What some analysts had already termed a “mild recession” may be turning into a serious recession following the Iraqi invasion of Kuwait. Already this year, most major domestic tourist attractions have seen a decline in visitors and spending levels compared to last year.
Further decline in leisure travel is expected as gasoline prices have increased sharply and as airlines have imposed fuel surcharges, adding up to 10 percent to fares. Travel industry experts comment that fearing a recession, Americans are skimping on vacation costs.
This development comes at an awkward time for the cruise industry which last year saw its slowest annual growth rate in more than 10 years and which will be introducing a record volume of new berths over the next 30 months.
Yet, cruise demand for the first six months of 1990 grew at an estimated rate of five to six percent over 1989, according to industry analysts. This is a healthy growth rate under the present conditions, although far behind the record years of the last decade.
Most of the increase can be attributed to the introduction of new ships. The Fantasy with a weekly capacity of more than 4,000 passengers on three- and four-day cruises represents about 2.5 percent of the market growth, while the new vessels of Chandris Celebrity Cruises, introduced later in the period, and the smaller Club Med I make up an estimated 1.5 percent, leaving a one to two percent growth for the rest of the cruise market in the six months ending June 30, 1990.
Impact
The cruise lines may be facing some belt tightening as load factors can be expected to soften because of the looming recession, along with increased fuel and air costs. An estimated seventy percent of the cruise passengers arrive by air.
Responding to market concerns, Holland America Line has issued a statement that it is guaranteeing all published cruise fares for departures through Jan. 31, 1991, applicable to bookings under deposit by September 15, 1990.
In Greece, however, a fuel surcharge has been added to all bookings as of last week as a result of increased oil prices.
In a statement from the Greek Association of Passenger Ship Owners, it was noted that fuel represented about 30 percent of total operating expenses.
While diesel fuel costs have jumped as much as 40 percent here according to some reports, fuel is said to represent less than five percent of a modern cruise fleet’s operating expenses.
In addition to increased operating costs, lighter load factors will force increased marketing budgets and more discounting as cruise lines compete for market share. While ticket revenues may decline, cruise lines may also have less opportunity to recoup their expenses onboard as passengers can be expected to cut back on onboard spending as well.
Thus, the cruise lines may be facing a period ahead of increased operating and marketing costs and reduced ticket and onboard revenues.
Already, several cruise lines have announced special discount programs for 1991 as well as new pricing policies which in effect amount to reduced rates.
Royal Caribbean Cruises has announced “economy” tariffs for both Royal Caribbean Cruise Line and Admiral Cruises, offering a further reduction from value season rates. RCCL will also maintain 1990 prices for the 1991 European program of the Sun Viking.
Royal Viking Line is extending its 1990 program of offering 50 percent savings to second passengers also on selected 1991 cruises.
In the financial markets cruise line shares have dropped sharply in response to the news of a pending recession. At press time, Carnival Cruise Lines had rebounded to $18.50. Its shares were trading below $18 earlier in the week after maintaining a steady range between $22 and $24 throughout June and July, moving with the overall market changes.
Vard, parent company to Kloster Cruise, fell sharply in Oslo, to NOK 115 from NOK 149. In London, Vard shares had retreated at press time to 10.25 pounds equalling its previous lowest level since it was introduced in June (1990) and down from a previous high of more than 16 pounds.
In London, both Trafalgar House and P&O, parent companies to Cunard Line and Princess Cruises, respectively, fell to 270 pence and 578 pence, only slightly above their previously lowest levels so far in 1990. Both companies are also involved in a wide range of other industries, however, which would be negatively affected by increased fuel prices.
At press time, Regency Cruises was listed at just below $2, while Europa Cruise Line was listed at about 50 cents. Premier Cruise Lines’ parent company Greyhound Dial Corporation fell to $29.25, slightly above its lowest listing over the last 12 months. Club Med remained relatively stable at about $23.60 compared to a 12-month high/low range of $28.60/$17.40.
1991
“I don’t see 1991 getting any better,” said Jay Lewis, President of Marketscope, a Miami based research and management consulting firm. He said that consumer confidence had eroded and that it usually takes a long time for consumer confidence to rebound. Lewis also said that all economic indicators were pointing to a recession.
“A major indicator is job formation,” Lewis said. “When job formation is high, people move up and get raises. When job formation is low, as now, people are not advancing and they are not receiving significant increases for more discretionary spending.”
Lewis and other executives interviewed by CIN also voiced some concern about the impact on the Mediterranean market if a full-scale war breaks out in the Persian Gulf region. Past incidents have shown that Mediterranean cruises can become the target of terrorist activities, and whether that happens or not, American travel in the region can be expected to decline at the slightest possibility of such acts, according to Lewis.
Lewis noted that several cruise lines were looking at the Mediterranean for repositioning older vessels.
Lewis also said that the tariffs the cruise lines are able to command this year are 90 to 95 percent of last year’s rates. He did not see any immediate improvement for 1991.
Bottom Line
Faced with potentially reduced revenues and increased costs, cruise operators could face several difficult years until the economy rebounds and market growth accelerates at a faster rate comparable to previous years.
Cruise line executives warned that surcharges may be put into effect if the Persian Gulf crisis escalates into a war.
