Sea Changes: Carnival Cruise Corporation CEO Arnold Donald On Transformation

As Arnold Donald’s turnaround of Carnival Corporation hits stormy seas, it offers lessons for any CEO struggling with transformation.

Just 18 months ago, it was all smooth sailing for Miami-based Carnival Corporation & plc. Its share price at a 10-year high, the $18.8 billion company was logging the highest profits of its 45-year history. But at a time when consumer-facing companies are just a bad quarter or two away from a stock drop, success stories can go sideways fast—even for a celebrated CEO like Arnold Donald.

Credited with steering Carnival’s revival over a six-year tenure, Donald now finds himself in the position of having to do it all over again. Weighed down by softening demand for cruises in the European market and a U.S. policy change that abruptly put a stop to its cruises to Cuba, Carnival has lowered its guidance for the remainder of 2019 and, at press time, its shares were lingering around $48, down from a high of $71 in January.

That’s not all. In June, Donald found himself in court with Carnival pleading guilty to charges that the company had violated terms of a probation from a 2016 pollution conviction by continuing to dump “gray water” in prohibited places such as Alaska’s Glacier Bay National Park. The transgressions proved costly, dealing Carnival both a reputational hit and a $20 million fine.

If there’s a silver lining here, perhaps it’s this: It isn’t the first time headwinds have taken the company off course, and it’s come back stronger each time. In fact, when Donald first took Carnival’s helm in July of 2013, two seismic events had just rocked the company.

Earlier in the year, a power outage on one of its ships triggered a breakdown in the sanitation system, leaving 4,200 passengers dealing with raw sewage and fecal matter. The headlines were not kind. Worse yet, that major mishap followed an even more dire disaster the year prior, when one of its ships capsized off the coast of Italy, killing 32 people. Together, the two incidents shook consumer confidence and sent both bookings and share prices plummeting.

Donald, who had served on Carnival’s board for 12 years prior to the major mishaps, was brought in to steer it back to profitability. Although he had never run a cruise line, Donald knew the company’s fundamentals and felt he could get the business on track. He was right. Five years into his tenure, its market cap had jumped from $27 billion to $44 billion and return on invested capital had doubled.

One of the keys to that turnaround was a listening tour he undertook upon taking the job. Most CEOs who assume a new leadership position move quickly to replace senior executives with their own people. Instead, Donald made it clear he wanted to listen to both the current leadership—some of whom had wanted his job—and to people throughout the organization. “I learned some very basic things,” he says. “If you listen carefully to the world, it will reveal itself to you. If you listen carefully to your guests, they will tell you what you need to do to exceed their expectations.”

Today, Carnival operates nine brand lines and its 107 cruise vessels (one more than the surface fleet of the Russian navy) represent one of the largest cruise fleets in the world. Nearly half of all global cruise guests will sail on a Carnival Corporation brand in 2019. Micky Arison, whose father, Ted, co-founded the company in 1972 with one ship, remains Carnival’s chairman.

While Donald acknowledges that Carnival is once again navigating stormy seas, he argues that its overall outlook remains robust “A confluence of circumstances did cause us to lower our annual guidance,” he says, “starting with the unforeseen change in U.S. policy that halted our cruises to Cuba. We also had one of our newest ships that had to come offline for some unscheduled repairs, and we are seeing some softness in the European sector. We continue to pursue recovery through adjustments to marketing and overall capacity among them. All this to say, the outlook for our company and our industry remains robust.”

Still, the industry as a whole also continues to grapple with the challenge of getting more vacationers on board with the cruise vacation concept. Carnival comprises roughly half of the $45 billion industry, but that industry is tiny compared with land-based vacations. All the cruise ship cabins in the world add up to less than 2 percent of all hotel rooms.
Struggle is nothing new for Donald. Growing up poor in New Orleans in the era of segregation, he was the youngest of five children in a family that welcomed a total of 27 foster children over the years.

Despite the fact that neither of his parents finished high school, he attended Minnesota’s Carleton College and graduated from Washington University in St. Louis and the University of Chicago Booth School of Business. His business career spans nearly four decades, with a variety of senior leadership positions in several industries, including 23 years at agri-chemical company Monsanto and chairman/CEO positions with Merisant, parent company of the Equal sweetener brand.

Affable and self-effacing (“I’m from New Orleans, I like people”), Donald is clearly a temperamental fit for the job: intensely interested in others, he loves to cultivate his reputation as a card counter at the blackjack table and for being an enthusiastic dancer.
During a recent visit with Chief Executive, he reflected on what he learned while fixing Carnival and how he’s coping with today’s headwinds. Excerpts, edited for length and clarity, follow.

What is the big lesson you’ve drawn from leading through Carnival’s comeback and its more recent ups and downs?

Listen, listen, listen. The key to most solutions is for everyone to clearly understand the problem and to have shared ownership of a clearly understood “what success looks like.”

You had no experience in the cruise industry when you came in to Carnival as CEO. What led you to take the job?

Having been on the board for 12 years, I got a surprise phone call from our lead director, but running the company never crossed my mind. I almost said no on the spot because I had basically retired. Micky Arison thought enough of me to ask me to consider it when a lot of people would’ve killed to have the job. Considering Micky could’ve hired anybody he wanted, I thought I’d at least have a conversation with him.

Through that conversation, I saw the platform and opportunity it represented. I also thought it would be a lot of fun and realized that I should’ve been begging for the job.

What kind of shape was the company in?

Both the company and the industry had languished a bit—share prices had been flat or declining for a few years. The core business was profitable. Even in tough times when fuel prices tripled, the company always made money. But most importantly, it was still a great value relative to the equivalent land-based vacation and was a tremendous experience for guests.

It’s just that there had been a series of perfect-storm-type events, some self-inflicted, some industry-wide that had led to mediocre or poor financial performance on a relative basis. And then, before I took over, we faced several disruptions that received widespread media attention that proved very negative for the industry.

Tell us about what you learned during your listening tour.

The core essence of our business is exceeding guest’s expectations. We have nine world-leading brands. Each one caters to a different psychographic—not demographic—segment.

For example, we pay Steve Wozniak to lecture on Seabourn Lines and he, at times, pays us to sail on Carnival, which is a completely different brand, because he likes the social atmosphere and the general community experience on Carnival. Some people want to be pampered, and some want to socialize. It’s two very different types of products. So, I learned that each brand had its own community. And if we understood well what resonated with that community, each of those communities in the general public are large enough to more than fill our ships at great pricing. I learned from our people that we didn’t have in place the best listening tools to hear our employees and be able to capture what they could do with the diversity of thinking to help us create extraordinary solutions.

I also learned that we were not leveraging our scale. We were the fifth-largest purchaser of airline travel in the world, but nobody knew that, including us, because each brand was doing it independently. I learned that the best way to address this was not to centralize, but to get the brands to communicate, coordinate and collaborate across the company in order to capture the diversity of thinking, but at the same time, leverage the scale.

One example of this is our revenue management tool, YODA, which six of the brands had a share in developing. Individually, maybe one or two could have financed it, but the rest of the brands were too small to have taken on such a big project. Just the sharing of learning and the sharing of what’s going on in their businesses has improved revenue management overall. The tool was better than what each had to work with beforehand.

What operational changes have you made as a result of this?

We did a market research study, basic stuff. But as opposed to each brand doing its own market research study, we did one collectively. Because we did that, we did a much deeper market research study and actually spent less money than if each brand had done its own. Coming out of the study we understood better how the brands are differentiated and how they resonate with different communities and psychographic segments.

We then reorganized our communications and media strategy around what each brand needed to deliver to its particular guests. That is constantly being refined, and it’s made a difference in terms of being effective and attracting the right people to each brand. If somebody gets on the right cruise, they will be cruisers for life. If they get on the wrong one, they may not be. But even worse than that, the most powerful marketing tool we have is word of mouth.

We can advertise and talk all we want, but if you tell your best friend, “Hey, I’m telling you, this cruise thing’s pretty cool,” they’re more likely to go on a cruise. An okay experience is not good enough because when that person goes home and their friends ask how the cruise was, the answer “it was okay” doesn’t make anybody really want to go.

We’ve seen disruption in the hotel and transportation industries with Airbnb, Uber and Lyft. How concerned are you about disruption in the cruise industry?

The beauty of the cruise industry is that it’s tiny. We’ll maybe sail as an industry 30 million people this year. There are 1.4 billion travelers a year, with over half a billion vacationers a year on the planet. The city of Orlando attracts something like 70 million tourists a year. Las Vegas sees 40-something million. Venice does 24 million or 25 million The entire global cruise industry is the size of one major tourism city, and not even that in some cases. So, we’re so tiny. Therefore, when you say disruption we’re not anywhere near a mature industry. We’re underpenetrated in every market in the world. We’re capacity-constrained because there are only so many shipyards. The most the industry can grow in a year is 7 percent off a small base.

It will be tough for anything that involves being on the ocean, that requires a vessel, to be instantaneously disruptive because there’s limited shipbuilding capacity.

How do you get cultural buy-in with 120,000 employees across hundreds of countries around the world?

It’s a challenge. But when I first came, I did the listening thing. When I pulled the top leaders together—keep in mind, some of those leaders loved me as a board member but never thought I was going to be running the company because some actually wanted the job—I made it clear that I wasn’t interested in having my own team. I could see some things needed improvement, but there were a million things going right that I didn’t even know about because I’d never run a cruise line. I asked the top guys, “What does success look like for you and your family five years from now? What does success look like for you and your brand or department five years from now? What does success look like for you professionally as an individual five years from now?”

Some hadn’t worked together before, so I paired them up. We conducted trust exercises so that we could get them to rely on each other. I was looking for mutual buy-in. When you present intelligent people with the same facts they tend to reach similar conclusions. We also tried this exercise with 70 leaders from around the world. It was tricky insofar as in some cases English was their third language, let alone their first.

After these exercises, they were all fired up. “For the company to be successful going forward, this is what we need to do. Let’s go.” I said, “Well, if I had told you this from the outset, you wouldn’t feel this way. You feel this way because you own it. You came up with the solution by yourselves, and now you own it. But if we just go out and tell the rest of the organization that, it’s not going to work because as soon as you hit a bump in the road, they won’t own it. We have to do the same thing with the people that report into you.”
In addition, we had to engineer diversity. The simple reason is that it’s the right thing to do, but put that aside.

Businesses thrive over time through innovation. Innovation by definition is diversity of thinking. It’s thinking outside the box. You increase your probability of innovative thinking if you have people who really are different from each other. If you purposely engineer a team of talented people who are truly diverse who are aligned around a common objective, where the process is to work together to drive true inclusion so everybody has an equal voice, everybody gets rewarded in the end.

You have to put the right processes in place. I engineered a diverse team, brought in some folks who were ethnically diverse and who were gender and background diverse. I wanted one person on the leadership team who didn’t have a college degree.

I have a man who was born and raised in Communist East Germany on my team. His manner and behaviors are dramatically different from a woman raised in Philadelphia who was a travel agent. Such people wouldn’t naturally work together, but by creating an environment where they understand what they share in common and have a common objective, they become a powerful force, and you multiply that across the leadership team.

You mentioned the importance of learning experiences from elsewhere. Do you take notes from other hospitality businesses?

Absolutely. We stole innovations from Disney. I look at everything and ask, “Will it fit for us, and can we improve on it?” If it just fits and it works, that’s good enough. But if we can improve on it, that’s even better. We look at everything from the automobile industry to pure service industries. We’re looking for practices and behaviors, tools that we can use to exceed our guests’ expectations.

At any of [Disney’s] parks, you’ll notice when a Disney employee talks to a child, they usually bend over or kneel to get eye-level with the child. It’s a subtle thing that enhances the interaction. We’re constantly studying little things like that or big things like lighting technologies.

You’re one of three or four African-American business leaders of Fortune 500 companies. How do you feel about being in a club that has diminished in numbers?

The lack of diversity in the C-Suite and the relative lack of diversity in board representation is a challenge for American business. It’s sad that since the ’80s the number of African American CEOs on that scale that you just referenced has peaked maybe at 10, but whatever the number, it’s very few and far between.
This is not a good thing. Consider what someone like Ken Frazier was able to do at Merck. Without more people like that the country will miss out because businesses won’t be as successful and they’ll be surpassed by competitors.

What should businesses do about this?

Start with people who are diverse themselves. When I came here, I purposely engineered diversity at the top. I didn’t try to program this at the entry level and hope people would percolate to the top over time. I brought in a young man, Orlando Ashford, who had been very successful running a profit center at an HR consulting firm. I hadn’t met him, but I knew enough about him.

I made certain that I had people below him who knew how to run a cruise business because he had never run a cruise business. I made sure the people above him would put him in a position to be successful, but with enough authority where he can leave his own footprint.

Oprah Winfrey became the godmother of Holland America’s Statendam where her Girlfriend Cruises twice created a great deal of excitement. This never would’ve happened if Orlando hadn’t come here. But it wasn’t just the one event. He’s generated brand excitement. Meanwhile, on the leadership team, he’s an HR expert, so that expertise can be shared across the entire team.

Similarly, [Carnival Cruise Line President] Christine Duffy came out of the travel-agent community. She had run a service business but never a cruise business. Now she runs the Carnival brand. If one was just ticking boxes, neither she nor Orlando would’ve gotten their jobs. Leaders have to think outside the box and be innovative in selecting people. People have to own it and believe it really matters. If they don’t, it will never happen the way it should.

Is there a reward system for hiring “outside of the box” as you put it?

I haven’t had to set up a formal metric because there’s enough interaction and contact that people can see its importance. I can see whether or not it’s happening and have a conversation with people if it’s not. When we do people reviews, on occasion I’ve said, “Ah, you’re a little light on diversity here. Let’s talk about that. What are you going to do about it?” We’re not perfect. Far from it. At the top, we have much more diversity today than we had five years ago, and it’s going to continue.

What else should people know about you?

I came from humble beginnings. I grew up in poverty. I have a loving family. I enjoy people and genuinely care about them. What do they want to achieve? If I can play some small role in helping them achieve what they want, I get a huge amount of personal satisfaction out of that. I think people know that, but that’s the one thing I want people to know about me.… and that I’m a diehard Saints fan, go Drew Brees!

Read more: How to Create the Team Cohesion Needed for Digital Transformation

J.P. Donlon: J.P. Donlon is Editor Emeritus of Chief Executive magazine.