The Making of Cruise Inc.

| March 20, 2009

We get some details from the reporter who produced the current CNBC cruise industry exposé.

Peter knows travel inside out. Besides producing TV segments and writing books and articles about travel for decades, he put himself through college running a fleet of charter yachts, and he has a pilot's license. When Peter does a story for NBC about any travel subject, he isn't just learning the business on the spot; he already knows the background and he is there to get the nitty-gritty details.

In producing a CNBC documentary about the cruise industry, Peter was determined to deliver the first public disclosure of the industry's internal business model. The show is revealing in ways that even surprised a veteran industry reporter like myself. He not only explains the business of cruising, but in using NCL as his test subject he was able to disclose its revenue model down to the last penny.

I spoke with Peter to find out how he did it. "This show was not just done in two weeks," he told me. "It took two years of research and preparation. Our goal was to reveal the nuts and bolts of this business and we had to be prepared to do that within the short seven-day period we had aboard the ship.

"We had to know where to go, what to see, and especially whom to ask the tough questions. When we finally got onboard we had unfettered access to all parts of the ship to get as much information as we could. But we only had one week."

Peter said he also interviewed CEOs from a number of cruise lines as well as many Wall Street cruise industry analysts during those two years of preparation. "But we needed a cruise line to agree to work with us, and it took us six months just to hammer out an agreement with NCL saying they would disclose all of the information we needed. You have to give NCL a lot of credit for agreeing to that level of visibility."

Indeed, that willingness by NCL to be so open about its business model is what makes this a great documentary.

The Making of Cruise Inc.

"During the seven-day cruise we had on Norwegian Pearl, we used six different camera crews running nearly 24 hours per day. We had them onboard, onshore and in helicopters and in boats," Peter explained. "The agreement I had with NCL clearly said we were allowed to go anywhere on or around the ship. The only restriction we had was if they said we were jeopardizing the safety of the passengers or crew."

The show goes to many places non-crew memebrs, even cruise industry reporters, never see -- e.g.,down into the crew decks to see a crew fire drill. Cameras go behind the scenes to the ship's surveillance center, where 1,100 video cameras are live and recording. The only public areas of the ship that do not have cameras are the restrooms. This is the first time a cruise line has ever revealed the scope of its surveillance systems.

Peter told me the level of security aboard Norwegian Pearl surprised him. "I was surprised, even though you know all of the cruise lines have security and surveillance apparatus,"he said; but no other cruise line has ever disclosed the level of this surveillance. We agreed that the sheer number of cameras is a reassuring surprise, since many cruise industry detractors claim the lines are not sufficiently safety-conscious.

Addressing People's Cruise Misconceptions

I asked Peter about the common misconceptions of cruising, and whether he thought his documentary dispelled many of them. He reiterated that the program's focus was to examine the economics of cruising, but he did list his impressions of the general public's most common misconceptions about cruising.

"A lot of the misconceptions go back to Love Boat," he said. (A personal note: It was the Love Boat that convinced me to pursue a job with Royal Viking Line back in 1982, on the same ship as Peter's first cruise.)

"The first misconception people have is that a cruise is all-inclusive," he said, noting that many people believe most cruises include alcohol and shore tours in the price. The only things included in most mainstream cruises are meals, entertainment and your stateroom. You pay for liquor, shore tours and staff gratuities, which are charged to your account at about $11 per person per day. There are all-inclusive luxury cruise lines, however.

"The next misconception is that all the staterooms are like the Presidential Suite," he said. This too is from Love Boat and many cruise-based movies, where the cabins -- like the movies' and TV shows' versions of New York City apartments -- are always bigger than they are in real life.

"The next misconception, which NCL has done a lot to dispel, is that cruising is regimented," he said. I have laughed about this one many times. It seems many non-cruisers envision every guest wearing some kind of uniform and the cruise director using a bullhorn to announce the next mandatory activity.

"And another more recent one is this crazy notion of people falling off of cruise ships," he added. We chalked this up to the media having no idea of what it takes to "fall" from a cruise ship. In fact, the reason why someone falls is hardly ever an accident and rarely (if ever) the fault of cruise ship design. You have to bypass the safety barriers to "fall" from a cruise ship.

"Norovirus is the next misconception," says Peter, "and my show does a lot to address the issue." In the program, we see NCL vice president Andy Stuart explaining how Norovirus is the second most common virus in the U.S. It was unjustifiably dubbed the "cruise ship virus" by unknowing media who did not understand why cruise ships are the only entity required to report outbreaks of Norovirus. The CDC does this because ships are the only self-contained environments where they can study an outbreak of Norovirus and learn something about it.

Cruise Industry Revelations from Cruise Inc.

Did Peter himself come away with any enlightening revelations about the cruise industry? "My revelations are probably the same as the television audience. We got NCL to disclose almost exactly how much money they make, including their cut of all of the various enterprises they have their toes in. Especially revealing are the on-shore ones like shopping programs and tours, but also the onboard revenue from the art auctions."

All these numbers are in the show. It is not that we didn't already know how these things worked, but it is the exact details that make the show so ground-breaking.

Finally, I asked what he thought of the cruise business today, within the current economic stretch and in the better times that hopefully lie ahead.

"Personally, I think there is too much capacity out there," he said. "There are too many cabins to fill and it leads to price erosion." I am not sure if he was just talking about current conditions, but this is one area where I disagree. This is certainly true right now, but in the long run the cruise industry has always shown us that it can absorb new capacity and sell those cabins. Almost every ship, even today, sails close to full. Every time a rash of new ships is introduced, someone says, "It's too much" -- but nearly all the cruises still get sold.

As the show points out, most of the revenue from any given sailing is generated by the cruise fare, but it is the onboard revenue that gives the cruise line its profit. I believe the newer ships are far more profitable on a per passenger basis - there is greater cost efficiency, since one ship now carries twice as many guests. Also, there are more ways for passengers to spend money on the newer, larger ships.

Finally, the cruise industry has something a lot of other businesses don't have - an easy way to get rid of excess inventory. An older ship can be sold or re-deployed to another cruise line in the same parent corporation.

Peter said he believes consolidation in the industry is inevitable. That may be true, but the two largest companies, Carnival Corp. and Royal Caribbean International, are already so big they both face anti-trust issues, especially in Europe. The Carnival takeover of Princess only won the European Union's final approval after they agreed to make it one of the world's first dual listed companies, on the New York Stock Exchange and the London exchange. There has been consolidation among the smaller lines -- rolling up Oceania Cruises with Regent Seven Seas, for example -- but that represents only a tiny part of the overall cruise industry.

As for the current economic situation, Peter said, "I didn't talk to one CEO who is thrilled about their numbers." That is true of almost any company these days other than McDonalds and Wal-Mart, but he does have a point. In the current economic downturn, "Breaking even is the new black," is how he put it, referring to the color of ink bookkeepers use to signify a profit (black) or a loss (red).

But as NCL's Andy Stuart says in the program, "Once we come out on the other side of this economic collapse, we will be that much stronger. We are very optimistic about our future."

"Cruise, Inc.: Big Money on the High Seas" makes the point that cruise lines are currently struggling. But I don't get the same feeling from this show as I got from Peter's "American Airlines - a Week in the Life," that the cruise industry's problems are anywhere near as systemic as the airlines' woes.

The airlines are burdened with barely negotiable union pension plans and other entitlements that have stifled the growth of that industry for years. Plus, the airlines have almost fully saturated the vacation market - there is no untapped market for them to grow into. Cruise lines have the advantage of legal, non-union foreign workers, and their share of the entire vacation market is still small. Only 17 percent of the American public has ever taken a cruise - so there is still plenty of market share to capture. And cruises usually garner the highest satisfaction ratings of any vacation experience. Every year, some 60 percent of the 13 milloion Americans who cruise are repeat cruisers - they know what they are buying and are willing to pay for it again. The majority of first-time cruisers choose to cruise again.

It is a simple concept: The cruise industry is still growing, and so far the usual signs of topping out, such as commoditazation or pricing pressure - not from an economic downturn but from market saturation - have not materialized. You cannot judge the industry based on the current environment - there are industries losing billions of dollars this quarter that will stay in business. If breaking even is the new black ink, then the cruise lines are doing just fine. There is still plenty of room to grow when this economy finally turns around.

Links to related articles:

Cruisemates' Preview of CNBC's "Cruise Inc."

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

Peter Greenberg's Travel Site

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