What You Can Learn from Cruise Inc.

| Tuesday, 05 Mar. 2013
| March 20, 2009

NBC travel correspondent Peter Greenberg shows us the tough economic numbers behind the cruise business.

If you saw Peter Greenberg's expose about the airline industry called "American Airlines - a Week in the Life," which aired on CNBC recently, then you know how tough he can be on the travel industry.

I watched a preview of his latest effort, a documentary on the cruise industry called, "Cruise, Inc.," which is scheduled to air on CNBC March 24. I was impressed with this show, not only for Peter's excellent coverage, but also for how well the cruise industry holds up in the harsh light of investigative reporting.

Like "American Airlines, a Week in the Life," the concept of "Cruise, Inc." is to take a one-week Caribbean cruise on NCL's Norwegian Pearl and "run the numbers" to see how profitable the cruise industry can be. The show reflects how the industry is surviving this harsh economic climate, and how well it will perform once again under more normal economic conditions.

I have to give Peter credit for unearthing many financial numbers we regular cruise industry reporters are not privy to -- i.e., trade secrets like how much salary a room steward makes per week. The answer will surprise you.

One of the program's most surprising aspects is that Peter convinced NCL to reveal how much each revenue-producing department on the ship has to contribute to the bottom line before a single cruise becomes profitable. It's a microscopic look into the details we sensed instinctively but have never seen in such detail.

But anyone who expects to see a dour portrayal like Peter's airline expose will be disappointed. In fact, all the "scourges" of the cruise industry are neatly dispelled, and it isn't because Peter is pulling any punches. His investigation turns up a surprisingly rosy picture of the cruise industry.

What You Can Learn from Cruise Inc.

I am not going to give away all the surprises and spoil the show for you. But I will tell you what you can learn. Cruise reporters like myself have long heard all the common criticisms of the cruise vacation: that it is for the "newly wed or nearly dead," that cruising is unsafe, that the entertainment is low quality, and that the crew is exploited. This show addresses all those allegations, and I think you will be surprised at what it finds.

The show begins by describing how the $30 billion cruise industry is mostly divided between Carnival Corp. and Royal Caribbean International, which together control about 80 percent of the business. The ship that Peter chose for his "week in the life" is NCL's Norwegian Pearl, even though -- as he reveals -- NCL only controls about 10 percent of the cruise industry. (The other 10 percent belongs to the smaller luxury cruise lines and niche players like Oceania Cruises and adventure cruise lines like Cruise West.)

Although NCL's "Free-style Cruising" is slightly differently from the larger cruise lines' revenue models, Peter's show still offers an accurate picture of the entire industry. Cruise reporters know the cruise lines flatter each other with imitation - only logical, since they know a good idea when they see one. The only thing unique in NCL's revenue model is having more alternative dining restaurants with a cover charge.

Taking a Cruise with Peter Greenberg

Peter takes an average one-week Caribbean cruise, investigating the day-by-day onboard activities to show us how a cruise makes money. The first day of the cruise starts with getting last week's passengers off the ship, but Peter begins the story with Hotel Manager Michael Klieverik supervising the technical aspects of preparing the ship for the next load of passengers.

After the last cruise passenger has disembarked by 9:30 a.m., crewmembers begin to vacuum miles of carpeting, change the linens and wipe the 1,200 staterooms clean of fingerprints, smudges and stains. We see them using an odd fog-producing machine that emits an airborne sanitizing mist. As thousands of pieces of luggage are loaded into the crew stairwells, cooks are preparing lunch for the hungry early arrivals. It takes four hours to pump half a million gallons of fuel into the ship's holding tank.

Klieverik describes the embarkation day processes as "organized chaos." One of the most telling scenes shows him speaking into his walkie-talkie to notify his crew of a public restroom that has a foul smell. As passengers begin to board the ship, they are greeted at the gangway with free champagne.

Peter describes the current pricing strategy in today's tough economy. Andy Stuart, NCL's executive vice president of marketing and sales, gets plenty of camera time and together he and Peter make it clear that the cheaper inside cabins selling at under $300 are mostly a way to entice new customers to try the cruise experience.

A Preview Clip of Cruise Inc.

Peter says it is normal to see staterooms selling for as low as $35 a night, per person, in today's market, but the first couple he samples reveals they paid about $1,600 total ($800 apiece) for a verandah cabin. Most news ships have balconies on 80 percent or more of their rooms, which command a higher price.

Peter locates the largest suite onboard, the Garden Villa at 5,200 square feet. These NCL suites are among the largest in the industry and would usually fetch $26,000 for the cruise line. On this cruise, the occupants are a married couple traveling by themselves and the price they quote is significantly less. The man is especially happy with the value he received "per square foot."

Peter cites the 60 percent repeat cruiser rate of NCL and most cruise lines as the "sweet spot" of the cruise market. This group is already familiar with the product and is more likely to book a veranda cabin or a suite. They also require much less hand-holding and familiarization time to make the sale.

Different Perspectives

Making each cruise profitable is the company's goal. Peter interviews several officers onboard to clarify how much each cruise component contributes to, or subtracts from, the bottom line. The first subject is food.

NCL is unlike the average cruise line in that it innovated "Freestyle" cruising back in 2000. Unlike most large cruise ships, which have one to three alternative dining spots where the guest pays an additional service fee, Norwegian Pearl has eleven restaurants in all, and for seven of them, Peter says, "be prepared to fork over as much as $25 per person."

He interviews a family of five regular NCL cruisers who say they prefer to spend the money for the special restaurants and get what they describe as "fantastic" food. He shows them in the Teppenaki Japanese restaurant, where he says "for $125 they get dinner -- and a show" from the animated chefs who cook the meals at preparation spaces surrounded by diners. Another young couple chooses the alternative dining six out of the seven nights, but says they would rather just pay more for the cruise and have that food included in the price. Still, they describe the specialty restaurants as "excellent, especially compared to some of the other cruise lines we have been on."

   
Sushi Chef at Work   Japanese Dinner   Teppenaki Grill

Andy Stuart reveals that some 60 percent of passengers eat in a specialty restaurant at least once during the cruise. The rest of the meals are taken in the no-extra-charge dining rooms and buffet areas.

Using the first day at sea as his example, Peter says, "On every deck and around every corner there is another sales pitch; from liquor by the bottle to gold by the inch, and even an emerald being sold by the pound." The screen shows a huge square cut emerald necklace from an onboard jewelry store.

Moving through the day, Peter reveals that the old standbys of cruising are still the biggest moneymakers -- the bars and the casino. He breaks down to the exact penny how much revenue each department needs to contribute to make the cruise profitable, including the beverage manager telling us to the penny how much each passenger needs to spend on beverages each day. We see some of the creative ideas NCL has to encourage people to drink, like wine tastings and martini-making classes. As Peter describes it, "the more you booze the better you cruise."

It has already been calculated that Pearl needs to sell $112,000 worth of liquids during the cruise. On the last afternoon, they are short of their target, but we do find out if they make it a hit or a miss by the next morning.

We see an art auction onboard conducted by Park West Galleries of Michigan. Peter says: "The champagne is free, but that is the only thing." I won't say whether he mentions the current controversy surrounding these auctions, but he does interview a young doctor onboard who has purchased three prints including a Rembrandt and a Salvador Dali for about $20,000 total.

We also get a peek at the spa, where massages are not the only options on tap. "How about a little botox?" Peter asks.

Moving on to the nighttime, Peter addresses one of the biggest non-revenue-generating aspects of the cruise experience - entertainment. Since all cruise shows are free, large-scale production shows can be quite costly. We see an interview with independent producer Jean Ann Ryan, well known in the cruise industry as the creator of stage shows for many cruise lines. We see a New York City audition where hundreds of dancers show up and only one is picked to work on a ship. Peter reveals how much Jean Ann is reportedly paid to produce just one show for NCL.

Not mentioned is that NCL was one of the first cruise lines to offer alternative entertainment such as "Tony and Tina's Wedding" and troupes from the famous "Second City" improv group. Some of these shows have a cover charge.

Here is yet another surprise. Jean Ann Ryan tells us how much a typical dancer can expect to be paid during a six-month contract.

Security Concerns

The show addresses some of the current concerns by the 83 percent of Americans who have never taken a cruise. Peter and Andy Stuart point out that NCL, and especially the Norwegian Pearl, is especially advanced in the area of security cameras. We see scenes of the control center for 1100 onboard security cameras where each camera is live and also recording.

Andy Stuart clarifies that this much security coverage, almost every square inch of public space (other than restrooms), is unusually high in the industry. He says NCL began building security cameras into its ships back in 2001, but each ship the company builds has more monitoring than the previous one. It was a fortunate thing for the company when a young lady fell from one of the Pearl's sister ships last year. The cameras captured the event on video and NCL was able to ascertain that it was truly what they describe as an accidental fall, with only the victim at fault.

Peter asks about the important crew screening and hiring procedures, when the line uses applicants from more than 100 nations. He doesn't pull any punches in describing the Norway boiler explosion where eight crewmembers died in 2003. He shows pictures of the accident victims and tells us how much was paid out in damages after NCL agreed to "plead guilty" to a charge of negligence.

I was happy to see Peter reveal how much a room steward gets paid. We at Cruisemates have always contended that these people are well paid by the standards of their nations of origin, and that they are very happy in their jobs, although many cruise industry critics try to paint the practice of hiring third world workers as exploitation. Peter reveals that their monthly salary is even higher than I estimated, and he doesn't mention that the cruise line pays all their rent, food, medical care and utilities. He does confirm that their salary is almost pure profit, and that many of these people are supporting entire families on their paychecks.

The show goes into detail about Norovirus, which Andy Stuart handles deftly. While explaining that the disease is not "the cruise ship disease," as many media named it a few years ago, we learn the truth about how many ships are affected each year. We also see the preventive measures they take today and hear about the steps taken during an actual outbreak.

Inside a smoky corridor during a very realistic crew fire drill, we see Safety Officer David Lang informing several room stewardesses, "if this were a real emergency you would now be dead, get down lower and crawl along the floor."

More Revenue Questions and Answers

The focus of the hour-long documentary is to show us the cruise industry as a business. Every facet of cruising is broken down according to how much it contributes or costs the bottom line. At the end of the show we learn whether or not it was a profitable cruise, taken in the light of the current economy.

NCL is not a publicly traded company, so they do not reveal every detail of their financial picture. Peter somewhat incorrectly describes Malaysian Star Cruises as NCL's parent company, and notes that the stock valuation of Star Cruises has gone down significantly recently. He also notes the same is true of Carnival and Royal Caribbean. Actually, NCL's majority owner is the private equity firm Apollo Management, which owns 50 percent of the stock, has a majority of board members and owns 100 percent of the Hawaii-based NCL-America.

Still, it is true that the stock of Royal Caribbean has sunk almost 80 percent since its last peak at over $50/share, currently trading at about $8.50/share. Peter interviews Robin Farley, managing director of UBS Investment Research. She just lowered her estimated earnings guidance for 2009 and stock valuation for Royal Caribbean two weeks ago.

Taking a break from NCL, Peter discusses Oasis of the Seas, the coming "world's largest cruise ship" to debut in November at some 40 percent larger than today's world's largest.

Oasis will be almost twice the size of the largest cruise ship Carnival has ever built. Peter correctly notes that although the introduction of ever larger ships has begged the question many times before, no new ship was actually determined to be "too big" after it was introduced.

Peter asks Robin if Oasis will be the first ship whose guests will actually say, "it's just too big." Farley correctly replies that has never happened, but adds ominously, "Perhaps, we'll see."

Getting back to revenue aboard Norwegian Pearl, Peter investigates the impact cruises have on ports of call. Using Roatan as an example, the response from the local minister of tourism is "we don't even want to think about what life would be like without cruise ships." This counters the many critics who describe cruise ships unloading passengers into local communities as ruinous to the indigenous culture.

Peter reveals the average revenue split between the cruise lines and their local tour partners. We learn that shore excursions are the third-largest producers of revenue on Pearl, and some 30 percent of the passengers actually book their tours online before they board the ship. We see examples of port charges, or "head taxes" around the world, and we learn about revenue sharing between the cruise lines and local shops like Diamonds International.

In the end we do the tally for the entire cruise. The show has taught us that, in fact, onboard revenue is only about one-third of all the revenue a cruise line makes. Cruise fares make up the largest part of a cruise line's earnings. We learn the economic impact of not having a full ship; what the beverages, shore excursions and spa contribute to bottom line; and whether or not it was a profitable cruise.

Summing Up "Cruise Inc." by Peter Greenberg

If you watched Peter's "American Airlines, A Week in the Life," then you know he does not pull any punches or varnish over the truth. In fact, before I watched my preview copy of "Cruises Inc," I expected he would have many more negative things to say about the industry, based on some of the sensationalism I have seen in the mainstream media about cruise ships.

I congratulate Peter Greenberg and I have to say I am very impressed. He showed the cruise industry in almost exactly the same light that I see it. I am a pragmatist and a businessman. I know the value of a dollar and realize what it takes to impress the American public with customer service. Yes, I am a fan of the cruise industry, and this show served to make me a bigger fan than I was before.

This is the unbridled truth about cruising, and I am sorry for the industry detractors who will be disappointed there isn't more "dirt." In this case, the truth hurts. The light that Peter shines on Cruises, Inc. shows us an industry deserving of our respect and our vacation dollars.

Links to related articles:

Cruisemates' Interview with Peter Greenberg

CNBC Homepage for Cruise Inc. Big Money on the High Seas

Peter Greenberg's Travel Site


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