P&O Princess Cruises (POC) has announced a significant reshuffling of its fleet, including the introduction of a new U.K.-based brand.

In spring 2003, POC will transfer the 1998-built 1,950-passenger Sea Princess from Princess Cruises to P&O Cruises, where it will be renamed the Adonia and will replace the 1966-built, 704-passenger Victoria, which has been sold and will be removed from the fleet in late 2002.

In turn, the newbuilding at Fincantieri slated for delivery to P&O Cruises in spring 2004 will instead be delivered to Princess Cruises. The ship, to be named the Crown Princess, will be an expanded version of the Grand Princess class, with an extra deck of cabins bringing it up to 116,000 tons with a passenger capacity of 3,100.

Finally, POC has decided to move the 1988-built 1,465-passenger Arcadia from the P&O Cruises fleet in spring 2003 and dedicate it to a new brand, Ocean Village. After an extensive refit, the ship's capacity will be upped to 1,620 passengers. The yet-to­ be-renamed ship will sail seven-day Western Mediterranean itineraries out of Palma, Majorca. A winter program has not been announced yet. The new Ocean Village brand will be targeted to a younger and active U.K. clientele, and will be headed by Managing Director Nick Lighton, formerly of Thomson Travel Group.

Strategic Ship Transfers

POC will be transferring the 1990-built, 1,590passenger Crown Princess from Princess Cruises to its start-up German brand A'Rosa in June where she will target the premium German-speaking market as the A'RosaBlu.

In October, POC will be transferring the 1999-built, 1,950-passenger Ocean Princess to P&O Cruises. She will be renamed Oceana.

In addition, the sister ship of the current Crown Princess, the Regal Princess, is slated to move from Princess Cruises to A'Rosa in June of 2004.

POC previously transferred the Sky Princess to P&O Holidays in Australia where she has been sailing as the Pacific Sky since fall of 2000, replacing the 1956-built Fair Princess.

The fleet reshuffling provides P&O Cruises with a fleet whose average age is under five years by mid-2003 and whose average ship size is 1,900 berths. In the North American market, the Princess fleet will have an average age of under four years by mid-2004 and an average ship size of approximately 2,300 berths.

Market Shift?

By moving the Sea Princess out of North America, POC is moderating its capacity gi:owth here in 2003 from 22.8 percent to 12.2 percent.

Also, by redeploying the Sea and Ocean Princesses POC is reducing the premium-market capacity of Princess Cruises, which has traditionally operated in this market segment, although two new ships, the Coral Princess (2002) and the Island Princess (2003), will partially offset the pullback. But POC has no firm orders for premium-market ships beyond 2003.

By 2004, Princess' premium market capacity will be 427,200 passengers compared to 812,000 for Holland America Line (HAL); 798,000 for Celebrity Cruises; and 780,000 for Royal Caribbean International (RCI).

By transferring the enlarged Grand-class ship, the new Crown Princess, which was originally intended for P&O Cruises, to Princess Cruises, POC is building up the company's contemporary market segment capacity in North America to more than 880,000 passengers by 2004. Princess will then have a fleet of six Grand-class ships.

The new Crown Princess will have a space ratio based on lower berths of 37.4 compared to 37 for the Carnival Conquest and 45 for RCI's Voyager class.

In the premium market, the new Princess ships have a space ratio of about 45 compared to 46.6 for Celebrity's Millennium, 46.6 for HAL's Zuiderdam and 42.5 for RCl's Radiance class.

Thus, near term it appears POC will drive revenue and earnings in North America through capacity growth and more efficient ships focusing more on the contemporary market than the traditionally higher pricing of the premium market. Whether this is a permanent strategic shift remains to be seen.

The new direction may also reflect comments recently made by financial officers at Carnival Corporation and Royal Caribbean Cruises (RCC) who said that it is harder to achieve premium pricing and absorb new premium market capacity.

In addition is the ongoing blurring of the distinctions between the contemporary and premium market segments by the features of the new contemporary market ships and by ship deployment.

Ocean Village?

The new brand is believed to be a U.K. adaptation of the German Aida concept - a casual and activity­ oriented, non-traditional cruise for younger passengers.

But while the German product was launched with a brand new ship designed specifically for the concept, Ocean Village is being introduced with a 14-year-old vessel.

The launching of Ocean Village also raises the question of why POC is introducing a new brand for the younger U.K. market just as RCC is doing the same with Island Cruises, a joint venture between RCC and First Choice. Is the merger between POC and RCC considered to be off? Why would the new combined company need two different brands targeting this niche U .K. market segment? On the other hand, Ocean Village may also be another obstacle in Carnival's proposed acquisition of POC. It could make a combined Carnival/POC the dominant operator in every single market segment in the U.K.

Global Deployment

According to POC CEO Peter Ratcliffe, "Our: existing strong global reach and modern fleet gives us the flexibility to deploy our fleet strategically. The ship deployments we have announced will enable us to accelerate our growth in the fast-growing cruise segment of the U.K. holiday market, further modernize our fleet within North America, and provide greater choice to our customers."

POC is also said to be considering taking over the two Renaissance Cruises ships laid up in Tahiti, the R3 and R4, which will have to be operated in the region to satisfy French financing requirements. Meanwhile, a joint southern European cruise venture with RCC is believed to be pending the merger between the two companies.

But POC's international involvement is its strength and weakness at the same time. By being in so many markets and by starting up new brands (or taking over marginal operations), the company lacks the focused scale of Carnival, for instance. Reaching into worldwide markets also tends to require more travel­ agent training and consumer education, which tends to translate into higher costs and lower returns.

But being in different markets also means that POC is not as dependent on any one market as Carnival or RCC are, and can more easily deploy ships where they would be most profitable.