Oceania sails to success on a shoestring

**Ally** · 05-30-2007, 07:44 AM

Frank Del Rio, chairman and CEO of Oceania Cruises, started his cruise line on a shoestring budget and has now sold a majority state to Apollo Management.

The voyage of Oceania

• January 2003: Oceania opens offices in Miami with 20 employees.
• July 2003: Maiden voyage of the Regatta, its first leased R-class ship from bankrupt Renaissance.
• April 2004: Maiden voyage of its second R-class ship, the Insignia.
• November 2005: The Nautica, its third R-class ship, begins cruises.
• November 2006: Oceania buys its three leased ships and buys out CruiseInvest's stake.
• February 2007: It sells majority stake to Apollo Management.
• March 2007: Oceania orders two new ships for $1 billion with an option on a third.
At the annual SeaTrade cruise convention in Miami Beach, news of an ambitious $1 billion shipbuilding program came not from the industry's 800-pound gorillas, Carnival Corp. or Royal Caribbean Cruises, but from Frank Del Rio, chairman and CEO of fledgling Oceania Cruises.

Del Rio, a brash, 53-year-old Cuban immigrant, was on a roll. He'd already sparked a buzz two weeks before the March convention when Apollo Management -- the New York-based private-equity giant -- agreed to take a majority stake in Oceania in a deal that values its equity at a lofty $475 million.

He co-founded the upscale Miami-based Oceania line in January 2003 with one leased ship and $14 million in capital -- a paltry sum for a business that typically requires major backing.

The ascent of Oceania, which has carved out a niche offering many of the amenities of luxury cruising at a more affordable price, marks a remarkable comeback for Del Rio. Six years ago, the industry maverick was fired as co-chief executive of Renaissance Cruises, as new investors took over. Five months later, the loss-ridden line collapsed into bankruptcy court.

He was an industry outcast, he says, tarred by that failure and so reviled by the powerful travel agents, who dominate cruise sales, that he was a veritable untouchable to other cruise lines.

''That's why I started Oceania,'' quips Del Rio, a gregarious and frank man with a penchant for self deprecation. ``Nobody would hire me.''

Del Rio, an accountant by training who started as an auditor at Florida Power & Light, succeeded by taking a big gamble on a rare opportunity and spying an unserved sector in a crowded cruise market.

Oceania made its mark by focusing on fine food and exotic itineraries. Plying waters in Europe, Asia and South America, its three 684-passenger ships call at alluring ports and spend more time there. Sample itineraries: Rome to Singapore or Bangkok to Beijing. And its prices start at $2,000 for a 10-day European cruise -- more than the cost of premium cruises but below luxury cruises.

While Del Rio was at Renaissance, the line had alienated the mighty cruise agents by bypassing them with direct sales. Agents, in turn, snubbed Renaissance, even as it was growing rapidly, adding eight new ships in 32 months. Though Del Rio eventually tried to make amends with agents, the line struggled with continued losses.

Five months after Del Rio got the boot, economic fallout from the Sept. 11, 2001, attacks finished off Renaissance, prompting the federal bankruptcy filing. The cruise operator's French lenders and France's export credit agency, Coface, repossessed its fleet of nearly new ships.

In the close-knit cruise industry, the line's failure triggered a lot of I-told-you-so's. With ever-larger ships chasing economies of scale, many doubted Renaissance's elegant but smaller vessels could turn a profit.

Soon after the repossession, two vessels that were in Tahiti were bought by Princess and one was leased to Swan Hellenic, at the time a unit of P&O Princess. The other five ships were lined up in the harbor in Marseilles, France, where they sat. The ships wound up under the control of CruiseInvest, a Marshall Islands company set up to manage the vessels and find homes for them.

But with the slump in worldwide travel after 9/11, they were hardly hot items. The big lines were wondering how they were going to fill all the cabins coming from their own existing ship orders.

''The general sense was the world was a pretty risky place with Afghanistan going on, and the SARS epidemic in Asia, and a bunch of factors,'' says James G. Dolphin, a managing director of AMA Capital Partners, a boutique investment bank in New York hired to help CruiseInvest place the ships.

CruiseInvest decided to solicit proposals from cruise veterans who might be interested in launching a new line with the idle ships. Among those invited to compete were Art Rodney, former president of Disney Cruises; Joseph A. Watters, a former president of luxury line Crystal Cruises; and Frank Del Rio.

Guy-Olivier Bygodt, a French banker whom Del Rio knew well, came to Miami to gauge his interest, but Del Rio says he turned him down -- twice. ``I didn't really think I'd be given a fair shot, given my association with Renaissance.''

Del Rio finally resolved to give it a whirl and set to work on a business plan.

During the summer of 2002, Del Rio submitted his plan for creating a new line, as did his competitors. The submissions were judged on ability to raise money, their plans for attacking the market and positioning the ships, and the deal they were willing to cut with CruiseInvest.

**Ally** · 05-30-2007, 07:44 AM

WINNING IDEA

Del Rio's proposal stood out. But to strengthen the management team, CruiseInvest wanted the freewheeling Del Rio to team up with the patrician Watters, a well-regarded executive who had not only been president of Crystal Cruises but also of Princess Cruises and Royal Viking Line.

''We were known as the odd couple,'' says Watters.

CruiseInvest agreed to very favorable lease terms to give the start-up a chance to get its sea legs. The deal included equity for CruiseInvest and an option for Oceania to buy the ships.

''We felt like winning a bit of a lottery, because this was a fantastic opportunity that doesn't come around very often, where literally brand new ships are being made available to you under incredibly beneficial financial terms,'' says Del Rio.

He worked with Daniel Holtz, of Walden Capital Partners, a Miami private equity firm, to line up investors. They put together $14 million, largely from locals, including Daniel's father, Abel Holtz, founder of Capital Bank; Russell Galbut, a principal in condo developer Crescent Heights; and Paul L. Cejas, CEO of PLC Investments. The sum was nothing in a capital-intensive industry like cruising and sufficed only because of the sweet lease terms from CruiseInvest.

STRONG BEGINNING

Oceania opened offices in Miami in January 2003 with 20 employees. Watters and Del Rio assembled an experienced team, including Bob Binder, a former Renaissance executive who is now president. Soon after, Robin Lindsay, then a senior vice president at Silver Seas, followed, and Jeff Drew, who had worked at Seabourn and Cunard, became senior vice president of sales. Senior executives got equity in shares that vested over time.

''Frank came to me and I had to think about it a long time,'' says Lindsay, senior vice president of vessel operations. ``He's a charismatic guy and tremendous to work for. He said it's a gamble, but if it makes it, you're going to do great.''

Oceania's first ship, the Regatta, got a multimillion-dollar upgrade, and by July 2003, the ship sailed its maiden cruise from Spain. It helped that CruiseInvest provided Oceania with the old passenger list from Renaissance to woo consumers fond of the distinctive ships.

''We sold out 13 cruises and got off to a good start,'' says Watters, who transitioned to founding chairman in January. ``We didn't try to grow too fast.''

FOCUS ON LUXURY

With four open-seating restaurants, Del Rio and his team decided to focus on gourmet food to distinguish the line. They tapped French chef Jacques Pépin as executive culinary director.

One entree: a 32-ounce, bone-in prime rib.'I love to see guests order it, because when it's delivered, there's only one word: It's `Wow!' It's an oversized plate, but we always like to have a little fall over the side,'' an exuberant Del Rio says. ``It's the best prime rib money can buy.''Del Rio also passionately weighs in on everything from the wording on the menus to the sofas, cushions and chairs that are used.

Lindsay says the line recently upgraded its mattresses and went to 700-thread count sheets and goose down duvets. ''It's always at Frank's challenge: let's do it better,'' says Lindsay. ``It's a phenomenal thing to find in a CEO. Usually they will say let's fool the guests and do it as cheap as we can.''

Oceania has specialized in longer, one-way trips (they range from 10 days to 35 days) and focused on personal pampering. ''Frank saw he could offer real value to customers, and customers would respond to the ships,'' says AMA Capital's Dolphin, who sat on Oceania's board until recently. ``He created a new niche.''

A pivotal step was wooing cruise agents, who sell more than 90 percent of cruises. 'We said, `Don't judge us by our words, judge us by our deeds,' '' Del Rio says.

Del Rio emphasized a partnership with agents and took pains not to sidestep them. Like many lines, Oceania allows consumers to book online -- but the trip is still assigned to an agent, who is paid a commission.

THE BOTTOM LINE

To contain costs, Oceania operates with a lean shore staff, with most workers juggling varied tasks. Cruising rebounded from the 9/11 slump faster than other sorts of travel. Demand for Oceania cruises is so keen the line is short of inventory, even as other lines suffer from a glut. Ticket prices have risen since the launch. And by last November, the cruise line was able to finance the purchase of its three leased ships from CruiseInvest and buy out its equity.

To grow, however, Del Rio needed capital to buy new ships. Typically, cruise lines ante up a 20 percent deposit when placing an order. With a $1 billion bill for two ships, that's $200 million. Del Rio talked to Royal Caribbean about a deal, people familiar with the situation say, but nothing materialized. Both sides declined to comment on the talks.

Private equity proved more fruitful. Apollo Management had recently tapped Adam M. Aron, a former CEO of Vail Resorts and Norwegian Cruise Line, as a senior operating partner and was interested in the cruise business.

APOLLO ENTERS GAME

In February, Apollo agreed to acquire a majority stake -- how much of a majority hasn't been disclosed -- and to assume $375 million in debt. Apollo officials declined to comment.

By March, Oceania ordered two 1,260-passenger, 65,000-ton ships from Italy's Fincantieri shipyard for $1 billion. The first new ship is slated for delivery in the fall of 2010 and the second in the summer of 2011. Oceania has an option for a third for 2012.

''We still think this niche has a lot of room to grow,'' says Daniel Holtz, of Walden Capital.

The ships' layout and decor will retain the feel of the current fleet, Del Rio says, though they will be more than double the size of the 30,277-ton R-class vessels. Cabins will be larger as will bathrooms and balconies; the ships will have six open-seating restaurants instead of four. They will also be 20 percent faster, allowing more globe-trotting.

''There is so much pent-up demand, if we had the ships today we could fill them today,'' says Del Rio.

Meanwhile, Oceania keeps preening its current fleet. The Regatta just came out of dry dock in Italy where it had an $8 million overhaul, including replacement of two galleys.

Del Rio, who has become fascinated with art, is scouting for art pieces and nautical antiques for the ships. He recently dispatched Lindsay on a quest to find certain Picasso prints he wanted for a ship's restaurant.

MAINTAINING CORE VALUES

A key challenge will be sustaining the ambiance and level of service on the bigger vessels. But Del Rio says the ships -- still mid-size -- will be designed with intimate spaces and they will keep a high staff-to-passenger ratio.

Meanwhile, Oceania is attracting imitators. This month, Royal Caribbean launched a new brand called Azamara Cruises that will use two ex-Renaissance sister ships it got with its acquisition of Spanish cruise and tour operator Pullmantur last November.

''We'll definitely be competing with Oceania,'' said Dan Hanrahan, president of Royal Caribbean's Celebrity Cruises unit and head of the new brand. ``They do an absolutely terrific job, and we admire what they do.''

Looking ahead, Del Rio predicts Oceania eventually may go public or wind up part of a bigger company. ''It is a consolidated industry, so it's possible that some day Oceania may become part of some other entity,'' he says. ``But we believe the more likely course, if we are able to execute our business plan as we believe we can, will be an IPO in a few years.''