State of the Industry 2003

Cruise executives were giving mixed signals about the current health of the industry and the near-term outlook at the recent cruise conference in Miami.

“We are in a difficult period right now,” said Howard Frank, vice chairman and COO of Carnival Corporation, but he quickly added that while “margins may get depressed a little, we still drive good profitability. We have the infrastructure to move product even in the toughest of times.”

Also on an upbeat note, Frank said that stronger companies are likely to emerge. “Difficult times makes us look at everything we do,” he said. “You reassess what you do; it forces changes upon you.”

“Q2 will be difficult, but Q3 is holding up reasonably well for Carnival,” Frank continued. He said that overall bookings were up for 2003, but not where they need to be and that pricing was down.

Richard Fain, chairman and CEO of Royal Caribbean Cruises, agreed: “This is clearly a more disappointing Wave Season than we may have hoped for.”

Added Colin Veitch, president and CEO of Norwegian Cruise Line (NCL), “There are a number of influences at work — the Norwalk virus, the economy and the threat of war. Uncertainty is the enemy of our business.”

But Veitch also said there is Jess discounting than meets the eye. He explained that by deploying ships in different markets, NCL has been able to manipulate pricing without affecting yield. “By deploying a ship in New York, we can reduce the price the consumer pays (who does not have to fly), without reducing the price that we get,” he said. “The key to growing the cruise market is to lower the price point — to make cruises available to more people.”

Said Bob Dickinson, president of Carnival Cruise Lines, “There are two prices to cruising, first is the price of the cruise, and second is the time of the cruise and the time it takes to get to and from the ship. But we are still doing a miserable job of communicating the value (of a cruise). People spend two to three times more on a land vacation. Only 15 percent of the American population has ever been on a cruise. Eighty-five percent has no concept of what a cruise is.” 

”We are giving away a phenomenal product. It is an obscenity,” Dickinson continued, adding that with more close-in bookings, he sees what he called a protracted Wave Season, without defining how long it may run. The Carnival brand will have an 18 percent capacity increase in both 2003 and 2004, according to Frank. But Dickinson added that it is his brand’s earnings that continue to fuel the parent company’s acquisitions.

Added Fain, “We are 50 percent sold out for 2003. Most industries would be overjoyed to sell that much this far in advance,” he added.

Future Growth

While bullish on the industry, Frank expressed a more cautious view of Carnival’s newbuilding plans. He said the industry was seeing unprecedented new capacity growth in 2002, 2003 and 2004. “We have an awful lot to digest in the next couple of years,” he said, noting, “Looking back, I am not sure how we got here.”

“I think we have to go through this period and digest the capacity. You will see a slowdown in new capacity, but it will not stop,” he said. “But growth will not continue at the same rate as before. Some brands will grow, some will not.

“Additional capacity will require a huge amount of resources,” Frank continued, “to maintain the product, hire crew, and generate passengers.”

Frank added that the strong Euro makes ships more expensive while the cruise lines’ returns are going down. “I do not know if we will order any more ships for 2005 right now,” he said.

Fain would not comment on the two options that RCC has pending, but said that he was looking long term.

Maybe there is not so much demand for more new ships in the short term, but long term the industry will need more ships, according to Veitch. “We (NCL) will add one ship per year for the foreseeable future,” he said.


Dickinson blamed slow growth out of Caribbean homeports on the lack of airlift.

On the issue of crowded ports — such as 16 ships with 40,000 passengers in Cozumel on the same day, Dickinson pointed to Las Vegas and Orlando, noting that “crowded” was a relative term.

As for ships deployed in Europe this summer, Frank said that “we have seen some softness, but we are encouraged and continue to believe that Europe will be good this summer.” Fain, who will have five ships in Europe with the Royal Caribbean International and Celebrity Cruises brands, said that “unless something dramatic happens, we do not expect to change.”

Veitch said that it was hard to fill Orient Lines’ two ships in the Mediterranean and that he sees NCL’s future in North America.

Among the luxury lines, Crystal Cruises may also see a better future closer to its home base. Crystal President Gregg Michel said that the company is looking to develop more shorter cruises in 2004 and more round-trip cruises out of U.S. ports.


Once Carnival completes its merger with P&O Princess Cruises, will the squeeze be put on the suppliers? Frank gave the standard answer: “We do not see any dramatic changes. We will look at costs to see where we can operate smarter or where we need to find more efficient ways. That is not necessarily bad for suppliers. It could instead be a win-win situation.”

He said that Carnival is still working to understand how to best run its growing business and that the focus for the next 18 months would be on the successful integration of the additional brands.

“We did not merge to create size,” Frank said, “but to fill in where we saw gaps in our company around the world.” Pam Conover, CEO of Cunard Line, added that there is room for both Cunard and P&O Cruises in the U.K. market under the same owner’s corporate umbrella.

Defending his deal in Hawaii, Veitch said that the recently passed legislation gives NCL a distinctive position in Hawaii, but not an exclusive position. Twenty-nine other ships will also sail in Hawaii this year, he pointed out, adding: “Anybody could have bought the assets of American Classic Voyages and do what we will be doing.”

For now, NCL will continue to sail the Norwegian Star on its Fanning Island itinerary while the new Project America ship will be positioned on an inter­ island seven-day program. A further ship is likely to be deployed on a three- and four-day program, according to Veitch.

In a turn-around, industry executives are not so modest about their direct bookings any more. Dickinson said that 13 percent of Carnival’s bookings are direct, compared to the industry average of 10 percent, according to the Cruise Lines International Associations (CLIA).

Fain would not comment directly on his brands’ direct booking levels but said they were less than 10 percent and that agents represent the dominant distribution but are not the exclusive form of distribution.

Conover said that “just over 10 percent of Cunard’s bookings were direct and that hasn’t changed for years.”

At NCL, Veitch said that direct bookings accounted for five percent of its business. “As a 10 percent player in the market, it is particularly important for us to have the support of travel agents,” Veitch continued.

NCL recently introduced a revised commission system, promising to increase the pay to agents who book more. Dickinson said it instead represented a reduction of commissions for most agents.

“When you manage to agitate Mr. Dickinson that much, you must have bit a home run,” responded Veitch.

So a little color was provided by the usual suspects while the rest of the industry leaders said very little of substance or were notably absent from this year’s discussion, including Princess Cruises.

Bob Sbarak, executive director of CUA, pointed out that the North American-based industry bas the potential to carry one million more passengers in 2003 than in 2002 when the fleet carried 7.6 million Americans or 8.7 million worldwide, which was 15.5 percent more than in 2001.

Sharak attributed the increase to stepped-up marketing efforts, aggressive pricing strategies, ship deployment, and measures taken to ensure passengers’ safety, while maintaining high product standards and offering passengers more choices.

The CUA fleet utilization rate was 97 percent in 2002, according to Sharak.

Post Merger

While industry executives ducked any discussion of the post-merger industry picture, Veitch illustrated what it will be like for the third largest company. He said at a separate press conference that post-merger the small lines run the risk of becoming irrelevant (to travel agents and consumers).

“We (NCL) are one of the Big Three, but the smallest, so we must differentiate ourselves,” Veitch said. “We want to be the leading line in certain areas in order to be relevant and active in the distribution system. We do not want to be the 10 percent player in each market. (NCL’s North American market share will be approximately 10 percent post-merger, compare•i to nearly 50 percent for Carnival and more than 30 percent forRCC.)

“It does not make any difference bow good your product is if the travel agents are not focusing on you,” Veitch continued.

That statement must in turn take on huge importance to the balance of the cruise operators, who will share the remaining 10 percent of the market. How relevant will they be to the distribution chain?

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