Cruise line executives speaking at the recent cruise conference in Miami expressed strong confidence in the continued growth of the industry. They also conceded that 1993 would be a difficult year. Opinions varied, however, as to whether the steep discounting would abate by the end of the year or linger through 1994. But there was consensus that some form of discounting will stay with the industry.
Seeking to counteract restrictive legislative efforts underway in Washington as well as demands from the Caribbean for increased financial contribution, impact studies were highlighted by industry spokespeople which showed that the industry contributes significantly to the U.S. and Caribbean economies.
Still, industry executives believe that some restrictive legislation is likely to be passed in the United States, and Caribbean leaders were forcefully asking for help.
Rod McLeod, Senior Vice President, Royal Caribbean Cruise Line and Chairman-elect of the Cruise Line International Association (CLIA), said that he identified three factors which will continue to drive the growth of the industry.
First, he said, there is a lot of market left to grow in the United States, Western Europe and the Far East as well as in Latin America and South America. Using an oft-cited CLIA statistic, McLeod said that less than 20 percent of the cruise prospects in the United States have ever taken a cruise. He also noted that RCCL today provides brochures in 15 different languages.
Secondly, according to McLeod, the industry is becoming increasingly marketing driven which he said will enable it to more effectively develop the market for cruise vacations. He also cited greater product diversification, market segmentation, the implementation of automated reservation systems and sophisticated yield management systems.
Third, McLeod said, is the building of new ships reflecting the industry's belief in its potential and its willingness to support that belief with significant commitments to build new ships.
McLeod forecasted that the North American cruise industry will grow to eight million cruisers by the year 2000. He said the industry has defied its skeptics for more than 20 years and has evolved as the fastest growing segment of the North American travel market.
Not surprisingly, industry speakers predicted that the cruise lines will continue to gain market share; that a more favorable supply/demand picture will evolve; and that more consolidation is likely.
A popular topic this year again was consolidation with predictions that the industry will be dominated by a few major companies by the year 2000. However, there were nuances:
Pam Conover, Vice President of Citibank, predicted four or five main cruise lines by the year 2000. Also speaking at last year's conference, she then predicted there would soon be three major companies.
Dermott McDermott, Chairman of Cunard Line, said that consolidation was a logical conclusion, looking at the numbers but that new players were still coming into the market.
Art Rodney, President of Crystal Cruises, said that three, four or five cruise companies could be expected to dominate 80 percent of the market. He noted that Crystal was not planning on a being a dominant player, but that the cruise line would be in the other 20 percent. He said that the luxury market can absorb one or two more ships by the end of the century.
Discussing the pros and cons of consolidation, Howard Frank, Senior Vice President of Finance at Carnival Cruise Lines, said that consolidation does not necessarily guarantee success. One must identify the synergies that can be taken advantage of, he said. He noted that Carnival also believed in the viability of individual products.
Responding to a question whether consolidation leads to product uniformity, McLeod said that consolidation instead can lead to product diversification. He cited Carnival as an example where consolidation has not led to fewer brand names. McLeod also said that RCCL's position up to the present has been to grow the RCCL brand. That may not be the case for the future, McLeod added.
McLeod said that RCCL saw yield improvement in 1992 and that further improvement was partially a matter of reconditioning the market. He also said that he expected to see further yteld improvement as the supply eases up.
Perhaps hinting at the first quarter results which had not yet been released at the tune, Frank said that "we think 1993 will be very difficult. There is still much capacity to absorb from 1992 especially in the premium market." He said he did not see much yield improvement.
Frank also suggested that yield management systems may not be the cure-all. "Look at the airlines, he said, "they claim to have the most sophisticated yield management systems, but are not very successful."
Martin Saarikangas, President of Kvaerner Masa-Yards, said that every salesman today must deal with discounting. It is not a question of discounting, but what is left on bottom line; he said.
Conover also noted that if the newbuilding programs were sustained, the industry could have some difficult times, but she said she was confident that there would be a supply/demand balance.
Frank added that he thought there will more newbuilding programs. He also said he was not sure if ships would be withdrawn by 1997 due to the new SOLAS regulations. He said that if shipbuilding subsidies are withdrawn, newbuilding costs will go up, making it more sensible to upgrade older ships.
As an indication of Carnival's strategic planning, Frank said "We are looking at the industry in global terms."
Janice Farmer, Analyst with Raymond James Associates, said that the market outlook was very promising although she pointed out that the industry's present 90 percent occupancy had been reached mainly by means of discounting.
Farmer attributed her favorable market outlook partially to the supply side where she said that SOLAS changes would be the biggest factor. She said there was a possibility that 14 percent of the capacity would leave the market before 1997. She said that Carnival had indicated that it would take four, possibly five ships out of the market. She said that the new rules could also eliminate the budget lines.
Based on the introduction of less new ships in the next few years compared to recent years, the possible withdrawal of 14 percent of the capacity, and continued increase in demand, Farmer predicted that demand will outpace supply.
"Stimulators" vs. "Derailers"
Farmer identified what she called demand "stimulators": market recognition of cruises as being good value; the good relationship between cruise lines, agents and their customers; improved market awareness of cruising; development of niche markets and new itineraries; and changing demographics with a growing population in the 35-54 age group.
Farmer also identified what she called "short term derailers" including consumer confidence which she said depended on Clinton's policies; political uncertainty; airlines; weather, and any negative media attention.
Discounting, Capital Needs
Discounting has brought per diems down and eroded profit margins, according to Farmer, who also said that because of discounting economies of scale have become even more important.
Between 1990 and 1991, the average revenue per passenger fell five percent for Carnival and RCCL, while operating expense per passenger increased by a half percent, according to Farmer. Subsequently, the average profit margin declined from 44.4 percent to 41 percent. According to Farmer, if the two companies had been able to hold their pricing at 1990 levels, they would have generated an additional $109 million in profits in 1991.
Farmer added that early booking programs had added some stability to pricing and that the cruise lines should have greater ability to set better pricing by 1994/95.
Farmer estimated that the industry will need $4 billion to $5 billion for new shipbuilding in addition to SOLAS requirement costs. She said the long-term winners will be those who have access to public capital and equity markets.
Bent Zeier, Vice President at Fearnleys, said that "our clients hoped for improved yields in 1995, 1996 and 1997 based on a better balance of supply and demand, but the surprising number of newbuilding orders, may have delayed this hope for a good bottom line until a later stage."
Conover noted that some of the newbuildings could be attributed to very favorable quotes in francs and lire which have been an incentive for cruise lines to act quickly.
Frank said it is probable that some sort of restrictive legislation will be passed in 1993. He said that the industry was lobbying to make the legislation the least harmful.
Conover said that the Gibbons Bill will not accomplish what it is supposed to. The yards here will not be able to build at competitive prices, she said. Instead, according to Conover, the price of newbuildings will increase, squeezing margins, and the price of second hand tonnage will also rise.
Zeier's opinion was that the second version of the Gibbons Bill was not better than the first and should be scrapped.
Saarikangas pointed out that the United States maintained a different kind of subsidy in the form of the Jones Act which is a "much bigger subsidy of U.S.-flag shipping than what is granted in Europe," he said.
Saarikangas also noted that if no subsidies were offered in Europe, only one new ship order would have been placed this year, clearly suggesting the Crystal order with Kvaerner-Masa Yards.
But Saarikangas also noted that if subsidies were phased out, building prices would (only) go up by about 10 percent.
Conover said that shipowners would have to absorb any increased costs, as the cruise lines cannot easily pass the cost on to the passengers, unless there is increased demand.
Frank noted that increased building costs could benefit the existing industry by making entry to newcomers very costly.
Rodney added the the Clay Bill, imposing U.S. minimum wages on the industry, would also have a major impact on the industry.
Alberto Gonzales-Pita of the White & Case law firm presented an imagined futuristic scenario whereby restrictive legislation had been passed in the United States and Havana had become the new major cruise port replacing Miami and its sister ports in Florida.
Gonzales-Pita said that the passing of the Gibbons Bill in some form or taxing the cruise lines will not result in any mass exodus from U.S. ports, but the combined effect of these proposals, especially the eassage of the Clay Bill, will result in an exodus or in the decline of the industry as we know it.
Frank said he believed Europe holds a "huge potential," but he admitted that the market was very complex with a different distribution system dominated mainly by large tour operators and with different languages and cultures.
"As we expand as an industry, U.S. operators will look to Europe; Frank said.
Rodney said that Crystal has developed some business in Europe but that the potential for the luxury market was not as great as the standard market. He said that Crystal's objective was to generate 10 to 15 percent of its guests from Europe and other international markets.
McLeod noted that the Far East is highly interesting to RCCL for its American passengers. "We have also taken the initiative to develop the Far East as a source market; he said.
McDermott said that Cunard was concentrating a lot of its efforts in the Far East and Australia.
Herbert Karrenberg, Managing Director, Seetours International, spoke about the European markets, and said that several ships of the mostly North American cruise fleet were already being marketed actively in Germany, including the Zenith, Majesty of the Seas, Radisson Diamond, Dreamward, Windward, Statendam, and Royal Majesty.
Karrenberg also said that 700,000 cruises were booked in Europe in 1992.
Conover noted that RCCL will be leasing its new ships, recently contracted to be built in France. She said that in the past the economics of leasing have not been so effective. Frank said that so far it has cost Carnival the least amount of money to buy ships. McDermott said that Cunard has a certain amount of charters. It all depends on economics, he said.
Gonzales-Pita noted that he saw a trend whereby larger lines with older ships will be chartering these to medium sized companies in market niches.