In an exclusive interview with The Guardian, Butch Kerzner commented on the company’s success thus far as well as its future plans.
According to Mr. Kerzner, his long-range goal for the company is to make it a global brand.
“Where I think we would like to be over the next several years is to take the Atlantis brand and make this a global brand that can be in the league of a Disney,” Mr. Kerzner said. “And to take One&Only which is our luxury resort brand and develop that brand into a kind of a Four Seasons type of brand.”
He added that although for Disney and The Four Seasons, it took over 100 years to achieve the level of global recognition they enjoy today, his company would like to achieve the same for Atlantis in the next five to 10 years.
“It’s the existentialist in me that says if you’re going to do anything you might as well do it on a big bold scale,” he said.
With Atlantis, Paradise Island servicing the North American market, Kerzner International is now pursuing the development of a second Atlantis in Dubai, United Arab Emirates, to cater to the European market.
“We would like to have an Atlantis property in at least three markets which one would be here for North America,” Mr. Kerzner said. “One would be for Europe which would be in Dubai and ultimately, perhaps in Asia, so there could be a third Atlantis.”
Kerzner International announced in late September that it had formed a joint venture with the Dubai government to develop Atlantis, The Palm. The $650 million project, which was projected to commence before the end of this year and completed by 2007, would include a 1,000-room resort and an extensive water theme park on 1.5 miles of beach front.
Immediately after the announcement of the Dubai development, Standards and Poors Ratings Services revised its outlook on Kerzner International from stable to negative. According to the S&P, given the high profile nature of the project and the fact that it will carry Kerzner’s most important brand name (Atlantis) among other things, there was sufficient strategic incentive for the joint venture partners to further support the project if construction costs rise or if the opening is softer than expected.
In response to the negative ratings, Mr. Kerzner said that although the company borrowed heavily to build Phase II, over the last four to five years, the company has never paid out a dividend, instead using the money to pay down debt.
“Our balance sheet is in very good shape …our leverage has gone from five times debt to cash flow to two times. So we’ve really gotten our balance sheet so we can now borrow again to build phase three and Dubai and all those things,” he said.
According to the Kerzner CEO, the decision to not pay dividend was made in line with long range plans to grow the company. “Over the last few years we’ve been getting a lot of the other projects ready to go, whether it was working over here with phase III or in Dubai and at the same time getting the balance sheet in a condition so these projects weren’t going to be a pipe dream but actually when the deals were ready to be done, we would actually have the capacity to go and do it.”
In keeping with the company’s aggressive approach to doing business, the company made a decision not to discount room rates or severely cut costs in the months following Sept. 11, but rather pumped up its marketing campaign by adding an additional $5 million to maintain occupancy at its resorts.
This decision, which to some might seemed bold, paid off as while the majority of properties on Nassau and Paradise Island reported falling occupancy rates in the months following the terrorist tragedy, Atlantis, the company’s flagship property, was able to by report a two per cent increase in revenue per available room (RevPar) by March of 2002.
“You can take the decision to cut room rates, which is what most of our competitors did and what the cruise line did and what people are doing today and continue to do,” Mr. Kerzner said. “However given this product and the way we built the product and the investments we made in it, the minute we start reducing our room rates, we’d never get the room rates back up and the cost structure of this business doesn’t lend itself to discounting our rates.” He continued that revving up the marketing campaign was the only viable strategy for the company, as any decision to cut rates would immediately have a huge impact on the bottom line leading to a continuous downward spiral. “What happens is you start having to cut costs, you’re offering less service, then the customers complain and you cut the rates again. I think that’s what has happened to a lot of hotels in the Caribbean.”
He said immediately after the tragedy, the company made two decisions: Increase marketing and do not cut back on service. “Our view was if people were nervous about flying then giving them another 20 per cent discount was not going to make them get on an airplane. Either people were saying I don’t feel safe and I am not going to fly or they were going to fly. For people that were still prepared to travel, we had to get out and talk to them.”
According to Mr. Kerzner, 10 days after Sept. 11 the company produced a television commercial which aired nationally in the United States. The company also approached the major airlines servicing The Bahamas and asked them not to pull out.
“A lot of airlines pulled out of a lot of destinations,” he said. “We went to the major carriers that come to The Bahamas and we said don’t pull out of The Bahamas we’re going to support this destination with real marketing and we told them this is how much we’re spending and the result was they didn’t pull out of The Bahamas.
When the first quarter results came for 2002, it showed that RevPar trends experienced sequential improvements by months with a decline of 17 and 8 per cent in January and February respectively, and a two per cent increase in March.
The new CEO confirmed that despite the company’s other interests internationally, Atlantis, Paradise Island would continue to be the flagship product. “I think there is so much potential here.” He added that for subsequent developments more emphasis would be placed on developing the water attractions. “At the moment the water attractions are almost just an amenity to the hotel,” Mr. Kerzner said. “I think when you get it big enough and exciting enough it becomes almost a theme park. The next phase a lot of the money is going to be focused on what we are going to do with the water rides. We’re going to build some very wild stuff.”
The idea behind the company’s significant investment in the Atlantis product is to ensure that once Cuba opens up to American travelers, Atlantis would be so far ahead they would never be able to catch up.
Prompted by a need for capital to complete Phase II, the Kerzners took the company public in 1996. Listed on the New York Stock Exchange (NYSE) under the ticker KZL, the company’s stock recently experienced its second 52-week high alert trading at $42.49. The stock price climbed 89 per cent since the same date 2003 when the price was $22.40. The price rise could be as a result of the announcement that the company will hold its conference call discussing fourth quarter earnings and outlook for the first quarter 2004 on Monday. The company recorded a net income of $6.5 million for the third quarter 2003.
By Martella Matthews, The Nassau Guardian
