Carnival Corp Analysis: A Student's Perspective
A Microeconomic Prospective
Carnival Corp. was established in 1972 under the name Carnival Cruise Lines by Ted Arison. Carnival Corp. is made up of Princess Cruises, Holland America Line, Carnival Cruise Lines, The Yachts of Seabourn, Cunard Line, and Costa Cruises. It is a publicly traded company, with its stock valued at $30.82 at 6:34 on August 11th, 2011 (Yahoo finance, 2010). Currently there are more than 85,000 people employed by Carnival Corp. Currently, Carnival Corp. is a leading competitor in the recreation industry in regards to cruise lines. At any one time, there are 270,000 plus people sailing on the Carnival Fleet ("Corporate information," 2006).
The recreation industry is filled with many different competitors. They range from motorcycle manufacturers, cruise lines, and theme parks. Competing within the cruise lines are Cruises, Royal Caribbean Cruise, and Carnival Corp., among others. Due to the economic recession, cruise lines have taken a big hit, with Carnival Corp included. With this in mind, the supply and demand, substitutes and competitive advantages of Carnival Corp. will be examined in order to understand how they have been performing in this time of economic changes. The industry as a whole will also be examined through the means of entry barriers, market structure, and the market shares of the various competing firms. By the end, a prediction will be given as to future steps for the company to consider.
SUPPLE AND DEMAND
With the recent economic recession impacting leisure activities, the quantity of cruises demanded went down drastically. Given the expensive nature of a cruise, many people could not afford the price, nor could they afford taking the time off to go on a cruise. In 2008, Carnival Corp.’s net income was $2,330,000,000 then dropped to $1,790,000,000 a year later. Due to the reduction in supply of discretionary spending, quantity demanded for leisure activities, such as cruises, declined. Recent research shows that the quantity of cruises demanded is starting to go up as the economy improves. In 2010, the firm’s net income was on the rise, increasing to $1,978,000,000 (Yahoo finance, 2010). Carnival Corp. is ready to meet this increase in quantity demanded with over 75 cruise ships in its various fleets. The company is also expecting to launch seven more ships by 2015. Since quantity demanded is increasing, it needs to continue on that path in order for Carnival Corp. to continue to see rising net income ("Corporate information," 2006).
When it comes to competitive advantages, Carnival Corp.’s strength lies in its diverse fleets. With such a wide variety of fleets, almost every geographical region of the world is covered. This leads to customers being able to go to the company whenever they want to go on a cruise, no matter the location ("Corporate information," 2006).
Another competitive advantage is its ability to obtain other companies through acquisitions. They had their first acquisition in 1989 and have been continuing to obtain new companies since then. Through these acquisitions Carnival Corp. has been able to impact every geographical market in the world, and rank itself as the leader in the cruise lines market ("Corporate information," 2006).
The last competitive advantage is the fact that the firm is dual listed on the New York Stock Exchange and the London Stock Exchange under the symbol CCL. Since they are dual listed, the firm has the ability to raise more funds from investor than its competitors. With this also come greater stability due to different markets being affected by different economic occurrences, political issues, and society’s views ("Corporate information," 2006).
Along with being dually listed, it also has a separate division headquartered in England called Carnival PLC. This gives the firm the advantage of having separate shareholders, as well as separate leadership. With this comes separate views, different innovation, new ideas, and different abilities. Since both companies operate under the Carnival name, they share information, technology, and innovation in order to keep both companies as market leaders ("Corporate information," 2006).
Within the economy there are many different types of markets. These markets can range from a monopoly to pure competition, with an oligopoly and monopolistic competition falling in-between. In regards to the recreation industry, focusing on cruise lines, the market structure is an oligopoly. An oligopoly “involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output” (McConnell, Brue, & Flynn, 2009). In the cruise lines industry, there are only a handful of large firms that dominate, include Royal Caribbean Cruise, Carnival Corp., Disney Cruise Line, and Carnival PLC, Carnival Corp.’s United Kingdom division. These firms generate most of the output, making this market an oligopoly (Yahoo finance, 2010).
Within the oligopoly market structure, there are three separate models in regards to pricing: the kinked-demand theory, the collusive pricing theory, and the price leadership theory. In the cruise line market, the pricing model implemented is the noncollusive kinked-demand theory. Here, each competitor prices their product independently of their rivals, yet can choose to react to rival price changes. There are no cartels or agreements stating which price the product will be sold at and price leadership is not occurring (McConnell, Brue, & Flynn, 2009).
In an oligopoly, there are entry barriers which make it hard for new firms to enter into the market and compete. This is true for the cruise line market. Not only is substantial capital investment needed to build or buy a cruise ship, but many employees are needed to run the ship, serve guests and perform housekeeping. There are needs to be a headquarters that needs employees to take care of the everyday office tasks, such as payroll, booking vacations for customers, and customer service. Along with those costs, ships need general maintenance before and after a cruise, which can incur high costs.
Along with the cost aspect of getting into the cruise business, there is the fact that many consumers are brand loyal to the larger firms, such as Carnival Corp. This means that a new competitor will have a hard time getting customers to sail with them since they already like sailing with another firm. Unless the new firm can implement a radically new experience, they will most likely struggle to achieve profits.
As stated earlier, Royal Caribbean Cruise and Disney Cruise Line are the two largest competitors for Carnival Corp. Other competitors include Celebrity Cruises and Norwegian Cruise Line. This is due to the fact that the market structure is an oligopoly. These few competitors dominate the market for cruise lines (Yahoo finance, 2010).
Since Carnival Corp. is not a monopoly there are substitute products on the market. Since Carnival offers cruises, any other cruise line, such as Royal Caribbean Cruise, offers a substitute. Disney offers a differentiated substitute since it targets family vacations through appealing to children. Characters and specialty locations on the ship, which are copyrighted and trademarked, make Disney a top competitor for Carnival Corp. in regards to substitutes.
With the slow, but steady, return of leisure spending, the cruise line market is once again becoming a profitable industry to get into. In order to find out who is generating the most profit from this influx of spending, the market share of the competitors is calculated. The market share is “the percentage of the total market which the sales of a company cover” (McConnell, Brue, & Flynn, 2009).In order to get this figure, the firms’ annual sales are divided by total industry sales. According to Adam Brown of seeking Alpha, in 2009 Carnival Corp.’s market share was 50%. This not only means that all competitors share the remaining 50%, but it also means that the firm is the market leader (Brown, 2009).
Since Carnival Corp. is currently the market leader, and it poised to continue holding onto this position, I recommend that they invest in new innovates ways of entertainment for this cruises. Also, since they are only starting to delve into the Spanish speaking area of cruises, I recommend hiring more employees with fluency in multiple languages, as well as expand their port of calls. By doing this they will expand their market impact and geographical reach, expand their customer base and increase their already large market share. They should also sustain their competitive advantages in order to maintain their customer base and brand loyalty. This will ensure that they can maintain their position as market leader.
Carnival Corp. is a large firm that is in a position that allows it to sustain its growth. Being the market leader has allowed it to survive this economic recession even though many other firms dependent of discretionary spending have failed. They are ready and waiting for the influx of the leisure dollar that is starting to come in and poised for action with seven new ships waiting to be released. With competitive advantages such as different fleets, dual stock listings, and a separate division located in the United Kingdom, Carnival has many resources it can tap into in order to keep their competitive advantages going strong. As long as Carnival Corp. stays in its current path and continues to improve its competitive advantages, they will be able to maintain their 50% market share, brand loyalty and market leadership.
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Corporate information. (2006). Retrieved from http://phx.corporate-
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009).Microeconomics: principles, problems
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