Crisis Looming for Cruise Industry?

The overcapacity crisis that is plaguing the tanker segment of the shipping industry is also looming on the horizon for the cruise lines, according to Helge Naarstad, chairman of Sea Goddess Cruises Limited. In a recent speech, Naarstad projected that the cruise fleet will suffer from overcapacity for the next several years.

There are already about 5,000 to 10,000 berths that go out empty today, Naarstad said, and he predicted that, by 1988, as many as 25,000 berths may sail empty as new tonnage is introduced.

Naarstad attributes this increasing overcapacity to the arrival of new and larger ships, as well as to the fact that older ships are not being retired.

The overcapacity will have a strong impact on cruise line balance sheets over the next decade, according to Naarstad. Moreover, he said that the gross rate increases that have occurred over the last five years cannot compensate for the overcapacity because “free air” programs and severe discounting have diluted tariff rates. Noting that dilution is up to 40 percent of tariff, Naarstad said “net income is obviously coming down.”

Naarstad claimed that increased cost effectiveness is the only thing keeping many lines in the black. However, he added that there is little left to streamline, and with the dilution, the cruise lines are becoming extremely sensitive to market changes. (Cost sensitivity analyses show that relatively minor changes will have drastic effects on the balance sheets.)

Some lines are trying to compensate by building larger ships, but according to Naarstad, larger ships do not necessarily mean profit­able economies of scale because there may be a point of diminishing returns. Although increased size may provide more pasenger revenues and less cost per passenger up to a point, Naarstad believes that beyond 2,500 passengers, ships become too large and compli­cated, and consequently, increasingly costly to build and operate.

The future of the industry does not lie in larger ships, but in the development of specialized ships and new cruise concepts, Naarstad said, noting that he believes the conven­tional vessel and cruise concept have reached maturity.

In 1980, only four percent of cruise revenues were generated by specialized ships, according to Naarstad. In 1985, however, that number increased to 12 percent, and it should reach about 20 percent by 1990, Naarstad predicted.

Naarstad believes that, because of their smaller size, specialized ships do not threaten to compound the problem overcapacity as much as the larger ships do. Instead, they allow the industry to develop niches, and grow at a slower, yet steady pace. He also said that these ships are less flexible in their rate structures, due to higher fixed costs per passenger, and therefore, will provide more stability in the market.

Nevertheless, Naarstad fears that the pending crisis will affect the entire cruise fleet. As the mass market becomes less profitable more cruise lines may decide to invest in specialized ships. This, ultimately will lead to overbuilding and overcapacity in the specialized fleet, leaving it with the same problems that are currently affecting the mass market.

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