State of the Industry 2002

Senior cruise line executives gave an upbeat forecast for 2002 at last week’s cruise conference in Miami, predicting that the North American-based lines will carry 7.5 million passengers in 2002 compared to 6.9 million in 2001. Three-and-a-half million are expected to be “new,” that is, people who have not cruised before.

The year-over-year increase of 7.75 percent is only slightly less than the historical annual average growth rate of 8.4 percent.

However, the forecasted passenger growth stacks up well against an estimated 4.1 percent capacity growth in 2002. While nine new ships will be introduced in 2002, a total of 23 ships have been or will be withdrawn over approximately the same period, counting back to last fall. (The full-year impact of the bankruptcies of American Classic Voyages and Renaissance Cruises will be felt in 2002.)

The net capacity gain for 2002 is estimated by Cruise Industry News (CIN) to be a mere 181,515 passengers.

This will give the industry an opportunity to catch up so to speak after only carrying 27,000 more passengers in 2001 compared to 2000.

Thus, the big players in the industry are positioned well to improve yields and earnings above previous expectations for 2002, although yields will be negatively impacted from having redeployed ships from more lucrative European sailings closer to ”home.”

In 2003, the industry will be back on its “normal” expansion rate with an estimated 10.2 percent increase in capacity, followed by 9.0 percent in 2004, before slowing down to 1.7 percent in 2005 and 1.6 percent in 2006.

However, it is expected that more of the older ships will be withdrawn in the short to medium term including Carnival Cruise Lines’ Holiday’. Jubilee, and Celebration, which would moderate the pace of expansion and leave the companies with bigger and more efficient ships. Analysts who follow the industry have issued “Buy” and “Strong Buy” recommendations on cruise stocks, although stock prices may already have moved past the best buys.

Mark Comoy, the new chairman of the Cruise Lines International Association (CLIA), and president of Radisson Seven Seas Cruises, said that 2001 suffered from a Y2K hangover as well as a soft economy and a depressed stock market even before the 9/11 hit.

Thus, CLIA reported 6.9 million passengers in 2001, up only 27,000 from 2000, when the industry carried nearly 6.9 million. Comoy said that the 2001 load factor was 85.1 percent compared to 90.4 percent in 2000.

Industry executives said they had hardly any cancellations after 9/11 and attributed what they called a fast recovery to the strength of the cruise product.

That was nonsense, according to Bob Dickinson, president of Carnival Cruise Lines, who attributed the full ships to heavy discounting and restrictive cancellation policies. “$399 for a seven-day cruise overcomes fear of travel,” he said, adding that after 9/11 Carnival had more cancellations than bookings.

“We had available berths last year that could have gone out empty, but we discounted and got 45 percent first-timers,” he said. “The mission is to convert (to cruising) the unconverted (people who have not cruised before).”

Not A Normal Year

Industry speakers cautioned that 2002 will not be a “normal” travel industry year. Yields will be down with more ships repositioned from higher yielding European cruises to lower-yielding sailings closer to “home.”

With three ships shifted back to North American waters in 2002, Jack Williams, president of Royal Caribbean International (RCI) and Celebrity Cruises, said the repositioning will have a “significant yield impact” – in the two to three percent range. He said that he was “somewhat satisfied” with the demand for the two brands’ summer programs in Europe, but that he expects to build capacity up again in 2003.

Howard Frank, vice chairman of Carnival Corporation, said that since the beginning of the year (2002) people have begun to book travel to Europe again.

Peter Ratcliffe, CEO of P&O Princess Cruises, said that consumers are now starting to feel confident again. He added that while yield may be down in the single digits for the cruise companies, general tourism, including hotels, had seen yield drop as much as 30 to 40 percent. That shows how strong the industry is, he said.

Ratcliffe also said that the 9/11 impact overseas was more short-term.

Caribbean port officials surveyed by CIN, however, said that winter traffic from Europe was down in the 30 percent range compared to last winter.

Colin Veitch, president and CEO of Norwegian Cruise Line, added that the recovery had been faster than expected.

Dickinson confirmed that the Wave Season was “very strong and sustained” but said also that it “has to be” in light of all the capacity that has to be filled.

Gregg Michel, president of Crystal Cruises, said that the company had held bookings through the end of the year (01) because of what he called “programs and cancellation policies.”

“We are struggling a bit in the first and second quarters,” he said. “We still do not do deep discounting although (we have) some tactical programs.”


Is consolidation good or bad?

Williams said that there is consolidation in every industry. “The relevant questions are if it is good for the consumer,” he added, “and if there will still be some level of competition.”

Frank used his company as an example, pointing out how the acquisition of Holland America Line had been positive for the consumer and for the company.

“Consolidation gives companies access to capital and it provides scale, which gives them the ability to bring prices down (for the consumer), while maintaining reasonable profitability,” Frank explained.

“A lot depends on how the consolidation is handled,” he said. “At Carnival, the member companies have autonomous managements,” he added, noting how Carnival also brings scale to suppliers.

Attempting to push aside any concerns of suppliers, Frank said that Carnival realized that suppliers must be successful too in order for Carnival to be successful.

But an informal survey by CIN could not find a single supplier or port in favor of further industry consolidation.

Ratcliffe said that the cruise industry needs to grow by 10 percent a year in the U.S. over the next two years and that consolidation would provide the scale needed to grow.

Ratcliffe also said that regulators should not look at the cruise industry as a single industry but in the context of the overall vacation market.

Dickinson underlined how the industry has a history of consolidation and that only scale has allowed the cruise companies to be so successful, enabling national television advertising and lower costs.

“We are selling cruises at 1982 prices,” he said. “We have driven costs down for the consumer.

“The consumer is the winner,” he said.

Added Frank: “I do not believe that consolidation brings dominance or pricing power to the market.”

Frank also said that P&O Princess seemed like a perfect match for Carnival.

Veitch meanwhile congratulated P&O Princess for having made Carnival “bid against itself’ and bid $6 billion for a company that only makes $300 million a year.

When asked if RCC would walk away from the proposed merger as previously threatened, Williams answered vaguely that RCC “remains in the deal today.” Ratcliffe repeated again his often-stated merger objective of creating a global leader and value for shareholders.

Ratcliffe also said that the industry must make sure that the Caribbean islands benefit too. “We must recognize the importance of the Caribbean to our industry,” Ratcliffe said. Dickinson added that it was the bigger lines – with the deeper pockets – that had helped develop the Caribbean mass market.

Other Issues

Dickinson challenged Veitch for hiding NCL’s direct business from travel agents. Veitch said that his company’s direct business was nine percent, but later corrected himself at a press conference and said it was actually five percent. (He said that it was NCL’s international passenger sourcing that made up nine percent of its total business.)

Dickinson said direct bookings made up eight percent of Carnival’s bookings. Williams said it was four percent at RCI and Celebrity in 2001, while Michel said it was between one and two percent at Crystal. Ratcliffe could not recall the exact direct booking volume for P&O Princess, but said it was less than five percent.

Meanwhile, the industry executives on the panel expressed concern about travel agents’ ability to keep up with the growing business. Frank said that the distribution system may not have the resources to grow their business and to take on the technology needed to book enough passengers.

“The question is whether the distribution system will make the investments to grow their business,” Frank said.

Noted Williams on the importance of travel agents: “Cruises are sold; they are not bought.”

New Developments

While the industry was abuzz with rumors about Celebrity Cruises moving its new ships up to the Crystal level (after hiring away Dietrnar Wertanzl, senior vice president of hotel operations at Crystal), Williams added fuel to the rumor-mill, whether intentionally or not, when he explained how he saw passengers migrating up (not down).

“The biggest migration you see is from RCI to Celebrity,” he said. “One brand can be a feeder brand for the other,” Williams added.

That of course begs the question: Where do passengers migrate after Celebrity?

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