Unit 8 Discussion: Royal Caribbean Cruises Invested

Unit 8 Discussionintroductionroyal Caribbean Cruisesinvested 14 Bi

Royal Caribbean Cruises invested $1.4 billion to build the Oasis of the Seas, a cruise ship that carries 5,400 passengers and stands 20 stories above the sea. The vessel is a third larger than any other cruise ship and contains 21 pools, 24 restaurants, 13 retail shops, and 300-foot water slides. When considering investment opportunities, managers must make two types of decisions—screening decisions and preference decisions. Screening decisions, which come first, pertain to whether or not a proposed investment is acceptable. Preference decisions come after screening decisions and attempt to answer the following question: “How do the remaining investment proposals, all of which have been screened and provide an acceptable rate of return, rank in terms of preference? That is, which one(s) would be best for the company to accept?” Sometimes preference decisions are called rationing decisions, or ranking decisions. Limited investment funds must be rationed among many competing alternatives. Hence, the alternatives must be ranked. Either the internal rate of return method or the net present value method can be used in making preference decisions. However, as discussed earlier, if the two methods are in conflict, it is best to use the net present value method, which is more reliable.

When using the internal rate of return (IRR) method to rank competing investment projects, the preference rule is: The higher the internal rate of return, the more desirable the project. The net present value (NPV) of one project cannot be directly compared to the NPV of another project unless the initial investments are equal. After an investment project has been approved and implemented, a post-audit should be conducted. A post-audit involves checking whether or not expected results are actually realized. This is a key part of the capital budgeting process because it helps keep managers honest in their investment proposals.

Any tendency to inflate the benefits or downplay the costs in a proposal should become evident after a few post-audits have been conducted. The post-audit also provides an opportunity to reinforce and possibly expand successful projects and to cut losses on floundering projects. The same capital budgeting method should be used in the post-audit as was used in the original approval process. That is, if a project was approved on the basis of a NPV analysis, then the same procedure should be used in performing the post-audit. However, the data used in the post-audit analysis should be actual observed data rather than estimated data.

This gives management an opportunity to make a side-by-side comparison to see how well the project has succeeded. It also helps assure that estimated data received on future proposals will be carefully prepared because the persons submitting the data knows that their estimates will be compared to actual results in the post-audit process. Actual results that are far out of line with original estimates should be carefully reviewed. Source : Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.). Columbus, OH: McGraw-Hill Education.

Paper For Above instruction

The Oasis of the Seas project by Royal Caribbean Cruises offers a compelling case for analyzing post-investment performance and strategizing improvements. This report presents an assessment of the current financial status of the Oasis of the Seas, explores potential remedial strategies, and outlines a comprehensive plan aimed at enhancing its profitability and operational efficiency. Using sound financial analysis and considering ethical implications, this report seeks to guide management decisions toward restoring the project's financial viability.

Current Status of the Oasis of the Seas Investment

Initially, the Oasis of the Seas was expected to revolutionize the cruise industry, attracting record-breaking passenger numbers and generating significant revenue. However, recent performance data indicate that the project has fallen short of expectations. Contributing factors include increased operational costs, declining ridership in certain markets, and external economic factors such as fluctuating fuel prices and global travel restrictions due to the COVID-19 pandemic. The project's net present value (NPV), calculated based on actual observed revenues and costs, indicates that it is currently in a marginal zone, with cash flows barely covering operating expenses, and in some periods, resulting in losses. This situation necessitates strategic intervention to prevent further financial decline and to ensure sustainable profitability.

Financial and Economic Analysis

To understand the roots of underperformance, an in-depth financial analysis reveals that fixed costs, including crew wages, maintenance, and infrastructure expenses, have remained high despite reduced passenger numbers. Variable costs fluctuate with occupancy rates, further squeezing margins. The decline in revenue per passenger margin, coupled with heightened operational costs, has pushed the project into a negative cash flow situation. Economically, the cruise industry faces secular shifts, such as changing consumer preferences favoring shorter, more affordable cruises, and increased competition from emerging cruise lines and alternative vacation options. This environment underscores the importance of strategic adaptation to remain competitive.

Strategic Alternatives for Improvement

Several alternatives exist to turn the Oasis of the Seas project around. First, operational cost restructuring could include renegotiating supplier contracts, optimizing crew scheduling, and adopting more fuel-efficient technologies. Second, targeted marketing campaigns could bolster passenger numbers, focusing on high-yield market segments. Third, diversifying revenue streams by expanding onboard amenities, introducing new premium packages, and increasing retail and dining options could increase per-passenger revenue. Fourth, leveraging technology for more efficient scheduling, inventory management, and customer engagement can improve overall operational efficiency. Lastly, strategic partnerships with travel agencies and promotional collaborations can increase booking volumes.

Plan to Improve Performance

The recommended plan prioritizes a combination of cost reduction and revenue enhancement. Immediate actions include conducting a comprehensive review of operational costs, focusing on areas with the highest inefficiencies. Negotiating better terms with suppliers and investing in energy-saving technologies can produce quick savings. Simultaneously, launching targeted marketing initiatives aimed at high-value clientele, such as luxury travelers and corporate clients, will help boost onboard revenues. These marketing efforts should utilize digital channels, data analytics, and personalized offerings to reach prospective customers effectively.

Implementation of onboard experience enhancements graded on profitability can further attract loyal customers and increase ancillary spending. Upgrading amenities and introducing exclusive packages promises higher revenue per passenger. Developing strategic alliances with entertainment and retail brands can also augment revenue streams while creating a distinctive cruise experience that differentiates the Oasis of the Seas from competitors.

In addition, establishing a robust monitoring framework to track financial and operational metrics will ensure timely identification of issues and prompt corrective actions. Regular post-audit reviews, as recommended by Garrison et al. (2014), will help verify whether implemented strategies are yielding the desired results and facilitate continuous improvement.

Ethical Considerations

Throughout this process, managing ethical implications is vital. Transparency with stakeholders about financial realities and future plans fosters trust. Ethical marketing practices should be maintained, avoiding misleading claims about the cruise's value proposition. Cost-cutting measures must not compromise safety standards or employee welfare. Additionally, environmental responsibility should be a core element, ensuring that technological upgrades align with sustainability principles. These ethical considerations not only enhance the company's reputation but also support long-term success and stakeholder confidence.

Conclusion

In conclusion, although the Oasis of the Seas project underperformed relative to initial projections, strategic intervention combining operational efficiency, marketing, and revenue diversification can steer it back toward profitability. Adopting a systematic post-audit approach as part of ongoing management ensures continuous assessment and improvement. Ethical management practices underpin all strategic initiatives, helping to maintain stakeholder trust while pursuing financial recovery. Implementation of these recommendations is essential for transforming the Oasis of the Seas from a financial liability into a sustained source of revenue for Royal Caribbean Cruises.

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