1995 Industry Preview

The coming year promises to be an exciting one for the industry with several new ship introductions by the major operators.

That is good and bad news at the same time.
New ships always generate more passengers. With no overall capacity growth in 1995 year-over-year due to a number of ship withdrawals, it should be easier to fill all the ships in 1995. The problem, however, is that most of the new ships are in the same market segment.

That, combined with increasingly price conscious consumers, can be expected to lead to continued downward pressure on rates also in 1995. In fact, the traditionally strong winter season does not look all that strong for some of the lines.

If the stock market is any gauge of expectations, it should be noted that the shares of Carnival Cruise Corporation and Royal Caribbean Cruise Line dropped significantly just prior to press time, only to recover slightly, with Carnival Corp. trading for $41 compared to a 365-day high/low of $52 1/4 – $38 1/2, and RCCL trading for $26 compared to a high/low of$30 1/2 – $23 1/2.

The shares of American Classic Voyages, owners of American Hawaii Cruises and Delta Queen Steamboat Company, bit a new low of $12 this week only to recover to $12 3/4 at press time compared to a 365-day high-low of $19 1/2 – $12 1/2.

AMCV even issued a press statement saying that there were no corporate developments or changes in the company’s business fundamentals that would account for the recent decline in the trading price of the stock.

While the cruise companies’ shares are more sensitive to market changes, the recent drop in share prices seems to go beyond market fluctuations, however. Consequently, it seems reasonable to attribute the drop to market concerns about 1995.

Executives at the major cruise lines have expressed cautious optimism for next year with modest improvement in pricing.

New Capacity

While seven new ships and refurbished ships are scheduled to enter service in North America in 1995, six ships have been withdrawn in 1994 and will be withdrawn in 1995 so there is no real growth in overall market capacity in 1995 compared to 1994.

The withdrawals are a result of what best can described as the evolution of the cruise industry where older ships and niche market ships are being forced out by new tonnage and cost efficiencies.

It is significant to note, however, that many of the ships that were withdrawn were in niche markets, while most of the new ships enter the contemporary/premium market where competition can be expected to continue to be hot. Hence, the pressures on pricing.

Carnival Cruise Lines is bringing the Imagination into service by mid-1995. The 2,040-passenger ship will sail seven-day Caribbean cruises from Miami.

Celebrity Cruises is entering service late in the year with the new 1,740-passenger Century which will also be operating in the Caribbean.

Princess Cruises’ 1,950-passenger Sun Princess and RCCL’s 1,750-passenger Legend of the Seas will operate seasonally in the Caribbean and in Alaska.

Crystal Cruises will introduce its new 960-passenger Crystal Symphony along with the Silver Wind from Silversea Cruises.

Delta Queen meanwhile will launch the 420-passenger American Queen on the rivers of the Mississippi valley.

Market Concentration

Depending on how markets are defined. the contemporary market will see a decline in capacity in 1995 over 1994 which theoretically will benefit Carnival, which will introduce the imagination in this market segment, the most.

The decline is mainly due to the withdrawal of American Family Cruises, and the sale of the Southward, Starship Majestic and Nordic Prince. This is only partially compensated for by the Imagination and Norwegian Cruise Line’s Leeward.

The premium market, however. will see a 21 percent increase with new tonnage from Celebrity, Princess and RCCL, in spite of the withhdrawal of the Crown Jewel.

While the summers provide cruise lines with options to sail to Alaska or in the Mediterranean, intense competition can be expected in the Caribbean during winter months of 1995/96 unless market demand suddenly picks up.

Interestingly enough, when competition in the Caribbean eases up in the summer, new tonnage seems to be attracted.

Holland America Line will be present nearly year-round in the Caribbean for the first time in 1995 with the Westerdam, which will only leave for the months of August and September, to sail from New York to New England Canada.

In 1997, HAL will be joined by Princess which will then also be year-round in the Caribbean.

The biggest relative capacity increase will be seen in the luxury market with the introduction of the 960-passenger Crystal Symphony boosting market capacity by some 20 percent.

Economies of scale favor Crystal, Cunard Line and Seabourn Cruise Line.

Economies of Scale

More than ever economies of scale will decide who will make money and who will not in 1995 and beyond as more new ships enter service.

Economies of scale can be broken down in three distinct areas:

Ship operating costs: the rule tends to be that more and bigger ships offer better cost efficiencies.

As an example, ship operating costs for the Carnival Corp. fleet were estimated at $32,953 per berth for the first nine months of 1994 compared to $38,404 for RCCL, $41,386 for Kloster Cruise, and $48,434 for AMCV.

Shoreside costs: after a critical mass bas been achieved, only small increases in costs are needed with the addition of more ships. Hence, a bigger fleet does not necessarily incur much more shoreside costs than a smaller fleet and considerably less on a per berth basis.

As an example, selling and administrative costs were estimated at $6,732 per berth for the flrst nine months of 1994 for Carnival Corp. compared to $9,157 for Kloster Cruise, $9,173 for RCCL and $14,543 for AMCV.

Capital costs: capital costs efficiencies are perhaps the most important ingredient, allowing a company more yield management flexibility and for more money to float to the bottom line.

For the first nine months of 1994. Carnival Corp. had interest and tax expenses estimated at $2.125 per berth compared to $2,560 in interest expenses for RCCL and $6,407 for Kloster.


Cost efficiencies are all important in today’s industry and bigger units are necessary in order to survive and to make money.

Still, it is interesting to note that the relative margins of the industry leader, the Carnival Corporation, have not increased with the growing fleet in spite of the increased cost efficiencies. The operating margin has remained about 22 percent of revenues while the net income has fluctuated between 16 percent and 20 percent for the last five years.

The interpretation must be that one industry variable has seen a downward development, and that is pricing. Otherwise with the increased cost efficiencies of the larger ships, operating and net margins should have been up.

The cruise lines have partially compensated for this development through sophisticated yield management systems. If that had not been the case, there would have been an erosion of margins.

The big question for 1995 becomes whether the cruise lines can firm up pricing in which case they can be expected to post record profits based on their maximized cost efficiencies, yield management and new ships being introduced.

If pricing does not improve, which seems a distinct possibility based on this past fall, or improves only moderately, the big operators still have the financial muscle to continue on their profitable courses. Meanwhile, any improvement in pricing will translate into more net income.

The outlook for the smaller companies and the niche operators becomes a whole lot shakier, however, if pricing does not improve.

Generally, the smaller companies do not have the muscle and need to generate higher per diems to cover costs.


The long-term outlook for the industry remains as optimistic as ever.

There is a huge market potential in North America and in Western Europe as well as in the Far East.

To tap these markets the cruise lines are building new ships designed for different market segments and cranking up their sales and marketing efforts.

At the same time, the new ships tend to offer better economic efficiencies which make the new fleet inherently more profitable.

Hence, older ships and weak operators will increasingly be forced out of the market, which is good for the remaining operators for three main reasons.

First, the operators that may be forced out are expected to be the ones offering the lowest prices, as a result of their need to attract business. Thus, their departure may alleviate some of the pressure on pricing.

Secondly, their departure may make the industry yet safer as their ships are most likely older and if the companies are financially strained they may also be cutting corners on maintenance and training.

Thirdly, the departure of some ships alleviate some of the supply, allowing for demand to catch up.

The new ships will also enable the major operators to sell off or re-deploy their older ships as already demonstrated by Carnival, RCCL and Princess. The new SOLAS regulations being phased in may also encourage the lines to get rid of some of the older tonnage.

Consequently, the combination of older ships being withdrawn and newer more efficient ships taking their place should make the cruise lines more profitable in the years to come providing other market variables stay the same.

This “renewal” of the fleet will also strengthen the companies that build new ships.

Lesson of 1994

The main lesson offered by 1994 is that niche markets are hard to break into or may not exist. Both American Family Cruises and FiestaMarina Cruises called it quits in 1994.

In addition, single ship and small company operators saw themselves squeezed further in a competitive market. Dolphin/Majesty came up short on loan payments which had to be renegotiated, while Seven Seas and Radisson Diamond found it practical to merge operations.

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