Royal Caribbean Cruises Ltd.’s (RCL) newest vessel, Oasis of the Seas, made quite a splash when she embarked on her maiden voyage from Finland in October, 2009. The ship is more than a third larger than the industry’s next biggest offering, or about five times the size of the ill-fated Titanic. At 225,000 gross tons, she towers some 20 stories above sea level, is longer than three football fields, and can accommodate 5,400 passengers and 2,200 crew members. The outsized boat, which will be based in Florida and cruise the Caribbean, is divided into seven “neighborhoods” – parks, squares, and areas with special themes. One “neighborhood”, dubbed Central Park, is open to the sky and features more than 12,000 plants and trees. Other attractions include an ice skating rink, a carousel, a mini-golf course, a 1,400-seat indoor theater for Broadway-style productions, a casino, volleyball and basketball courts, ice cream and tattoo parlors, two surfing simulators, two 40-foot-high rock-climbing walls, four swimming pools, and countless restaurants, bars, and retail shops. Allure of the Seas, an identical sister ship, is currently being built in Finland, and is scheduled to make its debut in late 2010.

When the $1.4-billion floating resort was ordered in 2005, the U.S. economy was on better footing and consumers’ wallets were fatter. There was no way for Royal Caribbean’s management to anticipate that this giant vessel would be christened during a time of considerable economic stress. Nowadays, cruise lines are promoting themselves as a great way for middle-income families to get a lot of bang for their buck, and are offering steep discounts on boarding passes to keep cabins full. The strategy is working for the most part, and booking volume is remarkably stable. Profits are hard to come by, however, even though fuel expenses are currently much lower than they were just a short while ago. Cost-conscious cruisers are spending less on dining, alcohol, gambling, shopping, and expeditions, mostly due to the lackluster economic backdrop. This, coupled with the aforementioned ticket discounting, is hurting yields (the amount made per passenger) and shrinking margins. 

We think it is too early to tell whether or not Royal Caribbean invested wisely, since cruise line operators have to take a very long-term approach when it comes to capital spending. This is because new ships are extremely expensive, usually take more than three years to build, and have very long life spans (sometimes more than 30 years). Still, management predicts Oasis of the Seas will be one of the highest returns on investment the industry has ever seen. Early signs should excite Royal Caribbean and RCL holders: booking trends have been strong thus far, and travelers are forking over about 10% more, on average, for a ticket on the Oasis of the Seas than for a boarding pass on one of the ship’s smaller rivals.

Other cruise line companies, like Carnival Corporation & PLC (CCL) and NCL Corporation Ltd., are taking a different approach. Carnival’s management said the company contemplated ordering outsized vessels similar to the Oasis of the Seas a few years ago, but ultimately decided that profits would probably not be sufficient enough to warrant that kind of investment. Instead, it opted to commission the $740-million Carnival Dream, which made her maiden voyage in September, 2009. At 130,000 gross tons, she is the largest boat the line has ever built, and can accommodate 3,700 passengers and 1,400 crew members. Her sister ship, the Carnival Magic, is scheduled to debut sometime in 2011. NCL (a/k/a Norwegian Cruise Line), a private company which is jointly owned by Star Cruises Limited (which is, in turn, owned by Genting Group) and private-equity firm Apollo Management L.P., is also spending big. Norwegian Epic, a 153,000-gross-ton vessel that will house 4,200 cruisers and 1,700 crew members, is set to make her maiden voyage in June, 2010.

Only time will tell which approach will ultimately be more profitable. Perhaps the buzz currently surrounding the Oasis of the Seas will die down, or maybe her fame will spark a ship building war of sorts. One thing is for certain, though: cruise line operators will need to continue spending big to keep their fleets up to date and to attract would-be cruisers, since we doubt sailing the high seas in style will lose its popularity anytime soon.