Carnival Corporation

Carnival Corporation

Carnival Place
MSEO 1000
3655 N.W. 87th Avenue
Miami, Florida 33178-2428
U.S.A.
(305) 599-2600
Fax: (305) 406-4700
Web site: http://www.carnivalcorp.com

Public Company
Incorporated: 1972
Employees: 18,000
Sales: $2.4 billion
Stock Exchanges: New York
Ticker Symbol: CCL
SICs: 4481 Deep Sea Transportation of Passengers,Except by Ferry; 4482 Ferries; 4489 Water Transportation of Passengers, Not Elsewhere Classified

Begun with one ship that ran aground on its maiden voyage, Carnival Corporation has since grown into the most successful and prominent American cruise line. Carnival is the largest cruise company in the world and either owns or has purchased interest in seven cruise lines, including Carnival Cruise Lines, Holland America Line, Windstar Cruises, Cunard White Star Line, Seabourn Cruise Line, Costa Crociere S.p.A., and Air-tours’ Sun Cruises. Carnival has combined these cruise lines into an operating fleet of 43 state-of-the-art ships that sail the seven seas. Through innovative vacation packaging and extensive advertising campaigns, the family-operated company has changed the face of the cruise industry by coaxing thousands of middle-class customers aboard its floating resorts. The firm’s interest in numerous tour companies that provide air transportation, hotel accommodations, and land excursions makes Carnival the most popular cruise line in the world.

Early History

Carnival was founded in 1972 by Ted Arison, an Israeli immigrant. After serving in World War II with the British Army and in Israel’s War of Independence, in the late 1940s Arison founded a cargo line running between Israel and New York, but was put out of business by competition from the Israeli state-run shipping line. In 1954 he moved to the United States, where he took a position as cargo manager for El Al, Israel’s national airline. He eventually founded his own air freight company, Trans Air System, which went public in the late 1960s.

In 1968, at the age of 42, Arison moved to Miami to operate a small Israeli-owned cruise ship running between Florida and the Caribbean. When the Israeli government impounded the boat to collect the owners’ debt, Arison quickly filled a Norwegian Caribbean Line ship with the customers he had lined up. Convinced that he should own boats rather than operate them for others, in 1972 he entered into a partnership with former schoolmate Meshulam Riklis, who then owned the travel conglomerate American International Travel Service (AITS). They formed Carnival Cruise as a subsidiary of AITS, and for $6.5 million they purchased the ship Empress of Canada, which they renamed the Mardi Gras.

The ship’s first voyage was less than spectacular: the Mardi Gras ran aground off the Florida coast with several hundred travel agents on board. Future voyages went more smoothly, however, and in 1974 Arison bought Riklis’s share of Carnival for $1, also assuming the company’s debt of more than $5 million. To cut costs, Arison sought to reduce fuel consumption by reducing the speed of the Mardi Gras and the number of stops it made. This simple economizing measure was to revolutionize the entire cruise industry. Since passengers would have to spend more time at sea between Caribbean ports of call, Arison added more on-board entertainment features, including a disco, casino, movie theater, and nightclubs. Carnival’s marketing staff quickly dubbed the Mardi Gras the “Fun Ship,” and other cruise lines soon followed Arison’s lead.

Growth and Expansion in the 1970s

In the 1970s the hit television series “The Love Boat” helped revitalize the cruise industry, bringing people on board ships in larger numbers than ever before: between 1970 and 1986 the number of people taking cruises soared from 500,000 to 2.1 million. By 1978 Arison had three ships running seven-day cruises from Florida to the Caribbean and in the Caribbean itself: the Mardi Gras; the Carnivale, which he bought in 1975; and the Festivale, which he bought in 1977. Despite a bad economy and high fuel prices, in 1978 Arison also contracted for a fourth ship, the Tropicale, which was completed in 1982. In 1979 Arison’s 30-year-old son, Micky Arison, was named president and chief executive of the company.

The 1980s brought the cruise industry massive expansion: between 1981 and 1991 the number of berths on North American cruise ships grew from 41,000 to 84,000. Carnival was the chief exponent and beneficiary of the boom. In 1982 Carnival’s four boats carried some 200,000 passengers, with the firm earning $40 million on revenues of about $200 million. During the next decade the number of passengers carried per year nearly quintupled. Beginning in 1980, Carnival’s revenues grew 30 percent annually, three times faster than the average for the cruise business as a whole.

During the recession of the early 1980s, Carnival ordered three more ships, the first from the Danish Aalborg shipyard at a cost of $180 million and two additional ships from the Swedish state shipbuilding company, Svenska Varv, for a total of $262 million. With the completion of these three “superliners” — Holiday, Jubilee, and Celebration —Carnival had the world’s largest cruise line fleet, with seven ships.

The 1980s and an Innovative Marketing Campaign

To help fill these ships, Carnival adopted aggressive marketing and advertising strategies. In 1984 Carnival initiated the memorable “Fun Ship” advertising campaign, which featured talk show host Kathie Lee Gifford partaking of shipboard amenities and singing “We’ve Got the Fun.” In 1984, for what was then the largest network television advertising campaign in the cruise industry, Carnival spent $10 million to advertise during “The Love Boat” and network news shows.

To gain support from travel agents, Carnival routinely sent representatives to travel agencies to inquire about vacation options. If the agent recommended a cruise as a first option, the representative would give the agent $10. If the agent’s first recommendation was a Carnival cruise, he or she would get $1,000. By the end of 1989 Carnival had given away more than $500,000 with this program.

In an attempt to attract younger, more middle-class customers to cruises, which had traditionally been the preserve of older, upper-class travelers, Carnival offered cheaper, shorter trips—in 1988 the company’s low-priced air and sea packages were approximately 20 percent below industry averages. Advertising efforts targeted toward the younger market included a 1988 Fourth of July party on a Carnival ship that was broadcast on MTV. These strategies paid off: in 1989 the annual household income of passengers was between $25,000 and $50,000, while 30 percent of the passengers in the early 1990s were between the ages of 25 and 39. In addition, Carnival’s ships were consistently running at full capacity.

Strategic Acquisitions

In 1987 Ted Arison sold 18 percent of the shares of his private empire, raising nearly $400 million for the company, and Carnival went on a spending spree. The company entered into a contract for the Ecstasy, sister ship to the Fantasy, which had been ordered earlier in the year. In addition Carnival attempted to buy the cruise ship business of Gotaas-Larsen Shipping Corp., which owned part of Royal Caribbean and a majority of Admiral Cruise Lines, but the sale did not go through.

In 1988 Carnival purchased the Holland America Line for $625 million. A long-standing company with four cruise ships and about 4,500 berths, Holland America sailed to the Alaska coast in the summer and the Eastern Caribbean in the winter. Holland’s trips were aimed at higher-income travelers—its Caribbean cruises cost 27 percent more than a Carnival cruise of the same length. In addition, as part of the package, Carnival acquired two other companies that Holland America owned: Windstar Sail Cruises and Holland America Westours, which included Westmark Hotels.

The acquisition greatly expanded the company’s operations. Windstar Sail Cruises, whose three large passenger sailing ships operated in the South Pacific, Mediterranean, and Caribbean, served the luxury market. Westours operated Westmark’s 18 hotels in addition to five dayboats, 240 motor coaches, and eight glass-domed railcars in Alaska and the Canadian Northwest. Already the world’s largest cruise operator based on passengers carried, with this single purchase Carnival boosted its number of berths by more than 50 percent. During the year following the acquisition, Carnival carried 579,000 passengers, generating $600 million in revenues and earning profits of $196 million.

Company Perspectives:

Our goal is to use our brands to reach every tier of the cruise market. Regardless of customer budget, itinerary, geography, demographics or psycho graphics, our brands really do cover the waterfront. That makes us unique in the North American cruise market, if not in the world … More than anything else, these vacationers want to have fun, and they recognize that Carnival offers them the ultimate fun experience. We also meet the needs of vacationers seeking luxury, elegance, shorter vacations, exotic destinations or land/sea packages. Within our other brands—Holland America, Windstar, Seabourn, Costa andAirtour’s Sun Cruises—we have vacations that appeal to virtually every potential cruise customer, a strategy that has made us a leader in every market and the most popular choice among consumers considering a cruise vacation.

—Interview with the Chairman, Micky Arison, 1997 Annual Report

In 1989 Carnival completed the Crystal Palace Resort & Casino, a lavish 150-acre resort in the Bahamas, which cost Carnival $250 million to develop. The 1,550 room hotel had many extravagant features, including a $25,000 per night suite that included a robot that brought bath towels and an aquarium with a stingray. With its 13 restaurants, golf course, tennis courts, and other recreational facilities, the Crystal Palace was the biggest resort in the region. Carnival’s 1989 revenues surpassed $1 billion, and the firm earned profits of $193 million while carrying 783,485 passengers.

Change and Growth in the 1990s

The following year Ted Arison, at the age of 66, stepped down as chairperson of Carnival and was succeeded by his son Micky. Shortly thereafter, the industry’s boom of the previous decade began to taper off. The war in the Persian Gulf brought higher fuel and airline costs and deterred tourists. The effects were reflected in Carnival’s stock price, which slid from 25 points in June of 1990 to 13 points late in the year. At the same time, it became apparent that the Crystal Palace would be an unprofitable venture. At the end of fiscal year 1990, Carnival incurred a $25.5 million loss from the resort and casino operation and not long after began attempting to sell the Crystal Palace. In 1991, with no prospective buyers, Carnival agreed to turn over a large portion of the resort to the Bahamian government, in exchange for cancellation of some of the debt incurred during construction. Carnival took a $135 million write-down on the Crystal Palace for that year.

Still, in 1991 Carnival enjoyed a 26 percent share of the passengers in the $5 billion cruise-ship market, with revenues of $1.4 billion. Its average occupancy level stood at 103 percent, well above the industry’s average of 90 percent. In April of 1991 Carnival signed a $300 million contract for a ship, the Sensation, to be delivered in 1993. In September of the same year the Fascination, to be ready in late 1994, was ordered at a cost of $315 million. In an effort to gain more working capital, Carnival offered 7.85 million Class A common shares for sale in 1991.

The company also entered into an agreement in 1991 to acquire Premier Cruise Lines for $372 million. Though smaller than Carnival, Premier had a lucrative contract with Walt Disney Co. to be the official cruise line for Walt Disney World in Orlando, Florida. The deal fell through, however, when a final agreement could not be reached on the price.

In 1992 Carnival agreed to acquire a percentage of Seabourn Cruise Lines. Seabourn, operated in partnership with Atle Byrnestad, served the ultra-luxury market, running tours to such locations as South America, the Baltics, the Mediterranean, and Southeast Asia. The company also signed a contract for a $330 million ship, the Imagination, to be delivered in the fall of 1995. Perhaps the most impressive ship introduced in the modern era was the Carnival Destiny, the largest passenger ship afloat at 101,000 tons and room for 2,640 people. Its maiden voyage was in 1996.

In 1997 Carnival purchased a 50 percent interest in Costa Cruise Lines, in partnership with Airtours, a travel company. These acquisitions strengthened the company’s presence around the world, but especially in the Caribbean. Yet the company’s most important acquisition came in 1998 when it purchased a controlling interest in Cunard White Star Line. Cunard’s five ships, including the QE2, the Vistafjord, the Royal Viking Sun, and Sea Goddess I and II catapulted Carnival into the super-luxury cruise line business.

By 1998 the company had changed its legal name to Carnival Corporation, to emphasize the growing diversity within its cruise lines. Yet when every indicator seemed to point the way toward uninterrupted and uneventful prosperity for the company, disaster struck. In July of 1998, the cruise ship Ecstasy caught fire after leaving the port in Miami, Florida bound for Newport News with 2,575 passengers on board. Although no one was injured during the fire and evacuation, the ship suffered extensive damage to more than 100 cabins, while heat and smoke damaged adjacent sections of the ship. The precise cause of the fire remains unknown, but the Ecstasy was examined meticulously and refitted in drydock; it re-entered cruising service not long afterward.

Carnival did not suffer financially or from a public relations standpoint because of the fire on the Ecstasy, and it continues to look forward to further growth, building on its name recognition, which is presently the highest in the industry. Since studies show that only five percent of the 70 million Americans who can afford cruises choose that type of vacation, Carnival seemed to have plenty of room for expansion.

Principal Subsidiaries

Carnival Cruise Lines; Holland America Line; Windstar Cruises; Holland America Westours; Cunard White Star Line (68%); Seabourn Cruise Line (68%); Costa Creciere S.p.A. (63%); Airtours’ Sun Cruises (26%).

Further Reading

Blum, Ernest, “Carnival Is Expected to Postpone Re-Entry of Ecstasy Beyond July 31,” Travel Weekly, July 27, 1998, pp. 1, 45.

Brown, Jerry, “Carnival Corporation Set to Buy Cunard,” Travel Weekly, April 9, 1998, pp. 1, 4.

Fins, Antonio N., “Batten Down the Hatches and Rev Up the Jacuzzis,” Business Week, August 19, 1991.

_____, “Carnival Tries Sailing Upstream,” Business Week, September 25, 1989.

Golden, Fran, “New Deals,” Travel Weekly, June 4, 1998.

_____, “Ted Arison Turns Hardship into ‘Fun Ship’,” Travel Weekly, March 30, 1998, p. 44.

“Pacesetter for Cruise Industry,” New York Times, July 25, 1987.

Rice, Faye, “How Carnival Stacks the Decks,” Fortune, January 16, 1989.

20 Years of Fun: A History of Carnival Cruise Lines, Miami: Carnival Cruise Lines, 1992.

Wayne, Leslie, “Carnival Cruise’s Spending Spree,” New York Times, August 28, 1988.

—Daniel Gross

—updated by Thomas Derdak