Executive Summary / Key Takeaways

• Royal Caribbean Group delivered a strong Q1 2025 performance, exceeding expectations with Adjusted EPS of $2.71, driven by robust close-in demand and higher pricing across itineraries and onboard spending.
• The company experienced its best WAVE season in history, with April bookings for 2025 outpacing last year at higher prices, resulting in a strong book position for the remainder of 2025 and into 2026.
• Full year 2025 guidance was raised, with Adjusted EPS expected in the range of $14.55 to $15.55, reflecting Q1 outperformance, favorable FX/fuel rates, and disciplined cost management (NCCXF expected -0.1% to +0.9%).
• Strategic investments in innovative ships (Icon, Utopia, Star, Xcel), expanding private destinations (Perfect Day at CocoCay, Royal Beach Clubs, Perfect Day Mexico), and entry into Celebrity River Cruises are key differentiators driving yield growth and capturing share in the $2 trillion vacation market.
• The company's "Perfecta" program targets a 20% Adjusted EPS CAGR from 2024 through 2027 and ROIC of 17% or higher, underpinned by moderate capacity growth, moderate yield growth, strong cost control, and a strengthened investment-grade balance sheet.

Setting the Scene: A Global Vacation Ecosystem

Royal Caribbean Cruises Ltd., founded in 1968, has evolved into a global leader in the vacation industry, operating a diverse portfolio of brands including Royal Caribbean International, Celebrity Cruises, and Silversea Cruises, alongside a 50% joint venture in TUI Cruises. With a combined fleet of 67 ships calling on over 1000 destinations worldwide as of March 31, 2025, the company is strategically positioned to capture a greater share of the vast $2 trillion global vacation market.

The core investment thesis for Royal Caribbean Group is built on a proven formula: moderate capacity growth, moderate yield growth, and strong cost control. This strategy is designed not just to recover from past challenges but to drive durable margin expansion, enhanced profitability, and superior financial returns by consistently delivering differentiated vacation experiences and expanding its ecosystem.

The competitive landscape is dynamic, encompassing not only other major cruise lines like Carnival Corporation (CCL) and Norwegian Cruise Line Holdings (NCLH) but also a broad array of land-based vacation alternatives and other leisure travel options. While competitors like Carnival leverage scale and cost leadership (CCL's ROIC recently 8-10%), and Norwegian focuses on product innovation (NCLH ROIC 6-8%), Royal Caribbean distinguishes itself through a relentless focus on experiential innovation, a powerful commercial flywheel, and strategic investments in proprietary technology and exclusive destinations. The company explicitly targets the value gap between cruising and land-based vacations, viewing it as a significant opportunity to attract new customers.

A foundational strength underpinning RCL's strategy is its investment in technology, particularly in digital platforms and artificial intelligence (AI). The company's AI-enabled yield management tools are becoming increasingly sophisticated, allowing for better demand forecasting and pricing optimization. This technology contributes to the ability to source the highest-yielding guests globally. Furthermore, investments in the guest-facing digital experience, including the mobile app and pre-cruise commerce engine, are driving tangible benefits. App bookings have doubled this year, and loyalty members, who are more likely to use the app, spend 25% more per trip than non-members. Crucially, the pre-cruise commerce engine, powered in part by AI, is shifting more onboard spending forward, with over 70% of guests purchasing activities before sailing and spending more than double compared to those who only buy onboard. Half of the onboard revenue in Q3 2024 was purchased through these AI-driven pre-cruise channels. This technological edge enhances the guest experience, streamlines operations, and directly contributes to revenue optimization and margin expansion, providing a competitive moat against rivals with less integrated or sophisticated digital capabilities.

Operational Excellence and Strategic Investments

Royal Caribbean's strategy is brought to life through continuous investment in its fleet and destination portfolio. The company is in a period of significant hardware introduction, with recent additions like Icon of the Seas, Utopia of the Seas, and Silver Ray already contributing to performance and future deliveries planned, including Star of the Seas (2025), Celebrity Xcel (2025), a third Icon-class ship (2026), a fourth Icon-class ship (2027), and a seventh Oasis-class ship (2028). These new ships are designed to be game-changers, elevating the guest experience and driving strong pricing and load factors. For instance, Utopia of the Seas is proving to be a highly successful entry point for new and younger cruisers in the short Caribbean market.

Beyond the ships, the expansion of the private destination portfolio is a critical differentiator. Perfect Day at CocoCay has been exceptionally successful, and the company is adding Royal Beach Club Paradise Island (opening end 2025), Royal Beach Club in Cozumel (opening 2026), and Perfect Day Mexico (opening 2027). These exclusive destinations enhance itineraries, drive demand, and represent a high-margin business expected to contribute significantly to future yield growth and profitability. The acquisition of the Port of Costa Maya and adjacent land for Perfect Day Mexico, valued at approximately $292 million, underscores the commitment to this strategy.

A notable strategic move is the launch of Celebrity River Cruises in 2027 with an initial order of 10 ships. This expands the company's vacation ecosystem into the fragmented river cruising market, leveraging the Celebrity brand's premium positioning. Management views this as a complementary high-margin, high-ROIC business with faster deployment and return profiles compared to ocean ships, aiming to capture substantial market share.

Operational efficiency is also a focus, with modernization activities planned for existing ships (like Ovation, Harmony, and Liberty of the Seas in 2026) to roll out learnings and features from newer vessels, enhancing the experience and potentially improving operational metrics across the fleet.

Financial Performance: Momentum Builds

The strategic focus on differentiated experiences, technological enhancement, and operational discipline is translating into strong financial performance. In the first quarter of 2025, Royal Caribbean reported total revenues of $3,999 million, a 7.3% increase from $3,728 million in Q1 2024. This growth was fueled by a 7.9% rise in passenger ticket revenues to $2,744 million and a 5.8% increase in onboard and other revenues to $1,255 million.

Yield performance was particularly strong, with Net Yields reaching $258.83 per Available Passenger Cruise Day (APCD) in Q1 2025, a 5.6% increase in constant currency compared to $247.20 in Q1 2024. This yield growth was driven by higher load factors and pricing on both new and existing ships, as well as increased onboard spending.

Cost management remained disciplined, with Net Cruise Costs Excluding Fuel (NCCXF) per APCD showing a slight increase of only 0.1% in constant currency, reaching $129.54 in Q1 2025 compared to $129.91 in Q1 2024. Total cruise operating expenses increased by a modest $23 million, primarily due to increased capacity.

The combination of strong revenue growth and disciplined cost control resulted in a significant improvement in profitability metrics. Adjusted EBITDA for Q1 2025 was $1,402 million, a 19.4% increase from $1,174 million in Q1 2024. The Adjusted EBITDA margin expanded by 360 basis points to 35.1% in Q1 2025 from 31.5% in the prior year period.

Net Income attributable to Royal Caribbean Cruises Ltd. more than doubled, reaching $730 million ($2.70 Diluted EPS) in Q1 2025, compared to $360 million ($1.35 Diluted EPS) in Q1 2024.

Cash flow generation also saw a notable increase, with net cash provided by operating activities rising by $0.3 billion to $1.6 billion in Q1 2025, primarily driven by the increase in operating income.

Outlook and the Perfecta Program

Building on the strong start to the year and robust booking trends, Royal Caribbean increased its full year 2025 guidance. The company now expects Adjusted Earnings Per Share (EPS) to be in the range of $14.55 to $15.55, representing approximately 28% growth compared to 2024. This updated guidance reflects the Q1 outperformance, a $0.37 benefit from favorable FX and fuel rates for the remainder of the year, and a $0.05 benefit from share repurchases.

The outlook assumes continued moderate capacity growth of approximately 5.5% for the full year, driven by new ship deliveries. Yield growth is projected to be in the range of 2.6% to 4.6% (constant currency), supported by the appeal of new ships, performance of the existing fleet, and contributions from private destinations. Net Cruise Costs Excluding Fuel (NCCXF) are expected to be between -0.1% and +0.9% (constant currency), reflecting ongoing focus on efficiency. Adjusted EBITDA is projected to grow by approximately 15%, with gross EBITDA margin expanding by around 210 basis points.

For the second quarter of 2025, the company anticipates capacity to be up 6% year-over-year, with Net Yield growth of 4.3% to 4.8% and NCCXF expected to be up 3.7% to 4.2%. Adjusted EPS for Q2 2025 is guided between $4.00 and $4.10.

The long-term ambition is encapsulated in the "Perfecta" Performance Program, targeting a 20% compound annual growth rate in Adjusted EPS compared to 2024 and a Return on Invested Capital (ROIC) of 17% or higher by the end of 2027. This program reinforces the commitment to the core formula of moderate growth and strong cost control, leveraging the investments in new hardware, destinations, and technology to drive future returns.

Balance Sheet Strength and Capital Allocation

A key achievement in the company's recovery journey has been the significant strengthening of its balance sheet. During Q1 2025, S&P Global Ratings upgraded Royal Caribbean's credit rating to investment grade, acknowledging the improved financial position and disciplined capital allocation.

The company ended Q1 2025 with $4.5 billion in liquidity, including $0.4 billion in cash and $4.1 billion in undrawn revolving credit facilities.

The focus remains on maintaining financial flexibility and further strengthening the balance sheet. The company expects to reduce leverage to below 3 times by the end of 2025. Capital expenditures for 2025 are projected at approximately $5.0 billion, primarily for new ships and destination initiatives, with $6.1 billion in committed financing already secured for ships on order.

With the balance sheet in a stronger position, the company has expanded its capital allocation strategy. A quarterly cash dividend of $0.75 per share was declared in February 2025 and paid in April 2025. Additionally, the company initiated a $1.0 billion share repurchase program in February 2025, opportunistically repurchasing $241 million of common stock during Q1 2025.

Risks and Challenges

While the outlook is positive, Royal Caribbean operates within a dynamic environment subject to various risks. Macroeconomic uncertainty, including potential shifts in consumer spending behavior or sentiment, could impact demand and pricing, although management notes that research suggests consumers continue to prioritize travel and value. Geopolitical events, fuel price volatility (though partially hedged, 59% hedged for 2025 at below market rates), and foreign currency exchange rate fluctuations can affect financial results.

Operational risks include potential disruptions from weather events (like hurricanes), unforeseen maintenance issues, or delays in new ship deliveries. The company's debt structure includes change of control provisions that could require accelerated repayment under certain circumstances. Legal proceedings, such as the ongoing Havana Docks lawsuit (despite the favorable appeal ruling, the plaintiff has petitioned the Supreme Court), also present potential liabilities, though the company believes routine claims are adequately covered by insurance. Maintaining compliance with debt covenants, including requirements for fixed charge coverage, net debt-to-capital ratios, and minimum liquidity, is essential.

Conclusion

Royal Caribbean Group's investment thesis is compelling, rooted in a clear strategy of moderate, disciplined growth, operational excellence, and a commitment to delivering differentiated vacation experiences. The company's recent performance, particularly the strong Q1 2025 results and record-breaking booking trends, underscores the effectiveness of its approach and the robust demand for its products.

Investments in innovative ships, exclusive private destinations, and expanding into adjacent markets like river cruising are key drivers expected to fuel future yield growth and capture market share from the broader vacation industry. The strategic focus on leveraging technology, including AI-driven commercial capabilities and integrated digital platforms, enhances efficiency, optimizes revenue, and strengthens customer loyalty, providing a competitive edge.

With the balance sheet significantly strengthened, achieving investment-grade metrics and enabling expanded capital allocation through dividends and share repurchases, Royal Caribbean is well-positioned to execute on its "Perfecta" program targets. While macroeconomic uncertainties and operational risks persist, the company's proven formula, strong book position, and focus on margin expansion suggest a positive trajectory for earnings growth and shareholder value creation in the years ahead.