”riding the storm for long term sustainability” d2 consulting team jenny wang suravij nakornthap...

”Riding the storm for long term sustainability”

D2 Consulting Team Jenny Wang Suravij Nakornthap Henriette Schiager Ignacio González

Conclusion

Company Profile

Financial ProjectionRecommendationIssue identificationSituation analysisCompany profile

• Premium cruise line

• Customer oriented

• Strong tradition of excellence

• $525M. renovation underway

• Wholly Owned Subsidiary of Carnival Corporation & PLC

Conclusion

Agenda


Situational Analysis

Issues Identification

Recommendation

Financial Projection

Conclusion

2

1

3

5

4

Conclusion

Stock price has been underperforming the DJIA Index and the FTSE 100 Index until recently


TRS*, CAGR Return

CCLDJIA

FTSE

-33.8%-35.6%

-33.1%

Carnival Corporation (CCL)

FTSE 100 (London)

Dow Jones Industrial Average

*TRS: Total Return to Shareholders

Source: Yahoo Finance

April 2008 to Present (% Change), with April 2008 = 0%

Conclusion

Carnival Corporation is among the top performer in the cruise line industry despite underperforming the market


Carnival Corporation (CCL)

Walt Disney (DIS)

Star Cruise (0678.HK)

Royal Caribbean Cruise (RCL)



TRS*, CAGR Return

CCL -33.8%DIS -33.4%

0678.HK -46.8%

RCL -66.3%

April 2008 to Present (% Change), with April 2008 = 0%

Conclusion

Carnival’s financial status is still strong fundamentally in comparison with competitors


2006 2007 2008

-20.00 %-15.00 %-10.00 %

-5.00 %0.00 %5.00 %

10.00 %15.00 %20.00 %

Profit Margin

Carnival Corporation Royal Carribean CruiseStar Cruise

2006 2007 20080.00

3.00

6.00

9.00

12.00

15.00

18.00

P/E Ratio

Carnival Corporation Royal Carribean Cruise

2006 2007 2008

-4.00 %-2.00 %0.00 %2.00 %4.00 %6.00 %8.00 %

10.00 %

Return on Asset


2006 2007 2008

-15.00 %

-10.00 %

-5.00 %

0.00 %

5.00 %

10.00 %

15.00 %

Return on Equity


Source: Yahoo Finance & Reuters

Conclusion

Opportunity for potential expansion in & outside U.S.


1st timer25%

Repeat45%

"Alumni"30%

Passenger Structure

US90%

Other10%

Passenger Profile

• The repeaters are the most important group

• Retiree and Baby Boomer generation occupy

the majority part of the customer base

• Gen. X & Gen Y still open for capturing

• The international market is still wide open, especially in Europe• The product is pro ved to suits European tastes

Domestic:

International:

Conclusion

Global Financial crisis has a negative impact on HAL’s performance and customer’s base


Dow Jones Industrial Average: April, 2008 to Present

TRS* = -35.6%



• Global financial crisis has seen the biggest GDP contractions among the major economies around the world

• US GDP fell 6.2% and Unemployment risen to 8.5% in 4th quarter of 2008

• The dramatic fall in Stock market has created a negative “wealth effect” which has a devastating impact on typical HAL’s customer’s base

• Massive discount is widely used in an attempt to fill the ship’s capacity, hurting HAL’s revenue, despite reduction in fixed cost such as oil price

• Reduction in on-board spending per customer has also cause a negative impact to the company

Conclusion

Treasury Yield Spread indicate that recovery would begin in Mid 2010


Source: Federal Reserve Bank of New York

• The model suggest that the economy will recover along with higher spread between the 3-months and 10-years treasury bills, which indicate that the economy will recovery by mid 2010

• The growth is expected to be less aggressive compare to the past due to tighter government policy which will be implemented to ensure sustainable economic foundation

• Conservative nature of recovery could see the recovery last longer than 6 years, comparing to the previous Dot-Com recession

• Criticism occur that conservative spending behavior (Frugality) could resurface again as people are trying to avoid debt; however, this is unlikely to occur as globalization creates fast changing lifestyle where people need to constantly adapt to new environment

Conclusion

Issues Identification


Issues Objectives

How can Holland America Line maintain its dominant status in the premium cruise line market?

Weathering the Recession Storm

Keep 100% capacity through a series of promotions in order to generate constant demand while maintaining a premium image

Expansion into new, untapped market and achieve incremental revenue of $11 million annually

Creating Long Term Sustainable Growth

Conclusion

Recommendations


The EuroGrowth StrategyThe VALUE Strategy

Conclusion

Value StrategyProvide added value while maintaining brand image and price– Limit price discounts to 10%– Vouchers for onboard spending credit– Offer value packages to compensate for less discount

• Onshore activities• Airfare• Loyalty Programs


Conclusion

Value Strategy

• Job loss insurance as a confidence boost– Full refund for job loss cancellation

• Advertising– Continue updating social network activity – Specialty cruise networking – Travel agents remain the most important channel

• Bringing prices back up after the recession– Fade out the small discount when recovery is starting– Stop offering additional vouchers– Keep the value packages to maintain value and premium image


Conclusion

Recommendations


The EuroGrowth StrategyThe VALUE Strategy

Conclusion

Euro-Growth Strategy


Europe presents viable growth opportunity• European cruise market increasing 18% annually• Competitors are expanding operations in Europe• Only 1%-2% European has cruising experience

Choosing a Region

Competition Repeat Potential Demand

Asia

Europe

South America

Moderate

Moderate

Low

Low

High

Low

Low

Moderate

Low

Conclusion

Euro-Growth StrategyWhere in Europe?


COUNTRY GDP PER CAPITA POPULATION CLIMATECURRENT CRUISE

MARKETACCESSIBILITY

TO PORTS TOTAL

UK 8 4 2 1 5 20

Spain 9 6 4 5 2 26

France 8 4 3 8 2 25

Italy 9 4 4 4 3 24

Germany 8 1 3 3 5 20

Netherlands 7 9 2 8 6 32

Norway 1 10 1 8 1 21

Sweden 7 10 1 9 5 32

Denmark 7 10 2 9 5 33

Belgium 8 9 2 10 6 35

Enter the UK, Germany, and Norway in 2010


Return Control Cost Local Management

Joint Venture International Branch

Alternative Entry Mode

ConclusionFinancial ProjectionRecommendationIssue identificationSituation analysisCompany profile

International Branch• Send sales and marketing team to the area• Developing brand image prior to real entry• Increase distribution channels

Conclusion


Target Market in Selected Countries


• Older (45+) and affluent • 15% population growth from 2005 to 2015

Rationale• Established market in the U.S. • Repetition potential is high • Semi or full welfare states with high spending power

USA UK Germany Norway

GDP per capita $47,000 $36,600 $34,800 $55,200

% Population over 65 12.80% 16.20% 20.30% 15.20%

Conclusion

Euro-Growth Marketing Strategy1. Develop relationships with travel agents 2. Begin online marketing and advertising3. Localized media & appeal


Conclusion

Implementation


Marketing Strategy 2009 2010 2011 2012 2013

VALUE Strategy

Activities & Airline Packages

Job Loss Insurance

Advertising

Euro-growth Strategy

Establish international branch

Advertising (Online + Print)

Travel Agents + CRM

Localization Appeals

Conclusion

Incremental Analysis


2009 2010 2011 2012 2013RevenuesTotal 9,627,691 9,685,677 9,776,554 10,449,339 11,175,280ExpensesProduction of new advertising campaign 1,000,000 0 0 0 0Vouchers 2,258,314 2,271,916 0 0 0Activity Bundles 3,387,794 3,408,198 3,408,198 3,408,198 3,408,198Market development & maintenance (Europe) 1,000,000 1,000,000 2,000,000 2,000,000 1,000,000Job loss insurance costs 73,694 74,138 0 0 0Advertising costs - Europe 0 1,000,000 1,000,000 1,000,000 1,000,000Airfare and other partnerships 1,613,850 1,623,570 1,623,570 1,623,570 1,623,570Total 9,333,652 9,377,821 8,031,768 8,031,768 7,031,768Incremental Net Income 294,039 307,856 1,744,786 2,417,571 4,143,512NPV (discounted at 6.78%) 7,285,476Budget Required 37, 165,995


2009 2010 2011 2012 20130

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

Incremental Revenues of Marketing Strategies

Incremental RevenuesProjected Revenues

Year

Revenues

CAGR = 3.8%


2009 2010 2011 2012 2013$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

Sensitivity Analysis

Net Income at 95% CapacityNet Income at 105% CapacityNet Income at 100%

Year

Net Income

ConclusionObjective • Maintain market leadership in premium

cruise line industry

Strategy • VALUE strategy• EuroGrowth strategy

Outcome• Maintain 100% capacity without diluting

brand image & keeping profits steady• Set foundations of long term expansion

into European market

ConclusionRecommendationIssue identificationSituation analysisCompany profile Financial


Q&A

Appendix

Presentation SlidesCompany ProfileStock Performance – IndexStock Performance – CompetitorFundamental RatioCustomerDamage of CrisisEconomic RecoveryIssues IdentificationRecommendationValue Strategy 1Value Strategy 2Eurogrowth 1Eurogrowth 2Eurogrowth 3Eurogrowth 4Eurogrowth 5

Appendix SlidesWACC AssumptionsNI AssumptionsCalculations Sensitivity Analysis, contd.Whole Incre. AnalysisSWOT Analysis Treasury Yield SpreadOvercapacity ConcernFinancial RatioRisk and MitigationRest of the World StrategyEurogrowth Supporting 1 EuropeDecision Table Europe-Raw Data

Implementation ScheduleIncremental AnalysisIncremental Revenue GraphSensitivity AnalysisConclusion

Conclusion

Key Assumptions

• Debt weight: 28.83% (2008)

• Equity weight: 71.17% (2008)

• Cost of debt: 7%

• Expected return on the market: 6%

Cost of Equity: (.12)+[1.35(0.6-0.12)] = 7.68% WACC: (.7117)(7.68)+(.2883)(7)*(1-.35) = 6.78%


Overcapacity concern

5-7 years

Price

Time

Price

Q

D

S

AB

Financial RatioCarnival Corporation Royal Carribean Cruise Star Cruise

2006 2007 2008 2006 2007 2008 2006 2007 2008

Revenue 11,839,000 13,033,000 14,646,000 Revenue 5,229,584 6,149,139 6,532,525 Revenue 1,967.3 2,576.2 436.6

Net Income 2,279,000 2,408,000 2,330,000 Net Income 633,922 603,405 573,722 Net Income (156.2) (200.8) (79.5)

Total Asset 30,552,000 34,181,000 33,400,000 Total Asset 13,393,088 14,982,218 16,463,310 Total Asset 6,139.7 6,428.6 2,568.1

Total Equity 18,210,000 19,963,000 19,098,000 Total Equity 6,091,575 6,757,343 6,803,012 Total Equity 1,943.3 1,972.6 1,886.5

EPS 2.90 3.05 2.93 EPS 2.96 2.82 2.68 EPS (0.024) (0.032) (0.014)

Price 48.25 44.80 19.85 Price 42.58 40.00 9.00 Price 1.940 2.060 2.650

Profit Margin 19.25% 18.48% 15.91% Profit Margin 12.12% 9.81% 8.78% Profit Margin -7.94% -7.79% -18.21%

ROA 7.46% 7.04% 6.98% ROA 4.73% 4.03% 3.48% ROA -2.54% -3.12% -3.10%

ROE 12.52% 12.06% 12.20% ROE 10.41% 8.93% 8.43% ROE -8.04% -10.18% -4.21%

P/E Ratio 16.64 14.69 6.77 P/E Ratio 14.39 14.18 3.36 P/E Ratio (80.83) (64.38) (189.29)

N/A N/A N/A

Financial Assumptions• All boast are at 100% capacity • Ticket yield per customer goes down by 10%; otherwise would have been down 20%• With vouchers onboard spending yield per customer stays the same, otherwise would have decreased 20%• Starting 2011 customer yield for onboard expenses + other increase at 10% per year. Otherwise yield onboard

per customer would have only increased 6% (change from 2006 to 2008)• Starting 2011 customer yield per ticket increase back to 1369.91 and increase 10% per year afterwards (change

from 2006 to 2007). Otherwise yield per ticket would only have increased 3% per year• Ticket sales from Europe increase at 25% (average for Carnival from 2006 to 2008) beginning 2012; otherwise

would have been 10% • Packaging costs for bundling activities packages are 15% of onboard per-customer yield • Assume 1 in 100 booked guests will cancel and require job insurance refund and ticket will NOT be able to be

made up with further purchases• Loyalty programs give all customers next $100 off their next cruise. 45% of customers will redeem this in 2 years

from their original cruise. • Airline partnerships cost HAL an average of $150 a round-trip ticket per customer. We increase these

partnerships by 20%. • 6% is the estimated market return

2009 2010 2011 2012 2013RevenuesPassenger tickets (USA) 6,632,439 6,672,386 6,672,386 7,139,453 7,639,214Onboard and other (USA) 2,032,483 2,044,724 2,126,513 2,211,574 2,300,036Passenger tickets (Europe) 736,938 741,376 741,376 852,583 980,470Onboard and other (Europe) 225,831 227,192 236,279 245,730 255,560Total 9,627,691 9,685,677 9,776,554 10,449,339 11,175,280

ExpensesProduction of new advertising campaign 1,000,000 0 0 0 0Vouchers 2,258,314 2,271,916 0 0 0Activity Bundles 3,387,794 3,408,198 3,408,198 3,408,198 3,408,198Market development & maintenance (Europe) 1,000,000 1,000,000 2,000,000 2,000,000 1,000,000Job loss insurance costs 73,694 74,138 0 0 0Advertising costs - Europe 0 1,000,000 1,000,000 1,000,000 1,000,000Airfare and other partnerships 1,613,850 1,623,570 1,623,570 1,623,570 1,623,570Total 9,333,652 9,377,821 8,031,768 8,031,768 7,031,768Budget 37,165,995

Net Income 294,039 307,856 1,744,786 2,417,571 4,143,512NPV (discounted at 6.78%) 7,285,476

Key CalculationsCarnival Current customer yield (tickets) = 11,210 MCarnival Current customer yield (onboard + other): 3,436 MCarnival 2008 customers: 8,183,000Carnival Advertising: 524 million in 2008

HAL Current capacity: 21,088 HAL ticket yield per customer: 11210/8.183 = 1369.91HAL onboard + other per-customer yield: 3436/8.183 = 419.84HAL added capacity in 2010: 2,106

HAL cruises per year: ~500HAL cruise ships: 14 Cruises per cruise ship: 500/14 = 35 HAL average capacity per ship: 21,088/14 = 1506HAL passengers per year: 1506*35=52,720

SWOT AnalysisStrengths• M

other company has 50% market share

• Economies of scale

• High customer loyalty

• Can move ships around

• Cooking classes (add more value)

• Mariner Society Loyalty program

• 1 more ship to enter

Weaknesses• M

ost revenues between May-Sept

• Uncertain market positioning

• Few distribution channels in Europe

• Lack of travel agent relationships in Europe

• Over 90% revenue from N. America

• Fixed cost industry

Opportunities• P

artner with “frugal” site

• Generation X & Y

• Asia market

• New Seattle port

Threats• R

etirees lost money

• Rich sensitive to stock market

• Discounts from all other travel locations

• Brand dilution

Risk and MitigationRisk Mitigation

• Offering lower discount could lead to competitive disadvantages (compare to competitors)

• Cannibalizing Carnival’s Corporation other cruise line in Europe

• Exchange Rate Risk for International operation

• Recession could last longer than expected which could delay expansion plan into Europe

• In addition to providing more value to the product, psychological effect of “discount” is still applicable for use in advertising.

• Work closely in CCL to try to avoid operating in the same route at the same time

• International Portfolio for currency hedging

• Still able to send sales team to establish a market and develop a relationship with local travel agencies and necessary media channel and prepare to capture the market when recovery begins

Rest of the world strategyAsia, Middle East, South America, Australia / Oceania, and Africa

The emerging of new economies has present a good opportunity for expansion; however, there are still doubts whether these countries would be able to generate constant demand for the long run or not (repetition)

Therefore, the current strategy in these areas is to target ultra high income group through international travel agencies

• Establish relationship with international travel agency which specialized in ultra high net worth individual these people are very price inelastic• Offer high class tour package (Once in a lifetime experience) which would generate abnormal revenue to the company.

In the future (5-10 Years), strategy in these areas can be revaluated for potential expansion, pending the change for favorable market condition.

EuroGrowth Supporting 1

• Travel Weekly (UK); 10/30/2008 TW Cruise Supplement, p5-5, 1/2p, 1 color

GROWTH FOR THE TOP FIVE EUROPEAN MARKETS FOR

CRUISESUK 11%Germany 8%Italy 24%Spain 32%France 16%AVERAGE 18%

Europe

Citation for EuroGrowth• ECC chairman and chief executive of Carnival UK

David Dingle.• "Cruise statistics 2008." Cruise Norway Web.17 Apr

2009. <http://www.cruise-norway.no/CDA/storypg.aspx?id=1776&zone=48%20&parentzone=0&version=1>.

• "Baby Boomers Population | Aging Baby Boomers | Women Baby Boomers." PRLog 22 Aug 2008 Web.17 Apr 2009.

Decision Table EuropeCOUNTRY GDP per capita Rank Population Rank Climate Rank

Current Cruise Market (million) Rank Access to ports Rank TOTAL

UK 33535 8 60.6 4 2 1.3 1 8 ports 5 20

Spain 31312 9 45 6 4 0.518 5 20 ports 2 26

France 33414 8 60.7 4 3 0.28 8 19 ports 2 25

Italy 29934 9 59.7 4 4 0.64 4 15 ports 3 24

Germany 33154 8 82.2 1 3 0.763 3 6 ports 5 20

Netherlands 37960 7 16.5 9 2 0.256 8 3 ports 6 32

Norway 53334 1 4.7 10 1 0.232 8 21 ports 1 21

Sweden 36365 7 9 10 1 0.178 9 7 ports 5 32

Denmark 35787 7 5.3 10 2 0.16 9 6 ports 5 33

Belgium 34458 8 10.2 9 2 0.07 10 2 ports 6 35

RANKING RANGES

26,000-28,999 10 1-9 million 10Short

winters 4 1-100,000 10 1-4 ports 6

29,000-31,999 9 9-18 million 9

Medium-short

winters 3 100,000-200,000 9 5-8 ports 5

32,000-34,999 8 18-27 million 8Medium-

long winters 2 200,000-300,000 8 9-12 ports 4

35,000-37,999 7 27-36 million 7 Long winters 1 300,000-400,000 7 13-16 ports 3

38,000-40,999 6 36-45 million 6 400,000-500,000 6 17-20 ports 2

41,000-43,999 5 45-54 million 5 500,000-600,000 5 21-24 ports 1

44,000-46,999 4 54-63 million 4 600,000-700,000 4

47,000-49,999 3 63-72 million 3 700,000-800,000 3

50,000-52,999 2 72-81 million 2 800,000-900,000 2

53,000-55,999 1 82+ million 1 900,000 + 1

Citation for Value

• http://www.forrester.com/Research/Document/Excerpt/0,7211,46294,00.html

• http://blog.nielsen.com/nielsenwire/online_mobile/twitters-tweet-smell-of-success/

• www.hollandamerica.com

http://www.forrester.com/Research/Document/Excerpt/0,7211,46294,00.html

http://www.forrester.com/Research/Document/Excerpt/0,7211,46294,00.html

http://blog.nielsen.com/nielsenwire/online_mobile/twitters-tweet-smell-of-success/

http://blog.nielsen.com/nielsenwire/online_mobile/twitters-tweet-smell-of-success/

Appendix NSensitivity Analysis

Total @ 90 9,076,292 9,130,958 9,259,285 9,884,763 10,552,666

Total @ 110 9,661,748 10,092,111 10,233,946 10,925,265 11,663,472Total @ 100 9,627,691 9,685,677 9,776,554 10,449,339 11,175,280

Net Income @ 95% 15,591 23,867 14,79,105 2,104,584 3,772,486NPV (discounted at 6.78%) 5,965,590

Net Income @ 105% 404,608 407,819 1,950,590 2,641,908 4,380,116NPV (discounted at 6.78%) 8,036,416

Net Income 294,039 307,856 1,744,786 2,417,571 4,143,512

Treasury Yield Spread Model

• Prior to recession, the spread will become negative, creating high probability of recession

• After recession, widen yield spread indicate the sign of recovery

Treasury Yield Spread Model (Continue)

Date 10 Year Treasury Yield 3 Month Treasury Yield Spread Rec_probJan-07 4.76 5.11 -0.35 0.253484Feb-07 4.72 5.16 -0.44 0.267854Mar-07 4.56 5.07 -0.51 0.251129Apr-07 4.69 5 -0.31 0.210788May-07 4.75 4.86 -0.11 0.210788Jun-07 5.1 4.73 0.37 0.228229Jul-07 5 4.95 0.05 0.270289Aug-07 4.67 4.31 0.36 0.326467Sep-07 4.52 3.99 0.53 0.326467Oct-07 4.53 3.99 0.54 0.356226Nov-07 4.15 3.35 0.8 0.401076Dec-07 4.1 3.06 1.04 0.384068Jan-08 3.74 2.81 0.93 0.364507Feb-08 3.74 2.17 1.57 0.389714Mar-08 3.51 1.28 2.23 0.409653Apr-08 3.68 1.32 2.36 0.353481May-08 3.88 1.77 2.11 0.300334Jun-08 4.1 1.89 2.21 0.190123Jul-08 4.01 1.66 2.35 0.260618Aug-08 3.89 1.75 2.14 0.192132Sep-08 3.69 1.15 2.54 0.159761Oct-08 3.81 0.68 3.13 0.157974Nov-08 3.53 0.19 3.34 0.116128Dec-08 2.42 0.03 2.39 0.085099Jan-09 2.52 0.13 2.39 0.098448Feb-09 2.87 0.3 2.57 0.038997Mar-09 2.82 0.21 2.61 0.01225

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