The discipline behind “Double Double”

A closer look at Royal Caribbean’s Double Double Program.

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Some might call Royal Caribbean’s newest earnings initiative audacious, sort of a doubling down for future earnings.

Not Richard Fain.

Royal Caribbean’s chairman and CEO says the company’s Double Double Program, announced in July, “sets demanding, but realistic targets” that give the plan its name: double the company’s 2014 earnings per share by 2017 and increase return on invested capital to double digits.

No other major cruise line has made such a long-term commitment to its shareholders, though in recent years they’ve all been in the same boat.

Over the past decade, cruise lines across the board saw inadequate investment returns from their fleets. Although the numbers of people booking cruises continued to grow, capacity outpaced them as lines introduced ships that were more than twice the size of existing vessels.

This led to price cutting across the industry to ensure that cabins were filled.

During his most recent earnings call, Fain described one of the steps being taken to arrive at the step change in performance promised by Double Double. Aim to eliminate last-minute discounts, which filled cabins with some customers but irked others who had booked earlier at full price.

By taking a more consistent approach on pricing, Fain said the company may not see the numbers of passengers brought in by late discounts, but “we think it will raise the satisfaction level of our guests and strengthen the perception of our brand superiority.”

Royal Caribbean is looking to maintain cost-conscious behavior. So the focus is on what we need to remain profitable, and making investments pay off.

Double Double’s twofold targets are meant to be hit consecutively, explains Jason Liberty, senior vice president and chief financial officer of Royal Caribbean Cruises Ltd.

“Both goals really hinge on double-digit return on invested capital,” Liberty says. “That means that we’re making smarter decisions about how we get the most revenue from all our assets and investments. Doubling our earnings will follow.”

The average median ROIC of U.S. companies over the past 45 years has been about 10 percent. Royal Caribbean was close to that average in 2005, but today its ROIC is about 3 percent.

“That’s why we launched the Double Double Program,” Liberty says. “We needed to set a direction for where the company has to go, and to get our more than 60,000 employees rowing in the right direction.”

Expanding across the global market and reading demand patterns more effectively will allow the company to target markets where people are willing to pay more for luxury experiences.

That’s one reason why Royal Caribbean International’s newly launched Quantum of the Seas will make its home next year in China, where a growing luxury-goods market may produce an estimated 7 million cruisers by 2020.

Across the entire fleet, the company is offering new dining, entertainment and shopping options for which guests are willing to pay more. Celebrity Cruises, for example, recently added such high-fashion brands as Kate Spade and Cole Haan to meet guest demand.

These programs increased onboard revenue by 7.6 percent in 2013, which in turn has increased the ROIC for each ship in the fleet.

“You can’t save your way to greatness, but you need to be cost-conscious,” Liberty says. “Royal Caribbean is looking to maintain cost-conscious behavior. So the focus is on what we need to remain profitable, and making investments pay off.”

Although Double Double is in its infancy, the strategy is already working. The company’s earnings for 2014 were up more than 40% over 2013 and are expected to be up a further 40% in 2015.