RCL equity report

Royal Caribbean Cruises Ltd Equity Report The Ohio State University
Equity Report
Royal Caribbean Cruises Ltd
Group 12
Elijah Li li.6141@osu.com Xin Lai lai.398@osu.edu
Brad Woolard woolard.33@osu.edu Yunlu Peng peng.520@osu.edu
Srinath Vedal li.6141@osu.com

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Royal Caribbean Cruises Ltd
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RCL, Inc. Thesis
Team 12
Company Description: Royal Caribbean takes to the waves to see the sights. The company operates
about 43 ships with nearly 10,000 berths overall. Three major brands-Royal Caribbean, Celebrity Cruises,
carry about 4 million passengers a year to nearly 500 ports in North America, Asia, Australia, the
Caribbean and Europe. Its other brands include Azamara Club Cruises, Croisieres de France, and 50%
joint venture in TUI Cruises. The company is funded primarily by passenger ticket revenues, which
account for roughly 72% of total annually revenues. Looking to the future, its full steam ahead as the
company’s expanding to varieties of underpenetrated
markets as well as delivers more ships and increase
capacity.
Rationale:
 RCL management and executive team have extensive
experience and insights towards the operation of the
company and the whole cruise industry. Overall, the
management incentives are well-aligned with the
company’s long-term growth strategy and shareholders ‘values. The management team is still striving to
achieve double-double program, which is to earn double digit ROICs and EPS by 2017.
 The whole Cruise industry is expected to grow in the next few years with the same trend of the whole
industry, as RCL is actively expanding its business and try to maintain its market share. Therefore, RCL
will enjoy a growth in short run while its long run performance will be greatly influenced by the long run
performance of the whole industry.
Key Assumptions:
 5-Yr Revenue Growth Rate: 8% (Capacity growth: 5.5%, Average per customer spending growth: 2.5%)
 CAPEX (% of Revenue): 20% (2015-2017), 15% (2018-2020)
 D&A (% of Revenue): 13% (2015-2017), 10% (2018-2020)
 Terminal Growth Rate: 4%
 Required Rate of Return: 9%
Key Risks:
 Adverse worldwide economic and unstable geopolitical condition could reduce the demands cruise trips
and negatively impact RCL’s operating profits, free cash flow, and other conditions including impairing the value of
the ships, goodwill and other assets.
 Capacity and pricing strategy expose to potential risks. An increase in capacity worldwide or excess
capacity of ship redeployment in a particular market would negatively impact RCL’s cruise sales and pricing, and
further adversely impact the net yield and revenues, which are the most relevant metrics measuring performance.
 Ship construction, repair and upgrade delays from shipyards may result in the delay and/or cancellation of
cruise delivery, which could potentially results in lost revenue, increasing operating expenses and lost market shares.
 Volatility in commodity prices, specifically energy, may affect profitability if fuel prices remain inflated
for an extended period (Royal hedges about half of current-year costs).
 A longer-term concern is that changes to the company's tax status under the U.S. Internal Revenue Code
could materially affect profitability

Company Overview
Royal Caribbean Cruises Ltd (RCL), Formed in 1968, is a Norwegian/American global cruise
company headquartered in Miami, Florida. It is the second largest cruise company (behind the combined
Carnival Corporation and Carnival plc behemoth) in the cruise vacation industry. The company operates
about 43 ships with nearly 100,000 berths overall. All the ships operate in approximately 480 destinations
on all seven continents. The company competes largely in several areas, which are exceptional crew
services, customized experience, innovation and quality of ships. Specifically, by offering a broad
selection of destinations and prices, variety of itineraries and continually investing in the maintenance and
upgrade of ships, the company incorporates variety of key innovations to attract new customers as well as
consolidate customer loyalty for repeating Guests.
Several key operating metrics could be used to evaluate the company’s performance and identify key
revenue drivers. The company’s operating margin has increased dramatically, which was driven by higher
yield and volume.
•RCL has managed to increase its passenger count at compound annual growth rate of 5.3% and
capacity also increased at a growth rate of 5% since 2009.
•Volume is the key revenue driver. A high occupancy rate allows for higher revenue for a marginally
higher cost and therefore improves margins.
•Net revenue yield, which could be derived by deducting variable costs from revenue and divided by
available passenger cruise days has raised to 2% in 2014, which is higher than its major competitor,
Carnival Corp
•RCL occurs lower fuel expenses, one of the major costs in the last 2 years. RCL’s fuel cost was 13%
of its operating cost, which is 3% lower than Carnival Corp (CCL) and 1% lower than Norwegians
(NCLH).
•RCL share price shot up considerably in 2014. Its share price increased by 75% to $82.43 from
$47.2. It is the only company among the three major cruise operators to outperform the S&P 500
throughout the year.
The positive trend of the company’s performance is expected to continue due to the implementation
of 3 significant programs. The double-double program represents the long-term strategic plan of the
company to attain double-digit ROIC a doubling of 2014 year-end adjusted earnings of $2.02 by 2017.
The three pillars of the strategy-moderate capacity growth rate, consistent cost consciousness and
improved revenue yields remain intact. Secondly, the loyalty program, functions as frequent flyer
programs to reward and retain loyal customers by offering exclusive services and benefits to repeating
guests. Lastly, from the Macro economics’ perspective, in 2015, the easing of Cuba travel restrictions will
have a positive impact on RCL, even the whole cruise industry, as it will allow for increased trade and
travel between US and Cuba. It will be a valuable opportunity for the company to explore the
underpenetrated markets to gain strong market presence.
Industry Overviews and Key Highlights
There are 3 cruise companies, Royal Caribbean, Norwegian Cruise Line Holding and Carnival Corp
that dominate the cruise vacation industry. The cruise industry is expanding rapidly internationally and
also highly concentrated. The three largest companies generate more than 90% of industry revenue and
carry over half of the cruise passengers worldwide. Growth strategies of the industry have been driven by
large capacity, ship diversification, more destinations and on-board/on-shore activities that match the
demand of consumers. Even though the industry has high growth potential, the market penetration rate is

Barriers to Entry
Expected retaliation
Economies of scale
Access to distribution
channels
Threat of Substitute
Highly Replicable Service
Homogenous Products
Low Switching Cost
Power of Supplier
Poor Bargaining Power
Fixed supplier
High swiching cost
Power of Buyers
Price Elastic demand
Low switching Cost
Numerous Substitutes
Competitive Rivalry
Carnival &Norwegian ≥ 70%
Market
Geographical Concentration
still fairly low, only 53% of the target North American market (or 24% of the whole U.S population) has
ever experienced an ocean cruise. That being said, a total of 7 ships were added in 2015. From 2016-2017,
15 more new cruise ships will be adding 39,637 to worldwide passenger capacity, or 8.1% and $3.6
billion in annual revenue. In the past couple of years, major players in the industry were exploring
opportunities in some emerging markets in Asia, where the market is underpenetrated to take advantage of
the market share.
Porter Five Forces Analysis
To analysis the industry
competition, we pick Carnival Group,
Norwegian Cruise, MSC, and NCL as
major competitors to further evaluate
the strength and weakness of industry
competition. Moreover, we utilize the
Porter Five Force Model to take an
in-depth look of competition.
1) Barriers to entry: Entering
to cruise industry requires a large
initial investment to buy boats, cruise
line and to expand market. Furthermore,
new entering companies suffer from
economies scales oligarch retaliation from huge firms.
2) Threat of substitute: Cruises suffer from homogeneous competition since productions
and services offered by top companies are basically the same. Moreover, customers are not sticky to
any companies in this industry because of low switching cost.
3) Power of supplier: Switching costs of suppliers are very high therefore cruises try to
maintain a good relationship with their suppliers to accumulate credits and get lower prices and more
financial flexibilities, such as increasing account payable amount.
4) Power of buyers: All luxury goods or services share a common trait on price –Demand
Elasticity. With several substitutes and a very low switching cost of customers, RCL doesn’t have a
strong bargain power towards customers.
5) Competitive rivalry: 1) Industry competitions are mainly between top 5 companies but
RCL hasn’t shown a considerable competitive advantages. 2) Each major company remains relative
strong competitiveness in some geographic segments. Therefore, RCL is unlikely to explore market
which is already dominated by other major companies.
Conclusion: Competition disadvantages of RCL overweigh the advantages. Both threats from
outside environment and competition inside the industry all limit the growth and the expansion of RCL.
Therefore, we think RCL is likely to maintain its current market share but to gain more market shares in
the future competition. Besides, RCL may only keep current percentage market shares in future
expansion.
PEST Analysis
To analyze the future growth or decline of the whole industry, we choose to use PEST analysis model
to measure influences from four major factors: Political, Social, Economic and Technological.

Political: Cruise line business could be very risky if entering into hostile water. Moreover, taxation
policies and environmental concerns may limit the profitability and industry growing.
Economic: With the economy retreating from great recession, cruise line industry enters to a high
speed development mode, with a more that 7.4% of growth in capacity coupled with an annual occupancy
exceeding 100% again in 2014. However, seasonal issues and increasing taxation put limitations on grow
of market.
Social: From social demographic perspective, customer tastes and preferences incline to be positive
for cruise, with a decrease of average customer age by 5 years and an annual increase of customer
expenditure of 5%.
Technological: Development of technology supports cruise ships with better capacity and smarter
maneuverability but lower cost. Entertainment innovations are key attractions for more passengers too.
Conclusion: In the next five years, the whole industry will keep growing. Growth of the industry
has been driven by revival of economy, customer preference and ever-accelerating technology. Meanwhile,
the cruise industry is also highly concentrated since more than 90% of industry revenue and half of the
cruise passengers are dominated by Royal Caribbean, Norwegian Cruise Line Holding and Carnival Corp.
Fierce peer competition and geographical market occupancy will dominate the future of the cruise
company.
Business Model
Due to the environment in which Royal Caribbean operates, our analysis examines significant factors
of RCL’s business model from two viewpoints:
RCL as an individual entity
Cruise industry as a whole
Usually, the industry or competitors would merely be a subsection of the business model. However,
with the close relation and small number of firms, the cruise industry firms face very similar business
environments.
Product Differentiation
Just for ease of analysis, we will assume that Carnival is the only competitor of Royal Caribbean due
to Carnival’s dominant market share that accounts for close to half of the industry. This is justified in the
fact that collectively, the two control 60% of the market. If Royal Caribbean wants to differentiate
themselves in the market, they must differentiate themselves from Carnival.
As a cruise provider, Royal Caribbean is in the service industry. As with many services and the
cruise industry in particular, there is often a tendency to view the supply as homogenous. However, the
continuous fight to differentiate their product from competitors and Carnival in particular is where there
competitive advantage lies.
Political
Economic

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Inherently, there are two ways cruise providers can differentiate themselves:
Price
Amenities
It is evident that Royal Caribbean believes amenity offerings are keys to long-term success. While
Carnival has many similar offerings available, their vision relies on power of the masses.
Royal Caribbean is relying upon demand of a younger and more active population to fill their ships.
As with many other industries such as the hotel business, the younger generation, or “millennials” are
paying more, traveling more and ultimately demanding more. If this holds true, Royal Caribbean offerings
such as the “wave rider”, ice rinks at sea, climbing walls, aqua theaters, inside cabins with virtual views,
zip lines and bars that move between levels. It is noted that RCL offers different packages through 6
different brands in the RCL umbrella. Other major cruise lines offer varying packages as well. With that
being said, we feel that RCL’s model does not give them a competitive advantage to gain market share but
it does offer the competitive advantage to gain market share. RCL will increase its capacity by 39,637
berths via 15 new cruise ships, representing an occupancy increase of 8.1% and a potential increase of
$3.6 billion in annual revenue. Our analysis is supported below with the industry outlook that we find as
the most bullish aspect of RCL’s future outlook.
Management
The current CEO, Rickard D. Fain has been with the company since 1988 when he was 40 years old
and is now 67. Fain and the management team have extensive experience, with an average tenure of more
than 20 years at the company and over 40 years in the cruise line industry. We think the shareholders
would be better served if the Chairman and CEO role are divided to promote great independence across
the board of directors. The company has its board divided by into two classes, which will be declassified
in 2015 and directors will be re-elected annually, which we perceive favorably. In addition, the Wilhelsen
family (control 15%) and the Ofer families control about 20% of voting rights.
We think overall the management incentives are well-aligned. The compensation are based on basic
salary, performance-based incentive salary and long-term view awards. Executives are expected to
maintain a fair market value of company equity to equal or greater than their basic salary, usually 5 times
more. We think the compensation system is fair and aligned with management’s risk and decisions
towards shareholders’ interests and the company’s long term view, which are to reduce leverage, achieve
flexible capital structure and The initiative Double-Double program, which is to achieve double digit
ROICs and EPS by 2017.
Financial Analysis
In financial analysis part, we mainly focused on those factors that could drive the performance of
RCL or put great risks on it. Thus, we have analyzed and forecasted the change, trend and value about
stock price, revenue, leverage, profitability, efficiency, and
liquidity.
Firm value and Stock price: This graph presents
that stock volatility made the market capitalization
fluctuate greatly. Meanwhile, the debt capitalization grows
steadily and slowly. Therefore, the enterprise value
changed mainly due to the change of market capitalization.

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However, the Total Capital shows the book value keeps a relative stable growth. Book value of equity
following the growing revenue shows a stable and organic increase in past ten years. Combining both
types of firm value, we think that:
The book value may keep a steady growth and leverage structure may remain the same in next
five years. Since debt capital ratio volatile from 47% to 54% in past ten years, we think CFO in RCL
may incline to keep a relative stable leverage ratio to generate an organic growth. Managers in RCL
may follow the percentage method; growth of financing follows the increase of total capital value.
Therefore, we can estimate in the suture RCL may stay a 50% debt capital ratio like always, showing
a healthy and stable debt financing policy. Therefore it is unlikely for RCL to abruptly increase a
great deal of debt to increase book value of enterprise. Thus, the growth of book value will follow
the growth of revenue in the future. And revenue will be the driver of firm value.
Leverage and liquidity: When we look into
changes of financial ratios, in last ten years the
leverage ratio (debt/asset ratio) stayed below 50%. In
the next five years, the leverage ratio is likely to
remain the same, just like what we explained in last
part. However, the current ratio remains in a very
low stage, from 0.15 to 0.40, which may raise
worries about liquidity risks. To evaluate the
potential risk of such low current ratio, we searched current ratios of Carnival and NCL. It turns out they
are all below 0.2 in 2014. Therefore we think such low current ratio may be determined by the nature of
business. Besides, since current ratio of industry stays below 0.2, low current ratio is not a considerable
potential risk for RCL. In the next five years, RCL may remain the same current ratio.
Efficiency ratio (Asset turnover ratio) seems quite stable in last ten years. Since expansions and
developments in last ten years haven’t changed the efficiency of operation, it is likely to remain stable in
next five years even if RCL is trying to exploring Asian and European market. Moreover, we think even
though efficiency impacts the profitability and free cash flow like a driver, RCL is hard to improve the
efficiency a lot in next five years. Therefore, we estimate the efficiency ratio stay the same in next five
years.
Cost: In addition, in last five years cost remains about 56% of revenue, from 54% to 57%. Although
we think cost is key driver for enter price value too, it is unlikely for RCL to decrease the cost to achieve a
better profitability. Because the competitions between suppliers are global and perfect, cruise line
companies like RCL cannot get an even lower price from suppliers. Therefore, in the next five years, the
COGS will remain the same percentage of revenue.
ROE (profitability): Therefore, since leverage cost and efficiency will remain stable in next five
years, ROE is closely related to growth of net profit margin. To improve the net profit margin, RCL has to
increase Sales & Services Revenue and Other Revenue, decrease COGS and operating expenses. However,
we concluded that COGS may remain 56% of sales& service revenue in next five years. Thus, to boost
profitability RCL should implement diversification strategy to increase other revenues and decrease the
operating expenses.
Conclusion: It is undeniable that revenue, profitability, efficiency and leverage are all drivers of
enterprise value. However, basing on historical data, only revenue is more easily improved since rest of
them mostly remain the same. Therefore, in this case we mainly focus on improving revenue to further

develop RCL. The revenue (Sales& Service) is determined by passengers and spending of each customer.
Moreover, in last five years occupancy rate of RCL remain more than 100%, which implies the demand of
customers overweighed the supply of RCL. Therefore, we think the increase of carrying capacity is
another index for the growth of passengers. Basing on 2015 cruise industry overview, spending of each
customer stays in an uptrend in the future. Thus, the growing revenue in next five years could be
estimated by the growth of capacity and spending of each customer.
Risk Analysis:
Major Risks Overview
1．Macroeconomics and geopolitical risks
For the cruise industry, it is absolutely essential to take into consideration of the whole
macroeconomic risks when assessing potential risk factors. Royal Caribbean faces a number of inherent
risks that may affect its enterprise value. Adverse worldwide economic and geopolitical conditions such as
continued unrest economic instability could negatively affect the company’s ability on a) generating
operating cash flows, b) obtaining new borrowing from capital markets in amounts that is sufficient to
satisfy capital expenditures and debt repayments, c) impairing value of ships, firm values and goodwill.
However, in general, the world’s economy is heading to a positive direction. The company is
expected to experience less volatility on revenues and demands. In fact, as shown on the CLLA Europe
report, Europe actually manages to increase 0.5% in growth rate of booking. It is an extraordinary result
given the fact of its slowdown economic climate. We believe it is a sign of boosting consumer confidence
and an increase of disposal incomes toward cruise vacation industry.
2. Financial/Business model risks
We believe the primary concern for RCL over the long run is whether the company could sustain its
business model and core values. We conclude the key factors that could affect the sustainability of RCL’s
business model, net yields and earnings are capacity and pricing strategy, emergency ship repairs, global
expansion and competition.
As mention above, capacity and pricing strategy are critical in determining the net yield, which is the
most relevant measure of pricing performance and revenue earned. Cruise sales and pricing are impacted
by both the new introduction and redeployment of ships. According to the company’s annual report, a
total of 33 new ships with approximately 98,650 berths are expected for delivery by 2019. Without an
increase in the industry’s market shares in vacation market, the further growth of the in capacity would
result in the depression of cruises prices and the company’s abilities to achieve yield improvement. In
addition, an increase in capacity from both new and redeployed ships could exceed the actually demand of
a specific itinerary, which could result in a lower profitability and pricing.
In addition, construction, repair and upgrade of ships also expose risks to the company. RCL depends
on shipyards to construct, repair and upgrade cruise ships on a timely fashion with quality assurance.
Failure to do so would result in delay or cancellation of cruises and further in lost revenue, increased
operating expenses, which would drag down the new revenue yields. Financial difficulties, including
liquidations encountered by shipyards could result in the same negatively outcomes.
Conducting business globally and expanding to new markets may result in costs, such as fuel and
risks, such as foreign exchange risk and interest rate risk. Expanding to new markets requires high level of
investment without assurance that the company will gain success and recover the initial investment as
anticipated. Also, fluctuations in foreign currency exchange, fuel prices and interest rates would result in

high level of volatility and a disruption of all hedging activities. According to the RCL’s most recent
quarterly report, the strengthening of US dollar and the rise in fuel prices are negatively affecting earning.
SWOT Analysis
Strengths Weaknesses
Strong Brand positioning and recognition High liquidity risk from low current ratio
Global/ Diverse customer segmentation Increase In Expenses
Advance Technology and fuel efficient Systems
Slowing Demand in European Economy
Less price compatibility in cruise industry
Opportunity Threats
Expansion into different Demographics Full Competition and Growth restrictions in Australia
Favorable trends in global cruise industry Abnormal weather Patterns, terrorist
Port Miami Stringent Environment rules and regulations
Plans to build, finance and operate new terminals Fuel, Currency rate, Taxes, government regulations
Strengths: Usage of advanced technology to reduce energy consumption and fuel costs.
Advancements in technology have resulted in design of fuel-efficient ships and implementation of
efficient hardware, including propulsion and cooling systems incorporating energy efficiencies.
Weakness: The structure of the cruise industry itself has two major weaknesses. First, Cruise lines
mainly depend upon travel agencies to book tickets. Any relationship disturbances with agencies will have
adverse impact on sales, operations and re venue. Second, the Cruise industry business is seasonal and
accounts high revenue in certain times of the year.
Opportunity：Investing in Port Miami is expected to double the number of passengers and
controlling over 60% of the Miami terminal in coming years. Besides, the partnership with Clear trip
International could have an upper hand and dominate the Chinese cruise industry.
Threats: Royal Caribbean faces significant competition from top cruise lines such as Carnival and
Norwegian on the basis of cruise pricing, travel agent preferences and amenities offered to the guests.
Besides, RCL might hit a wall when expanding in Australia, because Carnival group has already booked a
spot for an unnamed ship, which would arrive in the market in 2016. In addition, RCL extends its business
globally. Economic factors such as Fuel prices, Currency rates, Government regulations, Taxes are highly
unpredictable and would have a direct impact on the revenue.
Risk Priority Number Model

The risk priority model clusters risks on the relationship analyses between impact of risk and
probability of occurrence. We cannot control the external factors, but the impact of risks could be reduced
by taking significant measures. After analyzing the risk priority number, we can conclude:
• Guidance from Maritime Advisory Board of experts will create awareness about the policies and
safety regulations.
• Strong connections with the government will enable us to handle the changes in tax regulations
and reduce the overall impact of risk.
• Local presence in new markets will burgeon our ability to react more quickly to local market
conditions and better understand our consumer base in each market.
• Stringent security measures would help us combat terrorist and private attacks
• Continuous advancements in technology and implementation would enable us to generate profits.
Eventually create a unique brand value.
Recommendations
• Focus more on of improvement of ports and destinations in the Asia when expanding market.
• Increase Partnership with other major travel agencies in new sectors.
• Partnership deals with other travel agencies.
• Set up unique ideas on the cruise: Underwater sports activities, have no destination cruises.
• Advertisement focuses more on the younger generation.
• Loyal benefits to existing customers.
Valuation
The whole cruise industry is under expanding. As, while the occupancy rate is remained
constant, we are expecting the capacity to grow by 5.5% for the next five years. Meanwhile, by
consider the higher consumption power in China, Europe and other newly explored markets, we
also expect a 2.5% grow rate of spending per customer, which may due to higher ticket price as
well as greater on board spending. To sum up, an 8% annual growth rate of revenue is applied in
our analysis. As mentioned above, more new cruise ships will be adding from 2016-2017.
Therefore, we are expecting a higher CAPEX and a higher D&A in 2016 and 2017 (20% and 13%
of Revenue), and lower them later on in 2018-2020 (15% and 10% of Revenue). The percentage
relationships between other elements and the revenue are assumed to remain constant according
to the historical performance.
We assume the WACC of RCL is 9%. Although the historical WACC for RCL is 8.6%, and
for CCL, the main competitor, is 8.8%, a more conservative WACC should be applied, as the
potential risk of exploring new market is considered. For the terminal growth rate, we weighted

the average GDP growth rate of different countries by different business size of these markets.
Therefore, we put 4% as the terminal growth rate.
DCF Valuation
Ticker RCL
2014 2015 2016 2017 2018 2019 2020 Terminal
Revenue 8,074 8,720 9,418 10,171 10,985 11,863 12,812
Growth rate 8% 8% 8% 8% 8% 8%
Cost of Revenue 4,883 5,274 5,696 6,151 6,643 7,175
% of Revenue 56% 56% 56% 56% 56% 56%
Gross Profit 3,837 4,144 4,475 4,833 5,220 5,637
Operating Expense 1,744 1,884 2,034 2,197 2,373 2,562
% of Revenue 20% 20% 20% 20% 20% 20%
Operating Income 2,093 2,260 2,441 2,636 2,847 3,075
NOPAT 2,051 2,215 2,392 2,584 2,790 3,013
D&A 1,134 1,224 1,322 1,098 1,186 1,281
% of Revenue 13% 13% 13% 10% 10% 10%
CAPEX 1,744 1,884 2,034 1,648 1,780 1,922
% of Revenue 20% 20% 20% 15% 15% 15%
NWC 262 283 305 330 356 384
% of Revenue 3% 3% 3% 3% 3% 3%
FCF 1,179 1,273 1,375 1,705 1,841 1,988 39,770
Growth rate 8% 8% 24% 8% 8%
Time 0 1 2 3 4 5 6
PV Factor 0.92 0.84 0.77 0.71 0.65 0.60 0.60
PV of FCF 1,082 1,072 1,062 1,208 1,197 1,186 23,713
Enterprise Value 30,519 Discount Rate 9%
Net Debt 8,139 Terminal Growth Rate 4%
Equity Value 22,380
Diluted Share Outstanding 219.9
Est. Stock Price $101.77 Current stock price $91.25
Conclusion
Although the estimated intrinsic value of stock price is slightly higher than the current stock price,
we still recommend holding RCL’s stock. RCL’s short growth can be foreseen while the
long-term performance can very dramatically according to the development of the whole cruise
industry.
We evaluate the uncertainty and risk rating for Royal Caribbean is moderate. The domestic
economy has moderately recovered from the most recent slowdown, Royal Caribbean is not

expected to experience in dramatic downturn of the economy. Additionally, competition from
new entrants would be nearly impossible considering high entry barrier. However, volatility in
commodity prices (Royal hedges about half of the current-year costs), tax regulation, diluting
pricing and excess capacity could still adversely affect profitability and market share in the long
run.

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