Royal Caribbean sees the end of the 'price gap'

When the cruise industry came back from its roughly 15-month covid-related shutdown, ships were sailing at very low passenger loads. That was a necessity due to social distancing requirements, but prices remained low because demand simply wasn't there.

Some people were afraid to cruise during a pandemic, while others were not vaccinated, which for a period was a requirement. Other potential passengers simply did not want to deal with testing, mask-wearing, and other covid-era rules set by the Centers for Disease Control (CDC).

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"I'll cruise when it goes back to normal" was a frequent refrain on various cruise message boards and Facebook pages. 

For a long time, over the course of multiple earnings calls, Royal Caribbean Group (RCL) - Get Free Report CEO Jason Liberty talked about the price gap between a cruise and a comparable land-based vacation.

"There's also a pretty significant value gap to land-based vacations...We have that opportunity now to begin to close that gap. And that gap was about 15% to 20% pre-pandemic. Today, it's about 35% to 45%," Liberty shared in an interview in June.

That price gap has helped the cruise line win over new customers. It was simply cheaper to get on a cruise than to visit Walt Disney's (DIS) - Get Free Report Disney World or Comcast's Universal Studios. Basically, if you could cruise -- which includes entertainment and meals in the price of the fare -- for the price of theme park tickets, not including lodging and food, the choice led a lot of people to pick cruising.

The price gap, however, has largely gone away, at least when it comes to the newest ships in Royal Caribbean's fleet.

Royal Caribbean works to raise prices      

While the days of the cheap cruise have not ended, it's hard to find a low-cost cruise on a newer ship. Booking Wonder of the Seas generally costs much more (often twice as much, if not higher) than booking a similar itinerary on older Oasis-class ships.

The cruise line has also been able to pre-book its next biggest ship in the world, Icon of the Seas at very high prices, and the same will likely be true for the next (and maybe last) Oasis-class ship, Utopia of the Seas when it begins sailing 3-4 night itineraries out of Port Canaveral. 

Royal Caribbean International CEO Michael Bayley talked about pricing during the cruise line's second-quarter earnings call.  

"And what we've seen so far from our bookings, both volume and rate are incredibly encouraging. And we've been very thoughtful. As Jason mentioned earlier about the strategy of putting really outstanding hardware combined with excellent destination into the short product market because it truly is the on-ramp for new to cruise and also first to brand," said.

Bayley specifically addressed the price gap issue and the news was good for the company, but bad for cruisers hoping to get a deal. 

"I'd also like to add that Icon and Utopia and, in fact, Wonder when you look at this gap between land-based resorts and land-based experiences versus some of our top products, particularly these products we're talking about, there really is no gap," he added.

Royal Caribbean works to raise prices

Every business wants to maximize revenue. Disney has been a master of that using demand-based pricing at its theme parks to balance crowds and income. 

Royal Caribbean has gotten better at doing the same thing, according to Liberty.

"What I would say is it is very possible that we're in a more [positive] book position than we have been in the past. But I would just -- we've said this in the past -- our goal is to optimize revenue," he said. "And so, you could be plus or minus 5% on a book position standpoint as we kind of cross periods because we're looking to optimize revenue, not just optimize how much you have on the books at a certain point in time."

That's something Royal Caribbean has invested in.

"I think our teams have demonstrated...our ability to utilize what we would say are state-of-the-art tools to manage and optimize our revenue, not just on ticket, but also on onboard is what's helping us lead to optimizing our yield profile," he added.