The cruise industry’s future is characterized by relative uncertainty, according to the cruise line executives who spoke at last week’s cruise conference in Miami.

Several factors were defined as contributing to the uncertainty, including the present weakness in bookings combined with all the new ships being introduced over the next three to four years, and the battering of the distribution chain on which the cruise lines depend.

Al Wallack, Chairman of the Cruise Lines International Association (CLIA) and Senior Vice President of Marketing and Passenger Services for Celebrity Cruises, predicted that passenger growth will parallel the growth in berths in 1995 and said that CLIA was launching a major revamped Sail-a-bration campaign to promote 1995 fourth quarter sailings.

The factors which are contributing to create the uncertainties characterizing the state of the industry were defined by the cruise line executives.

Risk Factors

Risk factors that may impact the industry negatively were defined as follows:

Consumer attitude which is formed by economic, political and social events.

Negative press coverage which in 1994 resulted from a series of mishaps putting a severe strain on cruise lines’ public relations capabilities.

Oversupply with too many ships entering service too fast creating a supply-and-demand imbalance.

Old ships being rejected by passengers in favor of the new ships.

Discounting which when institutionalized may make it very difficult to raise prices back to “normal” levels.

Fine margins between profit and loss situations.

What some see as the threatened stability of the distribution system.

Lack of reliable long range forecasting as evidenced last fall.

Challenges

The executives also identified several challenges which can contribute to overcoming some of the risks:

Development of more first time passengers;

Development of new markets;

Product evolution allowing the lines to appeal to new and broader markets:

Brand differentiation so that all the ships do not look alike to the uninformed;

Onboard spending, to avoid bleeding the passengers to death once they are on board:

New itineraries, alleviating crowded ports in the Caribbean and Alaska;

Value, a combined message of what a cruise is about and its extraordinary value must be presented effectively in the marketplace.

Pros

Strong positives were also identified:

Cruising enjoys the highest customer satisfaction rating of any vacation form;

Cruising offers significantly higher value than any land-based vacation;

Cruising offers the most profit to travel agents;

Cruising has a phenomenal growth record averaging more than nine percent per year since 1980.

Cruising has a vast untapped potential since more than 90 percent of the North American population and probably more Europeans and Asians have not cruised yet.

Despite the positives, John Olsen, Chief Executive of Cunard Line, said that the industry was “tilting out of balance” for the first time in its history and that weaknesses were beginning to show in disproportionate amounts. He said that much of the industry was operating on a fine margin between profit and loss.

Way Out

The solution to the imbalance between supply and demand is market expansion, according to Bob Dickinson, President of Carnival Cruise Lines.

Pam Conover, President of Epirotiki Cruise Line, underscored that the industry must also develop new markets.

Conover said that the challenge in Europe was perceptions and seasonality. She said that cruises were mainly destination oriented and believed to cater to the affluent and marure. She also said that the European­ based lines need alternative winter itineraries out of the Caribbean.

Dickinson, however, disagreed with the companies who seek to develop foreign markets for their North American fleets.

“If 93 percent of the North American population has not been on a cruise yet, our approach is that we should not start marketing overseas,” Dickinson said. He added that while Carnival does go after international passengers, it is done on a low cost basis.

Dickinson also pointed out that it was meaningless to advertise price only to consumers who have not been on a cruise yet.

“When lines are talking price, they are not talking product,” Dickinson said. “But we must encourage the uninformed to buy.”

Dickinson pointed to Orlando and Las Vegas which he said attracts more than 70 million visitors every year at what he called a huge range of price points. Hence, he concluded, there should be a huge potential of cruise passengers in this country.

While Dickinson in the past has been critical of what he sees as other cruise lines focusing on repeat passengers rather than seeking to develop more first timers, Olsen pointed out that it was not such an easy task to get repeat passengers either. Besides, he implied, they pass away after a while. 

Adam Aron, President of Kloster Cruise (Norwegian Cruise Line and Royal Cruise Line) was the most optimistic of the cruise line executives present, but then again, he is also looking for investors to enable the company to build new ships.

While Aron noted that January bookings for NCL and RCL were up 13 percent over last year and that first quarter revenues should be up nine percent over last year, he said that potential investors were scared by the oncoming 11 percent annual supply growth through 1997. “The supply growth will put a significant pressure on our business,” Aron said.

Aron also said that the industry’s focus for the next 30 months should be to grow demand through product innovation and more imagination in sales and marketing. He also said that the industry must keep costs down in order to keep prices down and that the lines must be mindful of changes in the distribution system. He said he was concerned that one airline’s recent cutback in commissions could put 10,000 travel agents out of business.

Olsen said it was crucial for the lines in the luxury segment to define themselves and to distinguish their value. “Price cutting destroys the perception of value,” Olsen said, adding that value is no longer associated with luxury or privilege.

Dickinson said that the issue of the 90s is not yield management but revenue management, whereby the cruise lines have to look at occupancy and yield, he said.

Flat Year

Wallack said that 1994 saw modest growth at best but was probably flat while capacity grew by two to three percent.

He attributed the year to the negative press resulting from a series of mishaps which he said impacted the senior market and the fence-sitting first timers. He also said that consumers were pessimistic about the future as regards health insurance, social security, and interest rates. Once the consumers figure out the political sideshow, Wallack said, they will regain their confidence.

However, Wallack also attributed some of the problems to the cruise lines. He asked how the lines expect to convince consumers to pay $1,400 for a cruise for which they once paid $700?

Wallack also said that the new ships will make it increasingly difficult for the old ships to compete. The market will accept the new ships and reject the old, according to Wallack.

“This market-driven chilling effect will have more impact than SOLAS,” Wallack promised.

Wallack also underscored that the industry was dependent on a stable distribution channel which today is battered by negative press and shrinking sales, he said, adding that it was far from clear that the distribution system will remain intact.

He was also critical of travel agencies who maintain regular hours while research has shown that most consumers like to consider travel bookings between 5 p.m. and 8 p.m. or on weekends when most agencies are closed.

Didn’t Know?

Dickinson said that when cruise line executives were asked about last year’s fourth quarter last August. they showed unbridled optimism. “One month later,” he said, “the same executives were extremely concerned, and the fourth quarter was a disaster.”

Dickinson underscored that the disastrous fourth quarter was unforeseen by the cruise line executives as late as August which can only add to the uncertainty factor.

With the early booking systems in place, along with group bookings, the cruise lines should have known long before August that a weak fall was coming. The fact that CLIA announced the launching of the fall Sail-a-bration campaign last July suggests that the lines at least suspected a difficult fall.

No Reason to Panic

Dickinson said there was no reason to panic. He pointed out the industry’s phenomenal growth and emphasized that cruises have a higher customer satisfaction rating than any other vacation; that cruising offers significantly higher value than any land-based vacation; that cruising relies uniquely on the travel agent distribution system; and that he saw nothing in the airline commission cap that can hurt the cruise lines.

“If 5,000 travel agents go out of business,” Dickinson said, “most of them probably did not sell cruises anyway. Besides, 5,000 travel agencies go out business every year (regardless).”

Aron also pointed out that the cap on airline commissions could turn more agents to selling cruises to replace their airline commissions.

Dickinson added that 40,000 agencies in the U.S. and Canada should be selling cruises. Instead, 30,000 sell at least one cruise a year. Much fewer book cruises regularly, according to Dickinson, who said that 10,000 to 15,000 agencies sell cruises regularly.