Norwegian Cruise Line Holdings (NCLH) has embarked on a two-year campaign to spruce up its 21 ships in hopes that it will be able to push prices significantly higher as a result.
CEO Frank Del Rio, in a third-quarter earnings call with analysts, said it is an alternative strategy to continually building new ships to drive revenues higher.
"We think the return on invested capital on these kind of choices outpaces the [return] and the payback of new vessels," he said. "We've got billions of dollars invested in these ships. You have to maintain them at the highest standards if you expect to achieve these higher yields."
Del Rio started the process by upgrading the agenda for drydocks this fall of the Norwegian Epic and the Norwegian Gem, CFO Wendy Beck said on the call.
"It's a number of soft items: carpets, linens, plates, cutlery. It's standards that Frank has brought in and said 'these are minimum standards we have to be operating at,'" Beck said.
The improvements are focused mainly on the Norwegian brand rather than the company's two upper-end brands, Regent Seven Seas Cruises and Oceania Cruises, Beck said. Almost every one of Norwegian's older ships will go through a scheduled drydock.
"We have the youngest fleet in the industry, but some of the vessels are a little more seasoned than others," Del Rio said. "This is the time, an opportune time, where we can go in and bring them back up to as-new condition."
Del Rio said he believes some of the upkeep had been deferred on Norwegian's fleet.
"I will tell you that I think there was some underspending in prior years that we're playing catch-up on," he said.
The relative strength of bookings will help support the spending needed for refurbishments. Del Rio said bookings are ahead of last year on volume and price. He said the Norwegian Escape, as it begins preview cruises in Miami starting Nov. 9, is booked "three times deeper" than was its predecessor ship, the Norwegian Getaway, and at similar prices.
Del Rio said the company has "more passengers booked, more revenue booked, significantly outstripping our capacity increases, and we see stronger pricing across all three brands."
In the quarter ended Sept. 30, NCLH reported net income of $251.8 million, up from $203.3 million, while revenue hit $1.28 billion, up from $907 million in the third quarter of 2014.
Del Rio said the emphasis for next year will be on continuing to push prices up, both for tickets and onboard revenue. He said the two-year drydock window "gives us a very unique opportunity to upgrade the fleet over a short, concentrated time, so that the whole brand gets elevated in terms of product delivery and allows us to raise prices more so than if you hadn't done these things."
Among the Norwegian ships scheduled for drydock next year are the Norwegian Sky, the Norwegian Dawn and the Pride of America, which will be out of service for 24 days while it is sent from Honolulu to San Francisco. The Seven Seas Navigator and the Voyager are among the Regent Seven Seas ships scheduled for drydock. Beck said that a typical drydock for a Norwegian ship involves spending of between $7 million and $8 million but that the Pride of America will be more costly, in part because of transit time to and from Hawaii.