Challenging Year Ahead

The biggest issues for the industry in 2007 are the Caribbean (when will demand and pricing pick up?) and fuel prices (will they go back up?), according to the financial analysts interviewed by Cruise Industry News. 

But there is also concern that the Caribbean softness may spread to other markets.

According to Tim Conder, vice president and leisure analyst at A.G. Edwards & Sons, the two swing factors will be the Caribbean and fuel prices. He attributed the softness in the Caribbean to the American economy, noting that the consumers most likely to take Caribbean cruises have been the most affected by rising interest rates and higher gas prices. Conder also said that the slower comeback of the Gulf ports, and negative fall-out from the hurricane season two years ago have also affected the Caribbean.

At the Susquehanna Financial Group, Gaming, Lodging and Leisure Analyst Robert LaFleur said: “Our surveys of agents have found that the Caribbean may be affected by a series of issues: people have been concerned about hurricanes after the 2005 season; the economy; and the negative news coverage. These are issues that have relatively straight forward solutions – when gas prices go down, people may start to feel more confident and take a cruise.

“The more difficult issue is boredom with the Caribbean,” LaFleur continued. “That is a far more problematic issue. And I do not know what the solution is. If port A looks like port B that looks like port C, the cruise lines and the Caribbean have a problem. And as market penetration increases, this will become even more of an issue.”

Softness Spreading

“I think there is some uncertainty whether the problems affecting the Caribbean will spread to other markets with all the new ships entering service this year,” said Preben Rasch-Olsen, analyst of consumer goods and cruise at Carnegie.

Added Bob Simonson, leisure analyst with William Blair & Company: “I believe that 2006 only saw the first wave of declining consumer spending due to rising interest rates and gas prices. Middle America is being squeezed and discretionary spending will eventually be snapped off.

“It makes perfect sense that the market for short Caribbean cruises fell apart first. This is the entry level product, and these consumers were hit the hardest. Carnival Cruise Lines felt it first. Royal Caribbean tends to have a more premium product and the customers have higher income, so their market has been holding up better.

“The second wave will come as the financial impact moves upward precipitated by the difficult housing market,” he added.

“I could be proven wrong about the second wave, but I was right about the first wave,” Simonson said.

Bigger Problems?

“If you blindfold passengers on a Caribbean cruise, I don’t think they would be able to tell the difference between Carnival and Royal,” said LaFleur.

“Also, the industry is beholden to travel agents – they don’t like each other – but have to work together.

“Cruise lines do not control the distribution of their product. I would be hard pressed to find any other business model that is using third parties for distribution,” LaFleur added.

LaFleur noted that there is more seasonal capacity moving out of the Caribbean with Royal Caribbean, for instance, deploying a Voyager-class ship in Europe this summer. In addition, he said, a larger portion of the new ships are going to European brands.

Europe is hot, according to Tore Ostby, leisure analyst at Handelsbanken, who said that Europe is generating higher yields and has better growth potential. The question is if Europe can deliver.

Excerpt from the Cruise Industry News Quarterly Magazine: Spring 2007

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