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Cost of Cruise Business

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Is it just me, or does it seem that the one thing that has slipped significantly in our society in the new millennia is basic accountability and integrity in business? It seems like everything we buy these days is made with planned obsolescence and any recourse we may have for problems with a purchase is defeated by the “fine print” of the contract of purchase.

When was the last time you had a truly satisfactory customer service experience when bringing a problem with a purchase to light? Good customer service does still exist, but I am sure most of us agree that for most businesses it is far more rare than ever before.

What is most troubling about this? The lack of candor. Hey, we are all experiencing this bad economy which changes the terms of everything. When an airline starts to charge for luggage and food onboard we can see what they are doing. We may not like it, but the reality is that a trans-continental flight flying full this year may have an actual profit margin of only about $1000 after fuel and salaries are paid for. We still want and need to fly.

But when a company makes changes in their offerings they don’t tell you about that is a different story. We are seeing much lower cruise fares this year as enticements to get you onboard, however the cruise lines are also seeing higher basic costs to run their ships so they have to make cuts someplace.

What costs are up? As the Royal Caribbean quarterly report stated, the price of oil per barrel has dropped by almost 65%, but the price at the pump has dropped much less. Why? This is exactly what I am talking about. Where is the justification and integrity in the oil companies in helping our economy recover by freeing up capital and lowering costs for hurting consumers?

The cruise lines gave rebates to all the guests who paid a fuel surcharge in 2008 based on the price of oil PER BARREL which dropped late in the year. Now they are paying out those rebates and not collecting the fuel surcharge anymore, but they are still paying a premium for fuel just like we are at the gas stations. The cruise lines are also suffering from the cost of capital. Cruise lines need operating money to stay in business, but the cost of borrowing money has also gone up.

Most of all, unlike the airlines which have shuttered down aircraft to keep each flight full, the cruise lines are keeping ships in service and even growing by adding to fleets. This is the correct long term approach as these amazing new ships create new demand for cruising as a vacation (the entire cruise industry is still less than 10% of the overall vacation market). But short term, it means hurt to the bottom line as income must go into new products instaed of making the cruise you are sailing on today the best possible experience.

Flying sucks right now – all the flights are full, there are delays and extra charges for every little thing you want onboard. Cruises are different, ships are less full and the fares have dropped significantly. But let’s be realistic, the cruise lines must cut costs someplace.

One thing I have noticed is fewer food options onboard. On our last cruise the free room service no longer has a huge a la carte menu of options, it has just three options; beverages only, continental breakfast or eggs with toast. The dinners have been cut from five courses; salad, soup, appetizer, entree and dessert, to three courses by putting soups, salads and appetizers all under one category. It is a subtle change merely in menu layout, but it probably saves the cruise line a good amount of money since most people order by category.

Bottom line – you are going to see similar cutbacks everywhere in society. The oil companies are one of the few industries anywhere who have benefitted from a “windfall” of lower cost of doing business (with dropping cost of oil per barrel), but they have not shared it with us at the pumps. Don’t expect businesses like cruise lines who are drastically cutting prices to get you onboard to suck it up and still deliver the same great experience they can provide when times are good.

Cruising is still a great vacation value, but if you see a smaller steak or less exotic appetizers on your plate that is status quo for doing business today. Yes, it is frustrating, but don’t let it ruin your vacation.

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Comment from Marc
Time January 31, 2009 at 7:19 am

Paul, although you are a good cruise writer, I will never confuse you with an Economist. Some of your statements about fuel pricing and capacity are “off the wall.”

Please keep up the good work on Cruise News reporting and leave economic assessments to those that know what they are talking about. 😉

Comment from Chris
Time February 1, 2009 at 2:17 pm

I am on the fence about choosing to cruise as my next vacation choice. If the cruise lines want to cut corners, I may be forced to be equally selective. $5000 can still get a LOT in other sectors of the vacation market.

Comment from Paul Motter
Time February 2, 2009 at 8:25 am

Follow-up to Marc:

PAUL: What exactly is “off the wall?” I am not that uninformed.

MARC: First is your comment comparing airlines reducing capacity while cruise lines increasing capacity. You said it was smart for cruise lines to keep increasing capacity. I agree that the cruise lines will want new ships when we come out of this down turn; by the same token, airlines continue to buy new planes. Still, it wouldn’t necessarily be bad if some of the cruise lines temporarily “moth balled” some of their less profitable ships instead of lowering prices to fill every bunk.

The other issue I have is your comment that “crude oil” prices have dropped 65% but gas prices have not. First, they are two different products; gas comes from crude but crude cost is only a partial (I don’t know percentage) of cost of gas. Second, there are many “fixed” costs included in the price of cost; e.g. taxes (based on gallon not cost) and transportation. Still, while crude prices have dropped around 65% from their peak of $147 per barrel, gas prices have dropped around 60% from their peak of $4.114 per gallon.

PAUL: For the fuel comments I was merely echoing the comments of RCCL CEO Fain in last week’s Q4 report. He said that while price per barrel has gone down the price of ship fuel “at the pump” has not gone down by the same percentage.

As for cruise lines mothballing ships, the question is “good for whom?” Micky Arison has said his most important concern during this downturn is Carnival’s 80,000 employees, not shareholders.

MARC: Many (if not most) of Carnival’s 80,000 employees are dependent on tips. If you discount cruises so heavily to fill in all the bunks, will those paying $59 per day still feel like paying $11 per day in tips? I am really scared when a CEO starts talking about concern for employees versus shareholders. Without shareholder value, you will end up with zero employees.

As for fuel cost, I know many airlines hedged fuel such that their 4th quarter fuel costs were much higher than fuel on the spot market; I wonder if RCCL suffered the same fate.

PAUL: From the quarterly report I have a feeling RCI might have suffered that.

MARC: Paul, after your last email, I went and read RCCL’s quarterly report. They added a lot of capacity in 2008. The report also says that pricing is still going down. What surprised me was that there was no mention of withdrawing capacity. They are going to really hurt this year. It would be interesting to read Carnival’s quarterly report, also.

PAUL: I have discussed this with a lot of people, including Wall Street investors. Everyone is hurting in this economy. RCL carries the same amount of debt that CCL does, but CCL has twice as many ships (much more income). RCLs ace, however, is that the new ships they are bringing online are more fuel efficent per passenger and demand higher fares due to their newness and appeal. They make more money from Solstice and will make FAR more money per passenger with Oasis than they do with older ships.

What I don’t understand is Wall Street or other economists who think they know what is happening internally at these cruise lines and feel smarter than the people running these lines. If Galaxy was losing money they would mothball it, but they don’t. Meanwhile, while the Millennium class may not be very profitable these days they haven’t taken any out of service yet because over the long haul it is more important to retain customer relations and stability than it is to sweat over a short term P&L report.

We are all having hard times, but the short term mentality of analysts telling us how bad things are for Royal Caribbean is just hot air to me. Yes, they are going to suffer, but when this downturn is over they are going to emerge on top because they will by far have the most exciting ships at sea. The choice is to either succumb to the economy and lose their future leadership position, or stay the course and ride this thing out. I agree with management, they should ride it out.

No one knows where this economy is going despite what Roubini says. I predict at the worst we will have two years of bad recession, and at best we will see a bottom in six months. That means (on average) most likely a year from now we will start to see signs of recovery. That is exactly when Oasis of the Seas debuts. That ship is going to turn the cruise world on its ear.

MARC: Paul, thanks for the insight! Truthfully, we should have had our entire email conversation as part of the blog comments; that is the whole reason for blogging. Feel free to copy over if you wish.

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