The cruise industry is facing an optimistic future, according to cruise line executives who spoke at the recent cruise shipping conference in Miami. But executives have different formulas for success and some cautioned that there were also rocks on its future course.
Richard Fain, Chairman and CEO of Royal Caribbean Cruise Line, warned that the industry is threatened as never before by government regulation and taxation. He called for grassroots support to communicate the industry’s contribution to the U.S. economy to the government.
Kirk Lanterman, President of Holland America Line, also identified additional hazards to the industry’s future growth. He said that there may not be enough capacity to meet demand as lines retire older ships to meet new SOLAS requirements. He also said that frequent cruisers may become bored and that the cruise lines need to build new and more exciting ships, develop new itineraries; and develop new markets.
Corrado Antonini, Managing Director of Fincantieri, said that the argument of building subsidies is overstressed. He said that while subsidies reached 28 percent three years ago, they were now reduced to nine percent.
Who will succeed?
Tim Harris, Chainnan and CEO of Princess Cruises, said that the key to success in today’s cruise market is size. It is the large commercial concerns which are building the cost efficient fleets of large modem ships and which are increasingly recognizing economies of scale in promotional and administrative costs, he said.
But, according to John Olsen, Chief Executive of Cunard Line, “big is not beautiful.” He said that with size comes the temptation to blur the brand and to destroy the value of brand identification.
Olsen noted that the shipbuilders were keen to build, some offering subsidies, and that bankers were keen to finance. He compared the present-day cruise industry to the airline industry and said that the building could lead to self-inflicted destruction. Olsen said that in the airline industry, only the small airlines in the United States are profitable today.
Jan Lochtenberg, Vice President at Salomon Brothers, said that access to capital has become a competitive advantage in today’s cruise industry. He underscored that in an environment of low interest rates, the cost of capital is increasingly market driven, as opposed to subsidized, which favors the strongest capitalized participants over the long term.
Lochtenberg said that Carnival, Kloster and RCCL had recently raised capital in the bond market at 6.15 percent, 11.375 percent and 13 percent respectively. He added that while ships had usually been financed at OECD rates of 8 percent, Carnival had recently been able to finance HAL’s Statendarn at 5.75 percent in the bond market.
As to whether too much of the market is moving upscale, as some allege, Fain noted that RCCL doesn’t want to be upmarket, but at the upper level of the mass market.
Harris said that Princess has always been in the premium level.
Lanterman noted that “you don’t become upscale just by talking about it.” He said that if a cruise line is marketed as upscale, passengers expect an upscale experience, and the cruise line has to deliver. But that is easier said than done, Lanterman pointed out, and said that 400 to 500 crew members have to be trained, etc. He concluded that to be “perceived as upscale” but not delivering could be very detrimental to a company.
Fain also said he doubted that the level of first time cruisers is declining, as claimed by Carnival’s President Bob Dickinson. “At RCCL, we have more first timers,” Fain said. Harris said that the level of first timers has not changed at Princess. “If anything, we are attracting more first time passengers,” Harris said.
Eric Dawson, Commissioner of Economic Development and Agriculture for the U.S. Virgin Islands, proposed the development of a new relationship where both the islands and the cruise lines feel there is a level playing field. “There is a stalemate and it is time to move on. Both sides have much to lose,” Dawson said.
Dawson proposed the formation of a new committee to deal specifically with issues – which he identified to be the Caribbean marketing program, sourcing, and the environment.
Richard Sasso, Senior Vice President of Sales & Industry Affairs for Celebrity Cruises and Chairman of the Florida Caribbean Cruise Association, said it was important to look at the issues broadly. “There are many opportunities for each of us,” Sasso said, identifying two common denominators for success: Cooperation and communication between the destinations and the cruise lines.
Sasso also pointed out that the cruise lines are hiring more Caribbean nationals and have started to buy more supplies in the Caribbean. Sasso also underscored that the cruise ships contribute less than two percent of the pollution in the Caribbean and is working to achieve zero percent discharge.
John Fox, Vice President of Corporate Relations for RCCL, said that head taxes are an issue where neither party should expect to get exactly what they want. Fox also underscored that RCCL will buy supplies in the Caribbean if price, delivery and quality meet RCCL standards. He noted a recent contract was entered into to buy three million soap bars in Dominica.
Sasso added that Celebrity, Cunard and Princess were also among the cruise lines buying supplies in the Caribbean – in the Bahamas, Barbados and Curacao.
Ports & Destinations
Other interesting speakers were David Kaufman, Senior Vice President at Cunard; and Michael Ronan, Director of Port Planning for RCCL, who also pointed out some basic needs that ports often overlook, namely cleanliness and safety. George Michaelides, General Manager of Marketing for Louis Cruise Line, presented the growing mini-cruise market for Europeans, including Russian passengers, in the Eastern Med.