Cruise lines struggle against strong tides

Cruise operators are forever battling negative public attitudes. Among commonly held views, a cruise trip is either boring or for retirees only, and the experience is like living in a tourist prison and liable to induce nausea.

But since the Costa Concordia tragedy in January 2012, which claimed the lives of 32 passengers after the ship ran aground off Tuscany, they have battled the additional and more threatening perception that a cruise holiday can be perilous.

The impact of the Costa Condordia sinking and of mishaps to other vessels on parent company Carnival was starkly illustrated this week. Third-quarter net income was down 30 per cent on last year, forward bookings are slowing and the shares have taken a battering.

It is not only Carnival that is suffering. This week, senior executives across the industry gathered in London to compare notes on how negative publicity is affecting each of them.

“We were still feeling our way back to pre-2008 levels before things got substantially more difficult,” says Adam Goldstein, president and chief executive of Royal Caribbean International, which together with Carnival accounts for more than 70 per cent of worldwide revenues. “We are still battling against difficult events.”

The good news for the industry is that demand continues to grow.

In the UK, total passenger embarkations (UK passengers and overseas) grew 10 per cent in 2012, according to data from Cruise Lines International Association, which represents the largest lines.

“The industry this year is expecting 21m passengers worldwide to take a cruise holiday. We are seeing very strong growth in the UK with more than 1.7m people taking a cruise,” says Christine Duffy of the CLIA.

But that demand is being fuelled by price cuts as a nervous industry strives to ensure that ships leave port with 100 per cent occupancy. The industry’s business model is built around ships making about a quarter of their revenues from ancillary purchases on board.

“Name me a brand that doesn’t discount,” said a testy Micky Arison this week as the Carnival chairman dodged questions about the group’s falling net revenue yields, which measure the revenue earned from each berth.

Discounting poses a conundrum. In theory, it should help attract more people to cruises. The proportion of the UK population that went on a cruise in 2012 was 2.7 per cent. In the US, it was 3.4 per cent.

The industry would dearly love to nudge those figures higher, and to advance in relatively untapped markets such as France (less than 1 per cent) and Germany (less than 2 per cent).

History shows that more people go on cruises when capacity increases. The number of ships built since 2000, at 167, is four times higher than in the 1980s and double the number in the 1990s.

The industry effectively doubled in size in the Noughties, from 200,000 berths to 400,000. There are now 450,000, and the value of the cruise market is $36.2bn, up 4.8 per cent from last year, according to Cruise Market Watch, an industry data monitor.

“The pie is growing,” says Royal Caribbean’s Mr Goldstein.

Yet with net revenue yields in decline, the benefit of increasing supply is negated – which is why the rate of new ship orders is starting to slow. Only 20 vessels have been ordered over the next three years, the latest being the Britannia, announced by Carnival’s P&O brand this week.

Howard Frank, Carnival’s vice-chairman and chief operating officer, says: “There is more pressure from shareholders to slow down new building and get better returns on your ships. It’s a little bit of a balancing act. You’re balancing the strength of your balance sheet and credit ratings with your desire to grow in your markets.”

Ian Rennardson, analyst with Jeffries, says part of the industry’s problem is that the shipbuilding boom coincided with rising oil prices.

But there is structural weakness in this part of the leisure sector, he adds. “When you’re doubling an industry, you don’t get any pricing power.”

Other leisure businesses, such as hotels and tour operators, are more adept at controlling capacity to drive up prices.

That is going to be harder for cruise lines to achieve. “As they were building ships, they were educating the consumer to expect a cheap holiday,” Mr Rennardson says.

The projected average cost of a cruise trip per passenger per day in 2013 is $200.85, according to Cruise Market Watch.

That is competitive with other types of holiday, says Mr Rennardson. But now the industry wants to put prices up. “Their job is, how are they going to convince us to pay more? That is a two to three-year problem.”

Negative stories will simply make that task harder. The industry is doing what it can to combat them. CLIA members have introduced a passenger “Bill of Rights” after outbreaks of disease and power failures on ships attracted negative headlines.

Harder to tackle are environmental protesters such as those in Venice who leapt into the Giudecca Canal last week to stop the passage of cruise ships. They claim cruise ships damage Venice’s foundations and are an eyesore.

“As an industry we need to do a better job about why it’s not an environmental issue to come to Venice,” says Mr Frank.” “There is natural resistance and natural barriers in the minds of people that we need to overcome.”

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