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Economy and the Cruise Industry

Written by: Paul Motter

Cruises on sale, new ships on order, Europe getting cheaper. The cruise industry is unlike most U.S.-based travel businesses. Let’s take a look at the many ways in which the economy will affect cruising.

The first thing you will notice is that cruise prices are already on sale. You can see the Carnival “October Recharge Sale Event” the company is sponsoring now. We also see the NCL “Pity the Procrastinator” sale. Royal Caribbean is offering bargains on short cruises right now.

Cruise lines have always used highly fluid pricing to attract customers. I would expect to see some of the most affordable cruise prices in years in the next few months. Now, they naturally expect to make up the difference with what you spend onboard, but no one is required to spend anything onboard if you don’t want to, and in fact most people do spend less onboard during economic downturns.

Another very interesting change we are seeing is in the Dollar to Euro exchange rate. We are back to about $1.35 to one Euro. Last summer it was closer $1.60. Now, this current change in relative value is being caused by a SLOWDOWN in the European economy, something we have not seen for five years.

With the dollar getting stronger and the European economy getting weaker, cruises to Europe should be far more reasonable in the future than they were last summer. Furthermore, the European economy is expected to lag the U.S. economy by about two years. This means Europe should be even more affordable once the U.S. economy starts to recover and should stay that way for one or two seasons.

2009 could be the best year to cruise Europe since 2000.

With the credit crunch and the change in Dollar/Euro exchange rate, the cruise lines that have financing and can afford to build new ships have an advantage. Rumors have circulated that NCL cancelled the F3 project, but my personal gut feeling is that it is just on hold as NCL partner Apollo Management renegotiates the price. The ability to raise almost $1 billion in credit is a rare asset these days, and the shipyards should appreciate every penny they can get.

It should be noted that Royal Caribbean did secure financing for both of its new ships “Oasis and Allure of the Seas” from Scandinavian sources.

Meanwhile, other cruise lines which do NOT have new ships in production; Princess (after Ruby which will debut next month), Carnival (which has but one new ship on order) and Holland America (no new ships on order) have all recently announced extensive upgrades to their current fleet. Upgrading the existing fleet is always an advantage to a slowdown in new shipbuilding. These are all Carnival Corp. cruise lines.

Notably, Royal Caribbean International has six new ships on order, including the two new Mega-mega-ships Oasis and Allure, and four of the Solstice class for Celebrity. The unanswered question right now is whether the passenger market will be there for these new ships as they arrive. I believe it definitely will be for Oasis because it is so groundbreaking. Whether the Celebrity Solstice class debuts are right-timed remains to be seen. We will know more after initial reactions to Celebrity Solstice which debuts in November. If it works out, great, if not the third and fourth ship building schedules could be slowed down.

So far Solstice looks beautiful and fully in line with Celebrity Cruiser’s expectations. It has a beautiful and tasteful design, especially in the pool and spa areas. The cabins are about 20% larger which should make them very appealing.

Fuel prices are falling, hovering around $90/barrel, and even lower. This is down from $147/barrel back in February. This gives the cruise lines much more flexibility in pricing and itinerary offerings. It also helps to mitigate airline prices for getting to cruises.

If anyone has any other thoughts on economy and cruising – please comment below.

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Comments

Pingback from Free Economy Blogs» Blog Archive » US slowdown =3D Chinese slowdown
Time October 6, 2008 at 12:26 pm

[...] Economy and the Cruise Industry By Paul Motter With the dollar getting stronger and the European economy getting weaker, cruises to Europe should be far more reasonable in the future than they were last summer. Furthermore, the European economy is expected to lag the US economy by … Cruisemates Blog – http://www.cruisemates.com/blog [...]

Comment from Paul Motter
Time October 6, 2008 at 4:21 pm

One thing that verifies what I say in the text above – Disney just announced that they are sending one of their two ships to Europe in the Summer of 2010.

Their two new ships will not yet be in service, yet they are willing to send one ship to Europe for FIVE months. Disney would not do that unless they were sure the economy of the U.S. and the dollar exchange rate would be very favorable.

Comment from Kuki
Time October 7, 2008 at 9:53 am

It seems obvious that at least for the time being we’re going to be seeing some very low pricing on cruises.

On thing I find interesting, just like many oil companies, the cruise lines seem to be moving very slowly to remove, or at least reduce the fuel surcharges…. now that oil is below $90/barrel.

It might be interesting to ask the cruise lines what their intentions are in regard to these fuel surcharges.

Regards,
Kuki

Comment from Paul Motter
Time October 7, 2008 at 10:04 am

Well Kuki… as you point out, the price at the pump has not gotten 40% cheaper either, it is only about 15% cheaper than the peak.

I doubt that the cruise lines have seen much of a reduction in their fuel costs since it has to be processed also – like our gasoline is processed.

For those who wonder, ships burn Heavy Fuel Oil – petroleum-based fuel which contains the undistilled residue from atmospheric or vacuum distillation of crude oil.

It is also known as, Bunker Fuel Oil or
No. 6 Fuel Oil.

In Alaska and other ecologically sensitive areas they can burn a fuel (called HFO) with a low sulphur content (ie, cleaner but more expensive) to cut down on emissions.

Some cruise ships also have gas turbine engines, and they run on Gas oil, a high grade oil thats rather expensive (a gas turbine costs about $10,000 an hour to run on max).

If you did not know this – ships engines are actually electric motors. All fuel on ships is burned to power electric generators. That electric power subsequently runs everything on the ship from the air conditioners, hair dryers and the engines.

Comment from Ryan Wahlstrom
Time October 19, 2008 at 8:57 am

Paul, you must be spot on because I think this is the second of your posts I’ve ran into. The your point on the economy, I think after the initial panic subsides, cruise may actually grow as the value alternative – see http://www.ryanwahlstrom.com/blog1/?p=132. As far as the F3, I think you are wrong – I think Apollo needs/wants to get out. http://www.ryanwahlstrom.com/blog1/?p=135

Comment from Paul Motter
Time October 19, 2008 at 9:34 am

I didn’t think so then, but now I agree with you about F3, mostly because I see another Apollo business, Linens and Things, is closing 1000 stores, probably because they can’t raise the credit they need to keep them going. That is too bad.

I also think they thought about the format and may have decided they made some mistakes – going with no dining room for example. However, if the ecenomy turns around sooner rather than later I think we could still se them re-negotiate the terms and still build the ship.

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