On your first day on a cruise ship, you notice something.
Every crew member wears a small badge with a name and a nationality. Jonathan, Philippines. Sari, Indonesia. Dmitri, Romania.
At first, it looks like a celebration of diversity.
In reality, it is a sorting system. Your nationality often determines which deck you live on.
A cruise ship has a literal dividing line: the waterline.
Above the waterline is the world you see. Balcony suites, infinity pools, everything a few hundred dollars a day can buy. Below the waterline is another world entirely.
The crew call the main corridor running through the ship I-95, named after the highway on the U.S. East Coast. Blue carpet. Industrial lighting. Shift schedules taped to the walls. At 2 a.m., while you are asleep in your suite, someone is coming out of I-95, pushing a vacuum cleaner upstairs to clean the deck you walked on earlier.
Crew members live below the waterline. Two to four people share a cabin of less than eight square meters, with bunk beds and shared bathrooms. If you live near the stern, you feel the engine vibrate all night. If you live near the bow, you hear the anchor chain slam down. Earplugs are a necessity. No sunlight. Contracts last six to ten months, with not a single day off. Ten to fourteen hours a day, seven days a week.
One waiter from Bohol, Jonathan, has worked at sea for more than ten years. He was absent for the birth of all four of his children. Every time, he was somewhere serving dessert to someone else's table. But this job paid for two of his children to finish college. A Filipino service worker on board earns about $800 to $1,500 a month, roughly three to five times what they could make back home. For every opening, there are a hundred people waiting.
Not because life on board is good.
Because life back home is worse.
This economic equation only works because of a very specific structure. 👉 Full RCL Report
Royal Caribbean's parent company is incorporated in Liberia, in West Africa. Its ships sail under the flag of the Bahamas. One in Africa, one in the Caribbean. Neither in the United States.
That structure makes two things largely disappear at the same time: U.S. corporate tax, and U.S. labor law.
On the tax side, it relies on Section 883 of the U.S. tax code, a special exemption for international shipping. Last year, the company generated nearly $3 billion in profit and paid only $46 million in tax. Put differently, for every $100 it earned, it paid just $1.60 in tax. A U.S. company with similar profits would likely have paid something closer to $500 million or $600 million.
On the labor side, it relies on the Bahamian flag. No U.S. minimum wage. No U.S. overtime limits. No mandatory paid leave. There is a saying that circulates onboard: “If you’re unhappy, you can go home. Buy your own ticket.”
One structure removes two obligations: money owed to the government, and protections owed to workers.
But in 2020, the cost of that structure became visible.
During the pandemic, the U.S. airline industry received more than $50 billion in government support: loans, subsidies, payroll protection, the full package. Cruise companies got nothing. Congress’s logic was simple: if you are incorporated in Liberia, you are not an American company.
The same structure that minimized taxes also locked the company out of the safety net.
For fifteen months, Royal Caribbean’s revenue fell to zero, but the roughly 100,000 people tied to its ships could not simply be dismissed. Under maritime labor rules, the company still had repatriation obligations. Contracts were still active. People could not leave, and ships could not really operate. The company was burning nearly $300 million a month. More than 70,000 crew members were trapped inside steel hulls, unable to disembark, unable to go home, while ships with zero revenue continued to drain cash.
Saving $500 million or $600 million in tax each year sounds wonderful.
Burning $300 million a month is survivable too, as long as this kind of event does not happen very often.
Our team ran the numbers. Based on academic estimates, a zero-revenue event on the scale of COVID happens roughly once every 35 years. And yet the market assigns Royal Caribbean a P/E multiple more than twice that of Delta Air Lines: around 20x versus 9x. The company that can be shut down longer, burns cash faster, and cannot count on a bailout is somehow valued more highly.
That is not something I can easily explain.
Now look at the margin curve.
Last year, operating margin reached 27.4%, more than eight percentage points higher than five years ago. Wall Street calls this a “structural recovery.”
Our team broke that number apart. Of the revenue growth, the truly structural piece — brand upgrades and permanently higher onboard spending habits — is probably only about one-third. The other two-thirds came from inflation pass-through, post-COVID supply shortages, and a cyclical tailwind.
There was another hidden contributor. Last year, interest expense fell by $600 million — from $1.6 billion to $1.0 billion — because the company’s credit rating moved from junk back to investment grade. That drop in interest cost accounted for more than 40% of last year’s EPS growth.
That is not an operating improvement.
That is a one-time refinancing benefit. But the market is applying a 20x multiple to earnings that include this benefit, as if it will recur every year.
There is another thing I find hard to ignore.
Last year, the company spent $1.16 billion buying back its own stock. Management said it wants to raise annual shareholder returns to $2 billion. But free cash flow was only $1.2 billion. The gap — about $800 million — has to come from additional borrowing.
Borrowing money to fund buybacks.
That is a classic late-cycle move. Management either knows, or suspects, that today’s high-margin window will not last, so it wants to return cash to shareholders while the numbers still look strong.
What makes it even more interesting is the CEO himself. Jason Liberty has been a net seller of his own shares in each of the past eight quarters. The company is buying. He is selling.
Bullish in words. Bearish in action.
I do not know which signal is more honest. But SEC filings are hard to argue with.
If you expand the crew line item in an analyst model, here is what you find:
About 106,000 employees, accounting for nearly one-fifth of revenue, make up the company’s single largest cost bucket. But much of that cost is quasi-fixed. Crew members are on contracts. Whether the ship sails full or half full, you still pay them. That is why cruise companies have such extreme operating leverage: if revenue rises 1%, profit can rise 3% or 4%.
And the reverse is also true.
In 2008, revenue fell by less than 10%.
Net profit fell by three-quarters.
Because the wages of those 100,000 people below the waterline do not disappear just because demand softens.
So what does today’s stock price really imply? We ran the reverse math.
To justify the current price, the market has to believe that over the next decade this company can grow EBITDA at 12% annually. That global cruise penetration rises from under 3% to nearly 9%. That pricing power remains at 7% per year, even though next year’s guidance is already down to just 1% to 1.5%, barely keeping up with inflation. And that not a single zero-revenue event happens over the next ten years.
The probability of all those conditions holding at the same time is probably around one in six.
The market is paying full price for a one-in-six outcome.
I am not saying this is a bad company. Icon of the Seas can generate more than $3 million of revenue a day. CocoCay earns returns on invested capital north of 200%. Management has done an exceptional job on the product side.
But a great product and a justified valuation are two different things.
Whenever I think about this company, I come back to that line.
Above the waterline is what you can see: record margins, product upgrades, ships sailing full.
Below the waterline is what you cannot see: 100,000 quasi-fixed labor costs, the double-edged sword of an offshore structure, and a valuation resting on a one-in-six probability.
It is the same ship.
And the same set of numbers.