Royal Caribbean Cruises has filed a registration statement for an initial public offering. The offering will be underwntten by a syndicate managed by Lehman Brothers, Lazard Freres & Co. and Merrill Lynch & Co.

The offering proposes to raise $172.5 million at a price of $19.00 per share. Part of the proceeds will be used to repay portions of the company's debt. An application has been filed for the shares to be traded on the New York Stock Exchange.

RCCL is the second largest cruise company with nine ships and 14,234 berths providing an estimated annual capacity of 866,700 passengers and a 17 percent market share of the North American market.

Higher Sales/Higher Costs

Although trailing the Carnival Cruise Lines group in size and total gross revenues, RCCL achieved higher sales on a per berth basis in 1992 and higher gross per diems.

(Carnival: $1,473 million gross revenue on 22,981 berths, gives a per berth revenue of $64,096. RCCL: $1,012 million gross revenues on 14,234 berths, gives a per berth revenue of $71,000. Based on reported cruise days, Carnival reported gross per diems of $193 compared to $209 for RCCL.)

Net earnings were considerably less for RCCL, however, which posted $60 million in net earnings in 1992 compared to $276 million for Carnival. The lower earnings can be attributed to much higher operating costs on a per berth basis, $73,000 per year for RCCL in 1992 compared to $50,000 for Carnival. RCCL's GPDs may also be inflated by selling proportionally more air packages than the Carnival companies, especially Holland America Line. In addition, RCCL also has a larger debt burden to contend with.

Clearly RCCL has some catching up to do to approach Carnival's earnings level. But the fact that RCCL can earn more on a per berth basis with one brand name shows that if it can control costs better, it certainly has the potential to increase its earnings sharply. The 1992 earnings of $60 million, for instance, compares favorably to $4 million the previous year.

The poor earnings in 1991 were attributed to RCCL's investments in new ships and new products. Due to circumstances beyond its control, RCCL was forced to introduce two mega-ships within a six month period in the Caribbean market. In addition was the expansion and re-introduction of a ship in the West Coast market.

Yield Improvement

Since 1987, RCCL has been able to increase sales and earnings largely through the introduction of new tonnage and acquisition, but for the next three years, RCCL bas to develop its potential to increase earnings. The other alternatlve is raising prices which is unrealistic in today's market.

RCCL will have to work hard to improve yields on a quarterly basis, which is what the market will expect, without the benefit of new tonnage. In 1992, RCCL reported a 99.2 percent load factor. Thus, RCCL has to achieve better economies of scale; control costs better; optimize its yield management system; maintain its product quality; select the "right" itineraries; and sell and market effectively. There will be little room for errors.

In 1995, RCCL will be able to boost sales through new tonnage again with the expected delivery of the first of three new 1,800-passenger, 65,000-ton vessels.

A second new sister ship will be introduced in 1996. RCCL also has an option for a third sister ship to be delivered in 1997. By then, RCCL could see a 30 percent increase in capacity over 1993.

Consistent

Next to Carnival, RCCL has been one of the most consistent cruise lines, although not as consistent as its main rival.

According to travel agents and past passengers interviewed, RCCL used to be perceived as more upscale than it is today. Its ships used to be regarded in the upper level of the mainstream market often offering longer cruises while Carnival and Norwegian Cruise Line offered exclusively three- and four- and seven-day cruises.

Slowly, and as the market changed, RCCL was drawn towards the mid-market with shorter cruises and larger, higher-density ships, even three- and four-day cruises which RCCL had shunned for more than a decade. It has been a successful transition, however, as RCCL fills its ships and has become the largest single brand name in the industry. Meanwhile, its "old" market position has been taken over by Celebrity Cruises, Holland America Line and Princess Cruises. RCCL's new generation ships may aim at recovering its former market niche as well.

RCCL has also seen more internal changes than Carnival with more management shifts although Edwin Stephan has remained at the helm since the very inception of the company. Most of his present top level management has also been with the company a long time.

In 1988, RCCL was nearly acquired by Carnival. At the same time, RCCL's acquisition of Admiral Cruises proved to be incompatible and Admiral's ships were sold while the name was retired for the time being.

On the marketing side, RCCL has also gone through changes, while Carnival has hammered away with its "Fun Ships." RCCL present campaign promotes its "Royal Caribbean."

Innovation

RCCL has recently built a reputation for innovation. Last year, RCCL introduced its Breakthrough Rates which were promptly copied by most of the other lines. The program simplifies the rate structure and offers those who book early the largest discount. Rates go up closer to sailing time.

In addition, RCCL has introduced several other industry innovations aiming at travel agents including CruiseMatch, a computerized booking system.

RCCL's ships are now sailing nearly worldwide with year-round sailings in the Caribbean and the West Coast and seasonal sailings in Alaska and Europe. A proposed South American program, however, was cancelled, and Far East operations are said to be a long-term project.

By going public, RCCL, along with Carnival, will help make this industry much more accessible and visible to the public.