1994 should be a better year for the industry than 1993, which has turned out to be pretty good.
Looking back at 1993, nearly all the major cruise companies made money this year, but with the exception of Carnival Cruise Lines and Royal Caribbean Cruise Line (to a lesser extent), profit margins were not overwhelming. The market is still suffering from overcapacity and recession and the resulting discounting to fill ships.
Thus profit margins have been eroding and the cruise lines have been forced into innovative marketing and yield management programs (early booking discounts) and cost controls in order to bolster yields.
There is one main reason why 1994 should be better than 1993 and that is that with fewer new ships being introduced, the market will have a chance to absorb what now amounts to overcapacity. Once capacity is absorbed, the lines may have the opportunity to raise prices. A $1 price increase per passenger cruise day could quickly translate into a million on the bottom line. ln addition, the American economy is rebounding with the Clinton Administration recently receiving its highest approval rating ever.
These developments should bode well for the industry in 1994 and beyond.
Variables
In spite of the favorable outlook, there are developments that could affect the industry significantly, including pending legislation in Washington that could have punitive effect and problems in the Caribbean that need to be resolved between the cruise lines and the island destinations.
And while most of the large companies appear to be doing well, some of them pose a lot of question marks, and some of the smaller operators are clearly not doing well. Thus, more changes and adjustments can be expected in 1994.
New Capacity
Among the major operators, only Carnival is introducing new capacity in the mass market in 1994 and in the premium market through its Holland America Line division.
Thus, Carnival should be able to boost both revenues and earnings in 1994 through new capacity as well as improved economies of scale. In addition, Carnival should benefit from the expected general improvement of market conditions.
The other major operators should also benefit from better yields resulting from the expected improved market conditions.
But no one should expect to see dramatically improved bottom lines from better yields alone. While early booking discounts and yield management will generate revenue, the lines are unlikely to be able to raise rates much, if any, since the market is expected to continue to be very price sensitive.
Different Markets
While the mass market appears to be given some breathmg room in 1994, other markets are not. The premium and upscale market will see fairly significant new capacity through the introduction of HAL’s new ship and the new Silversea Cruises.
Silversea is entering the upscale market which seemed to have suffered more than the other market segments in 1993 and also will be receiving more tonnage in 1995 and 1996.
Onwards
Interestingly enough, from here on only Carnival continues to introduce new tonnage in the mass market.
The unknown factor is Norwegian Cruise Line, but the company’s recent newbuildings have targeted the upper level of the mass market. Everyone but Carnival seems to go the premium route to varying degrees – RCCL’s new ships are smaller thus more likely to aim at the upper level of the mass market: Celebrity Cruises and Princess Cruises are clearly aiming at the premium segment as is Holland America Line.
Aiming at the very top are Crystal Cruises, Silversea Cruises and Swedish American Cruises.
American Family Cruises, meanwhile, is seeking to carve out a niche with an original appeal exclusively to the family market. But the reports in so far appear to be mixed.
Travel Agents
Travel agents are optimistic about 1994. Advance bookings are coming on strong they said – citing the continuous growth of new product in the market, the beefing up of their own local advertising, and the widespread discounting.
But retailers also expressed concern about dwindling commissions and other cruise related problems.
At South Florida Cruises, in Ft. Lauderdale, agency President Jim Bone, said he expects a very strong year for 1994. Cruising continues to be on the upswing, he said, and the numbers have only increased each year at his agency.
In San Diego, Tom Roegge, Co-Owner of Cruise Holidays said that advance bookings have been slow in some markets, but that he expected a strong 1994.
Roegge also noted that while discounting sells cruises, it also cuts into profits. He said the early discount rates create a problem for agents which already have low profit margins.
Robert Falcone, President of Cruises, Inc., said he doesn’t mind discounts, but that he does mind last minute “fire sales”.
Falcone said it was sometimes a problem when passengers who had booked a cruise early in good faith found out that the cruise was deeply discounted close to sailing. “We had a hard time getting cruise lines to honor the lower prices,” he said.
Wayne Heller, President of Cruises Only in Orlando, said that the industry wouldn’t be where it is today if it weren’t for discounts. “You cannot sell cruises year-round at brochure rates,” he said.
Falcone said that the repeat market is the fastest growing segment of the cruise industry today and one that “represents the industry’s future.”
Bone said it was a mixed bag. “Some clients get tired of going to Nassau each year to pick out straw hats, and so look for different sailings. On the other hand, some clients are hooked on cruising and want the same thing year after year.”
To accommodate the anticipated bookings, Heller hired 50 new agents three months ago and plans to add a new reservations facility of from 30,000 to 40,000 feet in the Orlando area within the next six months.
Heller said he has reason to believe that next year business will be stronger than ever, pointing out the plethora of new product. “We have been attending so many inaugurals in the area and more are coming for 1994. “So we know the business is there and these ships need to be booked,” Heller said.
