In spite of a softening in the cruise market, industry executives and analysts believe that the industry is poised for long term growth. In the short term, however, several have voiced concerns of further consolidations.
The cruise industry has grown from 1,431,000 passengers in 1980 to 3,286,000 passengers in 1989, according to the latest marketing report from the Cruise Lines International Association (CLIA), which claims an average annual passenger growth rate of 10.3 percent through the 1980s. From an annual growth rate of 13.8 percent in 1986, the cruise industry’s rate of passenger growth fell to 11 percent in 1987, 9.5 percent in 1988 and 2.4 percent in 1989.
At the outset of 1990, growth projections called for a 12 percent to 15 percent increase in passengers this year compared to last year. Instead, mid-year calculations show an increase of five to six percent over 1989.
Cost of Growth
Industry executives claim that the cruise market is product driven, i.e., that new tonnage generates new passengers.
It is now clear that the product driven passenger growth also has come at increasing cost, in terms of marketing, sales incentives and discounting. Faced with a soft economy and increased operating costs, it is uncertain if the cruise lines can continue to generate its dramatic growth rate of the past.
In the last couple of years, in spite of intensified marketing campaigns , including multi million dollar advertising campaigns; minimum rates that in some cases are lower this fall than they were in 1986; and an industrywide average discounting level around 27 to 28 percent, the annual growth rate has continued to decline towards a more “mature” level.
This year, the product driven market concept may prove to be a falacy as passenger growth appears to lag behind capacity increases. While executives are quick to blame a faltering U.S. economy, it appears that the rate of growth was slowing down early in the summer, before widespread media reports of a looming recession and before the Persian Gulf crisis.
According to a quarterly survey by the management consulting firm, Temple, Barker & Sloane, leisure sales slowed down in the second quarter, and for the first time since its survey was initiated a year ago, agents experienced mixed results in cruise sales. Several agents were also reported to have noticed an increase in discounting as well as a greater demand for cruise packages.
The mid-year 1990 passenger growth of five to six percent over 1989 is also based on a tremendous boost in the short-cruise market, which inflates comparisons to previous years when cruises generally were of seven-days duration or longer.
Industry consultants indicate that the market may have reached a temporary saturation level whereby it needs more time to absorb the tonnage that is coming into the market. Art Averbook, President of Averbook Communications, noted that the biggest blockage to continued rapid growth is the distribution system. “Agents do not push cruises enough,” he said.
Averbook also disagreed with CLIA’s definition of the potential cruise market which includes individuals with household incomes starting at $20,000. “You need a household income of at least $40,000 to afford a cruise,” he said.
In its latest market report, CLIA predicted a domestic market potential of 60.8 million Americans who are prospects for a cruise vacation over the next five years. The forecast also predicted a total revenue potential of some $80 billion.
In 1989, however, with ships sailing at an industrywide average load factor estimated by Cruise Industry News at 82.5 percent, the cruise lines generated $4.12 billion in ticket revenues according to CLIA’s report which is based on an average per diem of $195. Allowing for a 27 percent to 28 percent discount, the average per diem would be reduced to about $140 and total ticket revenues to about $3 billion. According to CLIA, passengers also accounted for $820 million in onboard spending and $270 million for shore excursions. Total adjusted 1990 cruise revenues would be in excess of four billion dollars by also adding estimated revenue from the few non-CLIA members.
The overall American tourism industry is reported to generate some $350 billion in spending a year, including an estimated $54 billion by foreign visitors in 1990.
Through its expansion, the cruise industry is transforming its market, and in its report, CLIA was identified a changing passenger profile. New cruise passengers tend to be younger, married and vacation with children, but its report also showed that new passengers were less educated, with fewer college graduates, than their predecessors. Although they make more money as a group, 35 percent were said to have a household income of less than $40,000. Female passengers still had a slight edge over their male counterparts.
Prospective cruise passengers, as identified by CLIA, however, are younger, making less money, and more are single.
So, is CLIA on target with its definition of the market potential and the cruise passenger of the 90s?
According to American Demographics, 46 percent of American households have incomes of less than $24,999. Of these 43 million households, nearly half have household incomes of less than $13,000.
About one third, or 31 million households have median incomes of $35,500, while 20 percent, or 19 million households, qualify as upscale, with household incomes of more than $50,000. But only three million households exceed the $100,000 income level.
According to American Demographics’ definition, about 50 million American households would be left that can at least afford a cruise. However, the publication also pointed out that upscale households do not have a significant amount of discretionary income with “many households paying for college, caring for aging parents or saving for retirement – all at the same time.”
This definition of a narrow upscale market may help explain the relatively light loadfactors in this market segment including Royal Viking Line, Seabourn Cruise Line and Crystal Cruises.
By American Demographics’ definition, the largest market potential would be found in the middle-class households. However, the publication also pointed out that this is the most diverse of the three groups, making it the hardest to reach. Incomes range from $25,000 to $50,000; one in four has a college degree; two-thirds are married couples; the median age is in the early 40s.
On this newsletter’s assumption that the middle class is the main cruise market, the industry’s slower growth may partially be explained by the diversity of the market. This requires targeted marketing efforts, not necessarily accomplished through such mass marketing as television commercials.
A median annual household income of $35,000 would also explain why CLIA estimates that only 60 percent of its cruisers take a one-week vacation every year. There are clearly limits as to how much these households can afford to spend.
Industry executives and analysts expect a tough fall and winter. Several of those queried by CIN said they expected that one or two lines would not survive the period under their present ownership. They also expected some shuffling in management as bookings may turn even softer.
Cruise line are also facing increased costs in fuel, water, port taxes, and air transportation, which they may be hard pressed to recoup in face of increased competition as the lines scramble to fill their capacity.
Considering the fact that cruise rates have hardly been increased over the last five years, the cruise lines earnings and investments in extensive refurbishment of the existing fleet and an even more extensive newbuilding program, can only be attributed to effective cost cutting and increased onboard spending, revenue sources which sooner or later are exhausted.
So far only Dolphin Cruise Line has announced a fuel surcharge, but that cruise line already offered some of the lowest rates in the market.
Todd Allen at Temple, Barker & Sloane, referring to that company’s survey, said that the trend towards more packages indicated that vacationers who previously may have taken two vacations, one land vacation and one cruise, may now be combining the two.
For some cruise lines such as Carnival Cruise Lines that may be a way of maintaining revenues since it operates both ships and a resort, for others it may be cutting revenues in half.
Supply vs. Demand
In 1989, nearly 3.3 million Americans took cruises of three day duration or longer. According to CIN estimates, the capacity of the cruise fleet was 4 million passengers based on today’s allocation of three-, four-, seven-day and longer cruises, allowing for an average industrywide load factor of some 82.5 percent corresponding to an industrywide overcapacity of 17.5 percent.
The new tonnage introduced in 1990, will increase the industry capacity to an estimated 4,534,793 passengers. Meanwhile, if the passenger growth rate in 1990 is five percent, 3,465,000 Americans will cruise this year, reducing the average load factor to 76.4 percent, raising the overcapacity factor to 23.6 percent.
If passenger demand continues at five percent in 1991, 3,638,250 passengers will cruise that year compared to an industry’s capacity of 4,802,452 passengers.
If passenger demand increases to 10 percent in 1992, assuming the economy is back on track and that consumer confidence has returned, more than four million Americans will cruise that year, raising the average load factor to 78.7 percent and in the process reducing overcapacity to 21.3 percent. The industry’s passenger capacity will be slightly more than five million.
By 1993, assuming no other surprises, the industry could be back on its product driven growth course.
However, executives and analysts interviewed by CIN were reluctant to make any “safe” predictions, citing recent events affecting the industry, ranging from an airline strike to political upheavals, hurricanes and terrorism.
At least one executive also pointed out that five to six percent growth in 1990 was “not so bad” considering the present size of the industry. This year’s growth rate is equal to a 12 percent rate in 1980, he said.
On the other side of the coin, this newsletter also noted with interest the rating of cruises by passengers presented in the CLIA report. While 82 percent said they were pampered by the staff, only a surprising 60 percent rated their cruise as hassle- free, which may reflect the cruise lines’ need to generate more onboard revenues. Forty-nine percent said their cruise was good value for the money, and 31 percent said it was a bargain. But nearly a third, 29 percent, rated their cruises as confining and too regimented.
Clearly, as the market grows, all passengers are not returning as eager word-of-mouth advertisers of their cruise vacations.
Passenger demand is expected to continue to grow at a healthy clip, but at a less dramatic rate than in the 1980s. The forecasted 10 million American cruise passengers by the year 2000 is still within reach especially as more large ships are introduced into the short cruise market.
At an annual rate of growth from five to 10 percent, the industry could be able to generate as many as eight million passengers a year by the year 2,000 if there are enough ships to carry them.
Eight million passengers a year would generate ticket revenues of $14.4 billion based on average per diems of $300 and assuming an average cruise length of six days.
But in the short term with increased operating costs on one hand and increased marketing and sales costs on the other, the cruise lines may be hard pressed to show continued earnings growth to stay afloat and to finance expansion. Although Jim Parker, an analyst at the Robinson Humphrey Company said that several of the lines have not only managed to increase onboard earnings, but have increased yield from ticket revenues. This has been done by raising overall prices as well as prices for third and fourth persons in a stateroom and by changing seasonal pricing structures.
When the American economy rebounds and the American middle-class consumer regains his confidence, the cruise lines, most of which offer a superior vacation product, may be back on course, capacity-wise and earnings-wise.