Carnival – 2011

Forest David

A. Case Abstract
Carnival is a comprehensive strategic management case that includes the company’s year-end 2010
financial statements, organizational chart, competitor information and more. The case time setting is the
year 2011. Sufficient internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company. Headquartered in Miami, Florida,
Carnival’s common stock is publicly traded under the ticker symbol CCL.

The world's laregest cruise operator, Carnival operates a dozen cruise lines and about 100 ships with a total
passenger capacity of more than 190,000. Carnival operates in North America primarily through its
Princess Cruise Line, Holland America, and Seabourn luxury cruise brand, as well as its flagship Carnival
Cruise Lines unit. Brands such as AIDA, P&O Cruises, and Costa Cruises offer services to passengers in
Europe, and the Cunard Line runs luxury trans-Atlantic liners. Carnival operates as a dual-listed company
with UK-based Carnival plc, forming a single enterprise under a unified executive team.

B. Vision Statement (proposed)

Our vision is to be the world leader in the vacation industry.

C. Mission Statement (proposed)

Our mission is to provide our valued customers with an unrivalled cruise vacation experience (1, 2). We
believe that “good ethics is good business” and treat our employees like family (6, 9). We strive to provide
state of the art cruise ships all over the world (3, 4). We follow all maritime regulations while making sure
we are maximizing shareholder’s profit (5, 8). We also believe in giving back to our communities (7).

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
D. External Audit
Opportunities

1. The number of cruise passengers increased by 1 million in 2009.

2. Cruise industry’s primary age group is expected to grow by 20 million people in the U.S. and Canada.
3. Cruise industry’s primary age group is expected to grow 12% in Western European countries.
4. Travel and Tourism industry is expected to grow by 4% per year over the next decade all over the
world.
5. North American cruise guests have a 95% satisfaction rate.
6. Major competitor Royal Caribbean’s prices are much higher.
7. 90% of Americans have never been on a cruise.
8. Cruises only represent 2% of the overall vacation market.
9. 63% of cruise passengers are sourced from North America.
10. Young travelers prefer more modern and high-tech cruises.

Threats

1. Mideast tension causing oil prices to rise.

2. Currency risk- the U.S. dollar maybe losing it’s worth.
3. Increasing unemployment rate causing people to cut excess spending.
4. Gambling revenues are expected to decline 6%.
5. Unexpected weather conditions.
6. Pirate attacks and civil unrest.
7. Rising costs of ship building.
8. Long-term climate change and rises in sea level may threaten key destinations.
9. Lack of availability of convenient and safe port destinations.

Competitive Profile Matrix

Carnival Royal Caribbean Disney

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.12 4 0.48 3 0.36 1 0.12
Consumer Loyalty 0.09 4 0.36 2 0.18 3 0.27
Price Competiveness 0.10 4 0.40 1 0.10 3 0.30
Product Quality 0.08 2 0.16 3 0.24 4 0.32
E-commerce 0.07 1 0.07 4 0.28 2 0.14
Global Expansion 0.11 4 0.44 3 0.33 1 0.11
Customer Service 0.09 3 0.27 1 0.09 2 0.18
Management Experience 0.05 2 0.10 1 0.05 3 0.15
Production Capacity 0.07 4 0.28 3 0.21 1 0.07
Sales Distribution 0.07 3 0.21 2 0.14 1 0.07
Financial Position 0.09 4 0.36 1 0.09 3 0.27
Org. Structure 0.06 1 0.06 3 0.18 2 0.12
Totals 1.00 3.19 2.25 2.12
 EFE Matrix

Opportunities Weight Rating Weighted Score

1. The number of cruise passengers increased by 1 million in 2009. 0.10 4 0.40
2. Cruise industry’s primary age group is expected to grow by 20 0.10 4 0.40
million people in the U.S. and Canada.
3. Cruise industry’s primary age group is expected to grow 12% in 0.04 3 0.12
Western European countries.
4. Travel and Tourism industry is expected to grow by 4% per year 0.04 3 0.12
over the next decade all over the world.
5. North American cruise guests have a 95% satisfaction rate. 0.05 3 0.15
6. Major competitor Royal Caribbean’s prices are much higher. 0.07 4 0.28
7. 90% of Americans have never been on a cruise. 0.05 2 0.10
8. Cruises only represent 2% of the overall vacation market. 0.03 3 0.09
9. 63% of cruise passengers are sourced from North America. 0.04 3 0.12
10. Young travelers prefer more modern and high-tech cruises. 0.03 2 0.06

Threats Weight Rating Weighted Score

1. Mideast tension causing oil prices to rise. 0.12 2 0.24
2. Currency risk- the U.S. dollar maybe losing it’s worth. 0.06 3 0.18
3. Increasing unemployment rate causing people to cut excess
0.10 2 0.20
spending.
4. Gambling revenues are expected to decline 6%. 0.04 2 0.08
5. Unexpected weather conditions. 0.01 3 0.03
6. Pirate attacks and civil unrest. 0.01 4 0.04
7. Rising costs of ship building. 0.06 2 0.12
8. Long-term climate change and rises in sea level may threaten key
0.01 2 0.02
destinations.
9. Lack of availability of convenient and safe port destinations. 0.04 2 0.08
TOTALS 1.00 2.83

E. Internal Audit
Strengths

1. Carnival Corporation owns almost half of the total passenger capacity of the cruise industry in North
America.
2. The Holland America line has the highest rate of repeat customers in the cruise industry.
3. Seabourn Yachts have a service ratio of one staff member to one guest.
4. Over the next 3 years in Europe, our net passenger capacity growth rate is expected to be 8.9%
compared to the industry average of 5.8%.
5. Carnival owns P&O Cruises which is the largest and best known cruise brand in the UK.
6. Approximately 400,000 Brazilians and Argentineans took a cruise in 2010 and almost half of these
guests sailed on a Carnival Corporation and plc ships.
7. Our occupancy rates for all quarters in 2010 were near 100%.
8. Costa, Italy and Europe’s #1 cruise line, passenger capacity will grow by 24% over the next 3 years.
9. The Senior Cruise Director’s blog has attracted over 5.5 million visits which is more than any other
cruise brand.
10. Carnival Cruise lines operates from 19 homeports in North America which is more than any other
cruise line.

Weaknesses

1. No public vision statement.

2. Sales are mainly through travel agents costing a 10% sales fee and additional commissions.
3. Low market penetration levels in Asia and Australia.
4. Non-user friendly website.
5. 33% of operating revenue cannot be reduced because of fixed costs.
6. Total revenues have been flat since 2008.
7. Cash can only be used in the gaming area of the boat.
8. Working environment is difficult due to varying cultural backgrounds and communication styles.
9. $3.3 billion in goodwill on balance sheet.
10. Old ships need renovations.

Financial Ratio Analysis

Growth Rate Percent Carnival Industry S&P 500

Sales (Qtr vs year ago qtr) 11.70 24.80 14.50
Net Income (YTD vs YTD) NA NA NA
Net Income (Qtr vs year ago qtr) 2.60 152.20 48.60
Sales (5-Year Annual Avg.) 5.46 31.99 8.30
Net Income (5-Year Annual Avg.) -2.57 1.66 8.72
Dividends (5-Year Annual Avg.) -12.94 -3.38 5.61

Profit Margin Percent

Gross Margin 46.6 41.4 39.5
Pre-Tax Margin 12.6 16.2 18.2
Net Profit Margin 12.5 15.7 13.2
5Yr Gross Margin (5-Year Avg.) 50.2 41.0 39.7

Liquidity Ratios
Debt/Equity Ratio 0.40 0.33 0.98
Current Ratio 0.2 0.3 1.3
Quick Ratio 0.1 0.3 0.9

Profitability Ratios
Return On Equity 8.2 9.7 26.0
Return On Assets 5.1 -0.9 8.8
Return On Capital 6.1 4.0 11.8
Return On Equity (5-Year Avg.) 10.9 4.4 23.8
Return On Assets (5-Year Avg.) 6.4 2.6 8.0
Return On Capital (5-Year Avg.) 7.8 3.0 10.8

Efficiency Ratios
Income/Employee 22,805 38,582 126,792
Revenue/Employee 183,028 245,252 1 Mil
Receivable Turnover 41.3 26.0 15.2
Inventory Turnover 24.9 80.2 12.4
Net Worth Analysis (in millions)

Stockholders Equity $ 23,031.00

Net Income x 5 $ 9,890.00
(Share Price/EPS) x Net Income $ 26,263.00
Number of Shares Outstanding x Share Price $ 25,048.10
Method Average $ 21,058.02

IFE Matrix

Strengths Weight Rating Weighted Score

1. Carnival Corporation owns almost half of the total passenger
0.10 4 0.40
capacity of the cruise industry in North America.
2. The Holland America line has the highest rate of repeat
0.05 4 0.20
customers in the cruise industry.
3. Seabourn Yachts have a service ratio of one staff member to one
0.03 4 0.12
guest.
4. Over the next 3 years in Europe, our net passenger capacity
growth rate is expected to be 8.9% compared to the industry 0.05 4 0.20
average of 5.8%.
5. Carnival owns P&O Cruises which is the largest and best known
0.03 4 0.12
cruise brand in the UK.
6. Approximately 400,000 Brazilians and Argentineans took a cruise
in 2010 and almost half of these guests sailed on a Carnival 0.03 4 0.12
Corporation and plc ships.
7. Our occupancy rates for all quarters in 2010 were near 100%. 0.10 4 0.40
8. Costa, Italy and Europe’s #1 cruise line, passenger capacity will
0.03 4 0.12
grow by 24% over the next 3 years.
9. The Senior Cruise Director’s blog has attracted over 5.5 million
0.03 4 0.12
visits which is more than any other cruise brand.
10. Carnival Cruise lines operates from 19 homeports in North
0.07 4 0.28
America which is more than any other cruise line.

Weaknesses Weight Rating Weighted Score

1. No public vision statement. 0.02 1 0.02
2. Sales are mainly through travel agents costing a 10% sales fee
0.05 1 0.05
and additional commissions.
3. Low market penetration levels in Asia and Australia. 0.07 1 0.07
4. Non-user friendly website. 0.04 1 0.04
5. 33% of operating revenue cannot be reduced because of fixed
0.06 1 0.06
costs.
6. Total revenues have been flat since 2008. 0.07 2 0.14
7. Cash can only be used in the gaming area of the boat. 0.03 1 0.03
8. Working environment is difficult due to varying cultural
0.03 2 0.06
backgrounds and communication styles.
9. $3.3 billion in goodwill on balance sheet. 0.05 1 0.05
10. Old ships need renovations. 0.06 2 0.12
TOTALS 1.00 2.72
F. SWOT
SO Strategies
1. Purchase 10 new ships for the North American market (S1, S10, O1, O5, O7, O9).

WO Strategies
1. Publish a Vision Statement (W1, O7, O,10).
2. Hire marketing research firm to determine profitable customers who have never been on a cruise
before (W6, O7).

ST Strategies
1. Purchase 5 new ships for European markets (S8, T2).
2. Purchase 5 new ships for South American markets (S6, T2).

WT Strategies
1. Increase oil hedge positions to protect against rising oil prices (W6, T1).
2. Renovate old ships (W10, T7).

G. SPACE Matrix
 FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
Return on Equity (ROE) 4 Rate of Inflation -2
Return on Assets (ROA) 5 Technological Changes -2
Debt/Equity Ratio 5 Price Elasticity of Demand -2
Gross Margin 6 Competitive Pressure -4
Current Ratio 2 Barriers to Entry into Market -2
Financial Position (FP) Average 4.4 Stability Position (SP) Average -2.4

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)
Market Share -1 Growth Potential 4
Product Quality -2 Financial Stability 3
Customer Loyalty -2 Ease of Entry into Market 4
Technological know-how -2 Resource Utilization 3
Control over Suppliers and Distributors -4 Profit Potential 3
Competitive Position (CP) Average -2.2 Industry Position (IP) Average 3.4
H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Carnival

Quadrant III Quadrant IV

Slow Market Growth

I. The Internal-External (IE) Matrix

 The Total IFE Weighted Scores
Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High

3.0 IV V VI

The
EFE
Total Medium Carnival
Weighted
Scores

2.0 VII VIII IX

Low

1.0
J. QSPM

Hire
Purchase 20
marketing
new ships
research firm
Opportunities Weight AS TAS AS TAS
1. The number of cruise passengers increased by 1 million in 2009. 0.10 4 0.40 2 0.20
2. Cruise industry’s primary age group is expected to grow by 20
0.10 4 0.40 3 0.30
million people in the U.S. and Canada.
3. Cruise industry’s primary age group is expected to grow 12% in
0.04 3 0.12 2 0.08
Western European countries.
4. Travel and Tourism industry is expected to grow by 4% per year
0.04 1 0.04 4 0.16
over the next decade all over the world.
5. North American cruise guests have a 95% satisfaction rate. 0.05 2 0.10 1 0.05
6. Major competitor Royal Caribbean’s prices are much higher. 0.07 0 0.00 0 0.00
7. 90% of Americans have never been on a cruise. 0.05 2 0.10 4 0.20
8. Cruises only represent 2% of the overall vacation market. 0.03 2 0.06 4 0.12
9. 63% of cruise passengers are sourced from North America. 0.04 4 0.16 3 0.12
10. Young travelers prefer more modern and high-tech cruises. 0.03 3 0.09 2 0.06

Threats Weight AS TAS AS TAS

1. Mideast tension causing oil prices to rise. 0.12 0 0.00 0 0.00
2. Currency risk- the U.S. dollar maybe losing it’s worth. 0.06 3 0.18 2 0.12
3. Increasing unemployment rate causing people to cut excess
0.10 1 0.10 3 0.30
spending.
4. Gambling revenues are expected to decline 6%. 0.04 1 0.04 3 0.12
5. Unexpected weather conditions. 0.01 0 0.00 0 0.00
6. Pirate attacks and civil unrest. 0.01 0 0.00 0 0.00
7. Rising costs of ship building. 0.06 0 0.00 0 0.00
8. Long-term climate change and rises in sea level may threaten key
0.01 0 0.00 0 0.00
destinations.
9. Lack of availability of convenient and safe port destinations. 0.04 2 0.08 3 0.12
 Hire
Purchase 20
marketing
new ships
research firm
Strengths Weight AS TAS AS TAS
1. Carnival Corporation owns almost half of the total passenger
0.10 3 0.30 2 0.20
capacity of the cruise industry in North America.
2. The Holland America line has the highest rate of repeat
0.05 3 0.15 2 0.10
customers in the cruise industry.
3. Seabourn Yachts have a service ratio of one staff member to one
0.03 3 0.09 2 0.06
guest.
4. Over the next 3 years in Europe, our net passenger capacity
growth rate is expected to be 8.9% compared to the industry 0.05 3 0.15 2 0.10
average of 5.8%.
5. Carnival owns P&O Cruises which is the largest and best known
0.03 3 0.09 2 0.06
cruise brand in the UK.
6. Approximately 400,000 Brazilians and Argentineans took a cruise
in 2010 and almost half of these guests sailed on a Carnival 0.03 3 0.09 2 0.06
Corporation and plc ships.
7. Our occupancy rates for all quarters in 2010 were near 100%. 0.10 3 0.30 2 0.20
8. Costa, Italy and Europe’s #1 cruise line, passenger capacity will
0.03 3 0.09 2 0.06
grow by 24% over the next 3 years.
9. The Senior Cruise Director’s blog has attracted over 5.5 million
0.03 3 0.09 2 0.06
visits which is more than any other cruise brand.
10. Carnival Cruise lines operates from 19 homeports in North
0.07 3 0.21 2 0.14
America which is more than any other cruise line.

Weaknesses Weight AS TAS AS TAS

1. No public vision statement. 0.02 0 0.00 0 0.00
2. Sales are mainly through travel agents costing a 10% sales fee
0.05 1 0.05 3 0.15
and additional commissions.
3. Low market penetration levels in Asia and Australia. 0.07 3 0.21 2 0.14
4. Non-user friendly website. 0.04 0 0.00 0 0.00
5. 33% of operating revenue cannot be reduced because of fixed
0.06 1 0.06 3 0.18
costs.
6. Total revenues have been flat since 2008. 0.07 2 0.14 4 0.28
7. Cash can only be used in the gaming area of the boat. 0.03 0 0.00 0 0.00
8. Working environment is difficult due to varying cultural
0.03 0 0.00 0 0.00
backgrounds and communication styles.
9. $3.3 billion in goodwill on balance sheet. 0.05 0 0.00 0 0.00
10. Old ships need renovations. 0.06 4 0.24 1 0.06
TOTALS 4.13 3.80
K. Recommendations
1. Publish a Vision Statement.
2. Hire marketing research firm to determine profitable customers who have never been on a cruise
before for $100M
3. Purchase 20 new ships for American, South American, and European markets for $300M each.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $6,100M
Stock Price: $31.69
Shares Outstanding: 776
Interest Rate: 5%
Tax Rate: 0%

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom
EBIT $2,000 $3,000 $4,000 $2,000 $3,000 $4,000
Interest 0 0 0 305 305 305
EBT 2,000 3,000 4,000 1,695 2,695 3,695
Taxes 0 0 0 0 0 0
EAT 2,000 3,000 4,000 1,695 2,695 3,695
# Shares 968 968 968 776 776 776
EPS 2.07 3.10 4.13 2.18 3.47 4.76

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $2,000 $3,000 $4,000 $2,000 $3,000 $4,000
Interest 244 244 244 61 61 61
EBT 1,756 2,756 3,756 1,939 2,939 3,939
Taxes 0 0 0 0 0 0
EAT 1,756 2,756 3,756 1,939 2,939 3,939
# Shares 814 814 814 930 930 930
EPS 2.16 3.38 4.61 2.08 3.16 4.24

M. Epilogue

Carnival Corp. operates 101 ships totaling approximately 200,000 lower berths with 10 new ships
scheduled to be delivered between April 2012 and March 2016. Carnival Corp. & plc also operates Holland
America Princess Alaska Tours, the leading tour company in Alaska and the Canadian Yukon. Traded on
both the New York and London Stock Exchanges, Carnival Corporation & plc is the only group in the
world to be included in both the S&P 500 and the FTSE 100 indices.
In Winter 2012 and Spring 2013, two Holland America Line ships –– ms Oosterdam and ms Volendam ––
will sail a series of Australia, New Zealand and South Pacific cruises, visiting more than 50 ports where
guests can revel in the cosmopolitan attractions of Sydney, Melbourne and Auckland, and explore the
exotic landscapes of Vanuatu and Fiji in the South Pacific. The complete series of sailings ranges from 10-
to 58-days and features for the first time one of the line's larger Vista-class ships, ms Oosterdam. This
addition represents almost a 25 percent capacity increase in the Australia/ South Pacific region for Holland
America Line.

Carnival is having a huge, exclusive concert to welcome the line's newest "Fun Ship" to its year-round
homeport of Galveston, Texas. On Sunday, November, 13, 2011, set to the backdrop of the spectacular new
Carnival Magic from Pier 21, thousands of fans of Maroon 5 and Carnival will be treated to a free, ticketed
concert by the multi-platinum group the day before the new vessel sets sail on its inaugural U.S. voyage.
Carnival Magic, which entered service in May 2011 in Europe, will make its transatlantic voyage to arrive
in Galveston on November 13.

Carnival has 23 "Fun Ships" operate three- to 16-day voyages to The Bahamas, Caribbean, Mexican
Riviera, Alaska, Hawaii, Panama Canal, Canada, New England, Bermuda, Europe, the Pacific Islands and
New Zealand.  In addition to the 130,000-ton Carnival Magic, which debuted in Europe May 1, 2011, the
new 130,000-ton Carnival Breeze is scheduled to enter service June 3, 2012.

In October 2011, Carnival announced partnerships with entertainer George Lopez, who will become
Carnival's creative director for comedy and enhance its fleetwide comedy clubs; Food Network star Guy
Fieri, who will develop a burger venue called Guy's Burger Joint; leading video game manufacturer EA
SPORTS to create the first-ever EA SPORTS Bar at sea, and Hasbro for new larger-than-life game shows
featuring iconic games and brands. "Fun Ship 2.0 is the largest and most ambitious initiative that our
company has ever undertaken and it will serve to significantly transform the Carnival vacation experience
for our guests," said Gerry Cahill, president and CEO of Carnival Cruise Lines. "Through breakthrough
partnerships with some of today's biggest talents and most popular entertainment brands, plus our very own
new branded experiences and on-board destinations, Carnival fans and those new to our cruises are
destined for an incredible vacation experience."

The Carnival Liberty will be the first ship to feature many of the new dining and bar venues when it returns
from a scheduled refurbishment later this month.  Fourteen ships are scheduled to receive many of the Fun
Ship 2.0 enhancements through 2015.  Shareholders of Carnival Corp. & plc stock will receive a dividend
of $0.25 per share, a record date for the quarterly dividend of November 25, 2011, and a payment date of
December 16, 2011.