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State of the Cruise Industry

Written by: Paul Motter

Every year the cruise industry conference “SeaTrade” has a panel of top cruise line CEOs called “State of the Industry.” Some of the funniest and most sobering exchanges I have ever seen occured at these sessions. I wanted to borrow the term for an update on how the cruise industry is doing right now.

Royal Caribbean announced their latest quarterly earnings yesterday, and while they do not represent the entire industry, what happens to them is pretty typical for what the other cruise lines are experiencing. So, let’s take a look.

Royal Caribbean Intl. posted a loss for the second quarter in 2009 (April through June). The loss was not as bad as predicted, however, so we knew things were bad but they could have been worse. The loss they experienced in largely due to pricing pressure. Right now there is a LOT of competition for your cruise dollars, and you are an especially hard customer to pin down. The good news, however, is that you are still taking cruises, you are just making up your mind at the last minute possible.

Cruise ships are sailing full for the most part. In the cruise industry that means all of the berths are filled for a 100% occupancy rate. In cruising, ships can sail at up to 106% occupancy rates, which means there are extra people filling in extra third and fourth beds in the two-person cabins. Cruise ships are not bursting at the seams, but they are sailing selling their inventory despite the bad economy.

People are spending less onboard cruise ships now – using their discretionary funds wisely. The two onboard revenue areas suffering the most are casinos and art auctions. As far as we are concerned (speaking for Cruisemates) this is fine. While we enjoy blackjack or the occasional game of video poker, casinos do not pay off like they used to when Vegas was a gambling destination. Casinos everywhere are money sinkholes these days, and art auctions aren’t much better.

People are spending money on shore excursions, which also is fine by us. If you are going to pay money to get on a cruise to exotic places you should spend the money to see those exotic places once you arrive. Sales of tours are down overall, exacerbated by people booking cruises to places that are not tour-intensive.

For example, Alaska and Europe sales are down and both of these regions are best experienced by shore tours. You do not want to travel all the way to Italy and miss the Colisseum, for example. In Alaska tours are less mandatory but they do add a lot to the experience.

Alaska is the weakest market of all, and it is something of a mystery to us why that is true. Maybe the cruise lines are not “working it” where Alaska is concerned because the state passed a $50 head tax. When you add in lower cruise fares there just isn’t enough profit there to warrant a heavy push to sell Alaska cruises. We (at CruiseMates) advised our readers to snap up the Alaska bargain cruises months ago and now we hear that most Alaska inventory has sold. As for that head tax, Royal Caribbean’s CEO, Richard Fain, said he should have advised the state more vociferously that it was just a plain bad idea.

If you book an Alaska cruise now, you are like most people – putting off the cruise purchase decision until the last possible minute. This is the most vexing issue to the cruise lines right now – visibility. They are having a very hard time predicting how anything they try will work out. Capacity on ships for the rest of 2009 is only about 75% sold for Royal Caribbean right now.

Much to the cruise lines’ surprise, the Caribbean is the strongest region right now. Europe is being booked 75% by Europeans, even on English-speaking Royal Caribbean ships. This says a lot about the future of cruising as an industry – that Europe will be a strong cruise market from now on and this is just the beginning. Costa and MSC are being booked by almost 100% European cruisers.

Still, while there are European cruise lines like Costa and MSC, a lot of Europeans like American (Royal Caribbean) ships enough to speak English to sail on them. That is especially good for Royal Caribbean who does not have a European cruise line. Any way you look at it, the potential for Europe as a cruise market post-recession is huge.

Royal Caribbean says their onboard ratings have never been higher. Is it because fewer passengers means the staff on board is able to provide better service? Or is it because the recession makes the staff more grateful to the people who are cruising? After all, most of them work for tips and they understand that without passengers they would have no job.

One of the things driving the cruise market right now is new ships. If it were not for the recession, this would be one of the most exciting times in the cruise industry ever. Pre-sales for Oasis of the Seas are said to be spectacular (debuts in November). At the same time, Carnival Cruise Lines and NCL both have new ship debuts planned with Carnival Dream coming in November 2009 and Norwegian Epic following a year from now.

The introduction of Oasis of the Seas, the world’s newest, largest cruise ship in the world, would have been world news under different economic conditions. Meanwhile, Celebrity Cruises revealed that sales for their newest ships, Solstice and the brand-new Equinox, coming this week, are doing better than the rest of the fleet.

Although there is a lot of buzz about the financial viability for the first sister ship to Oasis of the Seas, Allure of the Seas, Royal Caribbean is confident they can manage to the finance the ship. In case you haven’t noticed, credit is one of the challenges with the current recession, but Royal Caribbean is managing and estimates they currently pay about a 7% interest rate on their loans combined.

Oil is currently selling for about $67 per barrel. The five separate cruise brands of Royal Caribbean International spent $155 million on fuel last year. Royal Caribbean hedges its fuel purchases by buying futures contracts. Right now, the line is 40% hedged for 2010 and 25% hedged for 2011.

That is the state of the Industry. Cruising is holding up better than most travel businesses, and is poised to sail through this economic downturn and ultimately come up smelling like a rose. What terms were NOT mentioned at all during this conference? Scroll down…

1. Swine Flu

2. Cruise “Crime” and the Congressional hearings.

3. Norovirus

Not that the cruise line don’t care about these topics, It is just that while the media is obsessed about certain things, within the cruise industry the bottom line is hardly affected by the same things the media jaws on about. Interesting.

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Comments

Comment from Dave Beers
Time July 24, 2009 at 6:31 am

I never thought much about it but the Alaska head tax is a profit killer. People see $50 and think that isn’t much, but run the numbers and for the average cruise ship it is $100,000 or more per cruise. For a typical Alaska cruise season that totals over 1.5 million dollars for the average sized ship.

Comment from lourdes
Time November 22, 2009 at 10:38 pm

i’ve never thought of cruising as bad til my filipina friend started working for one. now i truly believe that these are the devil ships. relationships among employees are tolerated by the management. this is really horrible as it breaks a lot of families

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