Carnival Cruise Lines, Inc.

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Carnival Cruise Lines, Inc.

3655 N.W. 87th Ave.
Miami, Florida 33178-2428
U.S.A.
(305) 599-2600

Public Company
Incorporated: 1972
Employees: 18,000
Sales: $1.4 billion
Stock Exchanges: New York

Begun with one ship that ran aground on its maiden voyage, Carnival Cruise Lines, Inc., has since grown into the most successful and prominent American cruise line. 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, making Carnival the most popular cruise line in North America.

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 operating 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 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. In order 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 onboard 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.

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, 3 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.

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.

In order 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-price 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.

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 that 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 longstanding 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 5 dayboats, 240 motor coaches, and 8 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.

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.

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. Carnival continued to look forward to further growth, building on its name recognition, which was 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.