In the midst of a period of substantial growth in the cruise industry, including new ships being introduced by several cruise lines, there is growing concern about the financial futures of many of the small and medium sized cruise lines.
“Economics just aren’t there anymore,” commented an industry source. “The Paquets, Dolphins, and Commodores of the Industry are struggling – losing money.”
Mark Rowan of Morgan Guaranty said, “My guess is that industry profits have not increased at all over the last 15 years.”
Due to the growing competition, marketing costs are escalating, profits are being diluted, and discounts are flourishing. In addition, wage and salary levels, as well as food and fuel costs are rising.
“The survivors will be the larger lines with enough capital to further differentiate themselves,” said a spokesman for Arthur Andersen & Co. “They can afford the massive expenditures and the reduced cash flow resulting from building new vessels; and they can support advertising budgets that reach out to the untapped, first-time passenger market, as well as focus on taking the market away from their financially weaker competitors,” he added, noting that whereas the larger lines can afford more general advertising campaigns, the smaller ones are looking for the maximum payback per advertising dollar, and therefore focus their marketing efforts on particular passenger categories.
“Costa Cruises operates with a $5 million marketing budget,” said Costa President Howard Fine. ”We should not need to spend that much, but are forced to, in order to keep our market share,” he added.
“We may very well see a shake-out within the industry,” commented a spokesman for Sundance Cruises. “Many are hanging on, hoping that demand will catch up soon. The survivors will be those who are well capitalized, have found clearly defined niches, and are willing to ride it out until the pendulum swings the other way,” he noted.
According to one source, mergers and consolidations between the smaller struggling lines are not the answer.
“These lines will still be operating with their used-up sources of capital, same old ships, etc. Also, the major lines don’t want to absorb them for the same reasons,” he said. “Their only solution will be to find someone with a substantial amount of capital to invest, who is willing to struggle for several years to turn the company around,” he continued.
In order to retain the confidence or the full-fare passengers, and if nothing else, to attract maximum marginal revenues on board, cruise lines with a great deal of excess capacity are offering large, last-minute discounts to fill their ships.
“An empty bed is a perishable item,” said the Sundance spokesman. “Once the ship leaves port those revenues can never be recovered. Something is always better than nothing!”
