The Walt Disney Company, headquartered at Walt Disney Studios in Burbank, California, is the ranked as the second largest media and entertainment conglomerate after Comcast. In addition to owning and operating studios, parks, resorts, and media, Disney has been successfully navigating a relatively small cruise line since 1998 having a worldwide cruise market share of 3%.

It appears that Mickey has been more successful in charming its marine customers than its terrestrial customers. Two of its four fleets, Magic and Wonder, have generated better returns than any of the company’s theme-parks.

Why are Disney Cruise Lines so profitable? The business model is not very intricate but one that may be a bit salty in taste.

Background

Disney cruise line operates four ships: Disney Magic, Disney Wonder, Disney Dream, and Disney Fantasy. The company also owns Castaway Cay, a private island in the Bahamas designed as an exclusive port for Disney’s ships. The number of staterooms in each ship varies between 875 to 1,250. Therefore, a Disney ship can accommodate anywhere between 3,500 and 5,000 guests, which excludes the 1,000 crew/staff members working round the clock to make the experience magical for its on-board guests. In 2016 Cruise Critic Cruisers’ Choice Awards, three of Disney’s ships won 11 category awards.

Disney ships are the first in the industry to be designed and built as family cruise liners with the ultimate objective of accommodating parents and children into the travel plans. Unlike most other cruise liners, Disney ships do not house casinos.

The Magical Numbers

The accounting of income from cruise lines must carefully match revenues against expenses for the current reporting period. The cost of a ship, which can be hover around $750 million, is capitalized and typically depreciated over 40 years. Therefore, the cost of the ship allocated as an annual expense is around $18.75 million. Much of the cost of building Disney ships resides on Disney’s balance sheet as an asset, which is reduced over time by the amount of accumulated depreciation. Each ship is conjectured to generate between $75 million and $150 million in profits depending on the size of the ship.

While Disney cruise lines may charge a small premium over other cruise lines, cruise fares are set quite low. The key goal is to generate large volume of passengers by charging low tariffs but subsequently charge additional funds for on-board services which include purchases of alcohol, Disney paraphernalia, paintings, rental equipment, tax free items, use of SPAs, massages, bottled water, and various activities on land. It is not unusual for families to end up paying 25% to 50% added surcharges accrued during the voyage.

Cruise lines are most cost efficient. Much of the staff and crew is international with a high proportion of the crew drawn from emerging and developing countries which means that Disney pays a tiny fraction of competitive wages. There is also a large deep-sea buried surcharge. The company has a policy of centralized tipping system and participation in the Disney tipping program is almost mandatory for all passengers. Nearly 10% of the cruise ship tariff is levied on all customers as an added surcharge for rendering high quality service. Moreover, cruise lines are typically registered in countries with very low taxes which lowers effective taxes.

Low and behold, you have a hefty stream of profits because total revenues are large while expenses are low. An initial capital investment of $750 million is able to generate a stream of high cash flows for 20 plus years. In the case of Disney, the profits are sizeable because it is able to leverage the Disney name.

Navigator Igor

Disney Chairman and CEO Bob Iger announced last month at the company’s 2016 annual shareholders’ meeting that the company plans to build two new ships which are anticipated to be much larger than the current ships. These ships are expected to join the Disney Cruise Line fleet in 2021 and 2023. Once operational, according to Goldman Sachs analysts’ predictiosn, Disney’s cruise revenues are estimated to reach $1 billion a year.

Are you ready to set sail on one of Disney’s cruises or would you rather buy a Disney stock? Either way you and your kids would become winners!

Miami, April 15, 2016; 12.33A

http://www.frommers.com/deals/cruise/thats-ridiculous-cruise-lines-and-the-passengers-they-carry#ixzz45jsG2j39

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