. The Celebrity brand has two ships on order for delivery in 2023 and 2025. Silversea has two ships already on the way for 2023 and 2024.
In short, the new-ship pipeline at Royal Caribbean Group, barring new orders, doesn't really start running low until 2026. That means there's been no immediate rush to order new vessels.
As Liberty noted, there was a cruise ship ordering frenzy in the years leading up to the pandemic, in part because construction slots at major shipyards around the world were filling up years in advance. Royal Caribbean and other companies locked in orders for ships much further in advance than normal.
Related: The 6 types of Royal Caribbean ships, explained
Until around 2015, "when you ordered a ship, you had to order [it] three to five years before you wanted it," Liberty noted. "And then what happened is that the market for new ships really began to heat up, and you had to order ships six or seven years out."
Hence the buffer in new ships already on order, he said.
"Our order book [for the next few years] is actually pretty full, not just [for] the Royal, Celebrity and Silversea [brands] but also TUI Cruises and Hapag," Liberty said.
When it comes time for Royal Caribbean Group to order new ships, the company will be aided by the way so-called "export credit" financing works for new ship orders, Liberty suggested. It's a type of financing that doesn't require cruise companies to spend much money in advance.
Related: The 5 best destinations you can visit on a Royal Caribbean ship
"What's beautiful about the cruise business is, with the export credit financing, you tend to put very little money down," Liberty noted.
The bulk of the cost of a cruise ship is due on the day it's delivered to a cruise line, which could be years after it is ordered.
"You take delivery of the ship, and [while you pay for most of the cost then], you immediately have the EBITDA" to help pay for it, Liberty noted.
EBITDA, which stands for "earnings before interest, taxes, depreciation and amortization," is a financial term related to profits.
Liberty said the company's decision-making process around new orders in the coming years would be less about the company's debt levels and "more about our strategy. It would be more about what is it costing to build a ship these days and the return profiles that we would need to see to order a ship."
Liberty said that, when it comes to capital spending, the high debt level that the company currently has would have a bigger effect on other, more discretionary projects that require heavy spending, such as overhauling older ships to make them more modern.
New ship ordering is "not where the pressure is [when it comes to capital spending]. The pressure is more around discretionary [capital spending]," he said. "It's not that we're not looking to invest. It's that our threshold to investment is higher as we right now have less discretionary capital."
Liberty said the company was fortunate that it had done a lot of overhauling and updating of older ships just before the pandemic, when the money was available.
"Most of our fleets were modernized during that time, so there's actually not a lot of modernization that we need to do," Liberty said.
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