Cruise Industry Outlook: Steady As She Goes

Despite the Concordia tragedy and a stagnant global economy, the number of cruisers keeps going up.

By Kathy A. Smith

Last year approximately 20 million cruises were booked worldwide, and that number is expected to rise to 30 million in the next 10 years. “That is quite modest growth, less than we've had in the last 10 to 20 years,” says U.K.-based Tony Peisley, cruise industry analyst and author of Cruising at the Crossroads: A Worldwide Analysis to 2025. “Still, this is the golden age of cruising in terms of quality of the product.” Peisley says the credit crunch in 2008 caused many cruise lines to temporarily suspend ordering new ships, but by the end of 2011 there were 27 on order, a trend he says will not soon stop (there are approximately 300 cruise ships in the world today). “You will still get people saying, ‘Well, there is too much capacity and that's why the yield is not as good as it has been,’ and I always say to that, ‘How many hotels were built this year? Hotels don't run 100 percent-full, and ships do.’”

Keeping Fares Low and Revenues High
Mike Driscoll, editor-in-chief of Cruise Week, concurs: “I think there is definitely optimism for the long term. For years they have been growing the business by ships, but now they are hoping to grow by rates; and hopefully later in the decade go back to the growth of ships.” To that end, numerous cruise lines have initiated cost-cutting drives, many of them technologically driven, in order to keep fares reasonable for passengers.

Money-saving measures include changing hull coatings, lowering speed and energy re-use. “If you look at the profit figures for Carnival, it is still making very healthy profits, but they would be a lot higher if fuel hadn't gone up,” explains Peisley. “Fuel cost is going to be the biggest issue in the future because of the environmental regulations coming in on fossil fuel,” he added, referring in part to the North American Emission Control Area (ECA) expected to be in place in August 2012, which will extend up to 200 nautical miles around U.S. and Canadian coasts and require the use of low-sulfur fuel or scrubbers.

Right now the name of the profitability game is onboard revenue. “If you have bigger ships, you have more opportunities to get onboard revenue,” says Peisley. “You can have alternative restaurants, more entertainment facilities and more shops. It is worth something between 25 and 30 percent for the big companies. They usually end up selling in excess of 100 percent occupancy. Unlike hotels where people have the option to dine or shop, on a cruise, even though you're going to ports of call, you have days at sea, and on those days people go shopping.”

“I think the only thing we don't offer on a Costa cruise is sand, and we are working on that,” says recently-retired Costa Cruises North America President and CEO Maurice Zarmati, who is now Senior Consultant on Costa’s worldwide sales, marketing and passenger-traffic initiatives. “I don't think there is one amenity you could get at the finest hotel anywhere in the world that you could not find on a Costa cruise.” Zarmati, who has been in the cruise business for 43 years, says Costa Cruises, a division of Carnival Corporation & Plc and the largest European cruise operator, previously focused its sales and marketing exclusively on the Italian market, but in recent years it has been concentrating on the U.S. as well, and with good reason: More than 12 million Americans a year vacation in Italy. Costa is also developing markets in places like China and Dubai.

“Growth expansion programs tend to be Europe-oriented,” adds Cruise Week’s Driscoll, who points out that the Europeans have more discretionary time on average than North Americans. Coupled with the fact that most European ports are within driving distance for vacationers, it is a definite geographic advantage for the market. In addition, many North Americans are making the trans-Atlantic crossing. “A line like Costa is bringing Europeans into the Caribbean during the winter months,” he explains. “The outbound is during the summer months, so you are having North Americans taking Mediterranean cruises or Baltic cruises. It works both ways, but right now there is a higher percentage of Americans going to Europe than Europeans going to America.”

Newbuilds
“If you look at the pattern of newbuilding activity for cruise lines, the overwhelming concentration of orders has been with the European shipyards. It is one of the very few segments of the overall industry where European yards remain the dominant force,” says Chris Hayman, Seatrade Global's Chairman of the Board for 22 years. Hayman, who helped develop the annual Miami Seatrade Cruise Shipping Convention and oversees numerous cruise conventions and exhibitions worldwide every year, says that even though the European yards still have a sizable supply network that keeps them number one, there is a new trend emerging – Japan's Mitsubishi HI yard now has orders for two of Carnival's German AIDA brand vessels. Both yet unnamed, delivery is expected in 2015 and 2016. “Will more cruise ships be built in Asia in the future? That's an interesting question which we will all be watching with interest,” he adds.

Undoubtedly vessels like Allure of the Seas and Oasis of the Seas, currently the world’s largest cruise ships, are the result of market demand. Dr. Kieran Dodworth, a naval architect who specializes in hull form and superstructure optimization using RANSE CFD and Managing Director of Safety at Sea Ltd., was a key member of the team which designed the Oasis of the Seas' superstructure as well as many of its unique open deck comfort features like the solarium, an open glass area on the top deck at the front of the ship that houses fine dining areas. “What we did was provide input into the design and shaping of the glass in such a way that we have wind speeds of 50 knots outside the glass while inside the wind speeds are a comfortable five knots.”

Ports and Terminals
Oasis of the Seas homeports at Port Everglades, Florida, which in late 2009 began servicing Royal Caribbean's Oasis-class ships. Plans are in place to upgrade four other cruise terminals that will be used for Carnival Corporation's newest and largest cruise ships. The estimated $35 million renovation is part of the largest agreement in Carnival's history. It will see 25.5 million Carnival-brand cruise passengers sailing into and out of the port over the next 15 years. “We have to build the ability to simultaneously get people off the ship at the same time we are booking them for the next cruise,” says Phil Allen, Chief Executive and Port Director.

The ability to provide shore power for cruise ships (called “cold ironing”) is quickly becoming a necessary green option. In 2009 Port Metro Vancouver became the first port in Canada and the third port in the world to install the new option. “In 2011 we had 35 connections and eliminated just over 1,300 tons of greenhouse gas emissions,” says Cruise Manager Carmen Ortega. The port is the main gateway for Alaskan cruises, which are gradually returning to capacity after a controversial passenger head tax was introduced in 2006 and subsequently reduced in 2010 as a result of pressure from the cruise industry. "The capacity is returning. We saw it here in Vancouver with the 15 percent increase in business we had last year.”

Expected to open this July is Port Canaveral's new state-of-the-art, $60 million cruise terminal facility. Cruise Terminal 6 will be the second terminal focused on accommodating large cruise ships. The port is already home to the Carnival Dream, Royal Caribbean's Freedom of the Seas and the Disney Dream, and will soon be home to the new Disney Fantasy. “We are on an upswing and are optimistic that it is going to continue,” says CEO Stan Payne, noting $40 million in cruise revenue last year.

Cruise activity is coming back to peak numbers at the Port of Galveston, particularly since Hurricane Ike in 2008. “We are homeporting the Carnival Magic and the Carnival Triumph right now year-round. Royal Caribbean’s Mariner of the Seas operates seasonally, and this coming year we will have the Disney Magic coming in the fall and also the Caribbean Princess,” says Steve Cernak, Port Director. Cernak says by the end of the year the port will see over one million cruise passengers, who will travel to the Eastern and Western Caribbean. Cruise Terminal 1 is now fully built out with a new gangway that can accommodate large ships. “The whole point is to make sure the passenger is not inconvenienced when processed through your facility,” he says.

“We expect to reach our projection of 940,000 passengers this year,” says Wade Elliott, Senior Director of Marketing for Tampa Port Authority, who has been overseeing $3.5 million in upgrades to Cruise Terminals 2 and 6. The port has also been expanding its parking facilities, an award-winning design that added 700 spaces, making a total of 4,100 within close proximity to the terminals. Tampa is home to the Carnival Legend and Carnival Paradise, Royal Caribbean’s Jewel of the Seas and Holland America’s Ryndam. Norwegian Cruise Line began homeporting the Norwegian Star there last fall.

Norwegian is busy building two new ships that will be ready in the spring of 2013 and 2014 and result in a 30 percent increase in the line’s capacity. The Norwegian Breakaway and Norwegian Getaway follow the design of the Norwegian Epic, offering the popular solo-staterooms and reintroducing outside staterooms with additional innovative, yet-to-be-announced features which Andy Stuart, Executive Vice President of Global Sales and Passenger Services, says will meet the increasingly high expectations of today‘s cruise ship passengers. “The scale of cruise ships has changed significantly,” he explains. “This has allowed variety and all sorts of new amenities. We’re excited by how Norwegian Epic has been received, and we’re taking the experience to the next level with Norwegian Breakaway and Norwegian Getaway. Given that we’re the third largest cruise line, this makes us a very, very fast-growing business.”

Traveling the World
The cruise business also has a unique luxury offering. The World, a 644-foot vessel, is owned by its 130 resident passengers, who hail from 19 countries, and has traveled to more than 800 ports since 2002 according to Michael Zeff, Manager of Technical Purchasing. “The ship’s captains and residents collectively determine the ship’s yearly itinerary based on the best sea routes and the residents’ personal interests,” he says. “In the summer of 2012, The World will sail through the Northwest Passage, the largest and most luxurious passenger vessel to ever attempt the voyage.”

It’s clear that the cruise industry is not only moving with the times technologically and meeting evolving passenger expectations, but it also continues to grow despite high fuel costs, strict environmental rules and the stagnant state of the global economy. Norwegian’s Stuart sums it up: “I believe the cruise industry as a whole offers such tremendous value for the money that, in times of recession, it tends to be quite resilient. Not immune, but quite resilient.” – MarEx

 

Kathy Smith is based in Vancouver, British Columbia.