The long-term prospects for the cruise industry are bright, but there are a number of issues that must be dealt with in the near-term, according to industry executives who spoke at the recent Seatrade Cruise Shipping Conference in Miami, March 10 - 13, 1992. Further consolidation was also projected going as far as only three major cruise companies commanding 90 percent of the North American market by the year 2000.

Representmg some of the major cruise lines, financial institutions, port authorittes and service and supply companies, speakers focused on what they saw as a need for the cruise lines' need to market themselves better; a need to communicate their contribution to society better; and a need to re­-focus efforts on offering a higher quality of service.

Others identified growth opportunities in international markets as well as pointing to a need for a better working relationship between the cruise lines and the ports especially in the Caribbean region.

This year's conference was also characterized by an unusually active and frequently negative rumor mill about some of the participating cruise lines, while some of the executives on the panels also took some verbal shots at each other.

Winners and Losers

Bob Dickinson, Senior Vice President, Sales and Marketing, Carnival Cruise Lines, said that the industry's success was not mutually shared by all the cruise lines. He said there were winners and losers.

Dickinson noted that some cruise lines had over-expanded within their product range and had to lower price points, reducing yield and creating cost pressures. He said that in such cases 'those' cruise lines "begin to attract different passengers, the atmosphere changes," leading to problems for 'those' lines and for the industry. He said that rates for the entire industry would go down and added that he hoped 'those' cruise lines would quickly be addressing the problem.

Better Marketing, Sales Training

Dickinson, widely known for his industry pep talks, said that discounting has become the primary message of cruise line advertising, and that the industry must find ways to more effectively tell the story of the desirability of cruising. He said that the cruise lines and their ad agencies must innovate ways to get this message across while still promoting "deals."

According to Dickinson, while discounting worked and filled the ships in 1991, it generated more repeat passengers, but a smaller share of first-time cruisers. He said that for the industry to grow at must do a better job of enticing non-cruise vacationers to try a cruise vacation. Dickinson said that the average cruise passenger will cruise again every 2.4 years.

Trygve Hegnar, Chairman and CEO of Kloster Cruise Limited noted that its divisions, Norwegian Cruise Line, Royal Cruise Line and Royal Viking Line had reduced discounting in 1992 compared to 1991. He said that there will always be some form of discounting such as early bird savings, group rates, last minute bookings, etc.

Dickinson also said it was time for all the cruise lines to help bear the load of sales training. He said that travel agents need to be trained to become more effective sales people which in turn will increase cruise sales. Dickinson said that the best agents now only close one out of 10 sales.

Dickinson noted again that the cruise lines only account for two percent of the annual domestic travel market and that only six percent of all Americans have ever cruised. He suggested that the remaining 94 percent represent a huge market potential.

Supports Caribbean Campaign

Dickinson said that he supported the proposed joint Caribbean marketing campaign of the Caribbean Tourism Organization and the Caribbean Hotel Association. He said that Carnival would recommend that the cruise lines contribute $2 million to the campaign provided the Caribbean islands can raise a total campaign budget of around $14 to $15 million.

Dickinson pointed out that the cruise lines have brought millions of cruise passengers to the islands giving the passengers a unique opportunity to sample the product. He said that the challenge is for the islands to give the best impression and take advantage of the opporrunity.

Member of Society

Richard Fain, Chairman and CEO of Royal Caribbean Cruises, spoke about the need for the cruise lines to communicate to the public and national and local authorities the great benefits they contribute to society.

Speaking clearly in the context of restrictive legislative proposals in Washington, D.C., Frun said that we must educate the public about the value of our industry to society in the same way we have educated the public about the value of a cruise vacation."

As an example of a message that should be communicated, Fain said that the cruise industry represented an opportunity to revitalize the U.S. merchant marine through American ownership, management and operation of ships. Fain said it was not important whose flag flies from the stern of the ships.

Fain used RCCL as an example. He said that only five years ago the cruise line was owned exclusively by foreign interests and that key strategic decisions were taken overseas. Today, however, company headquarters are in Miami; company management is mainly American; the company buys from American suppliers; and the company uses mostly U.S. lawyers, accountants and other advisors. Fain said that the cruise industry is one of Florida's largest employers with a total annual economic impact of as much as $5 billion.

Building Subsidies

Fain was also critical of the Gibbons bill which he said could penalize shipowners who build vessels with foreign subsidies. He said that while the theory behind the legislation was to help remove subsidies abroad in order to create a level playing field between U.S. and foreign yards, instead it would create a mine field.

Fain said that the true issue was not that foreign subsidies were so huge that unsubsidized American yards cannot compete. He said that current subsidy levels in Europe were nine percent. The real problem, according to Fain, is that many U.S. yards are not competitive after years of direct and indirect subsidies.

John Stocker, President, the Shipbuilders Council of America, said that be believed the European subsidy practice was extensive and that the Gibbons bill would remove what he called distortions in the marketplace.

Tax Legislation Backfires

Fain also noted the new tax legislation enacted in 1986 which said that if 50 percent or more of ownership of a shipping company is American, the company must pay American corporate taxes itself and its American shareholders must pay taxes on any dividends. He said that shipping companies tend to be international and that American ownership in due course could be reduced to 49 percent, thus eliminating tax liabilities. At the same time, ownership would be transferred to foreign hands, exactly the opposite of what so many in Congress wanted, according to Fain.

Fain noted that no significant cruise line in the world is owned or controlled by U.S. citizens.

The "Good News"

Fain also presented two examples of how the industry and the authorities can work together. He said that a few years ago when budgets for the U.S. Coast Guard and the U.S. Public Health Service's Center for Disease Control were trimmed, the cruise lines helped re-instate the inspection programs and are shouldering the costs.

Fain also called for the industry to take the lead in protecting the environment by eliminating cruise ship pollution.

Worldwide Cruising

Tim Harris, President of Princess Cruises, focused on international market growth which he defined as more non-Americans cruising and more Americans cruising in waters away from the North American continent.

Harris said it was his firm belief that in ten years time, cruising will have become a truly worldwide industry. He also noted that P&O carries more non-Americans as cruise passengers than probably any other line, and that Princess, its North Amencan subsidiary, carries more Americans to cruises overseas than any other North American operator.

Harris said that air travel within Europe has yet to be fully deregulated, but in cases where air fares have started to fall, such as between England and Florida, the cruise business is growing fast. As cheaper flights make cruising a more viable option for Europeans, cruising can compete more effectively with Europe's traditional low-price package vacations, according to Harris. He also noted that the demographics were as good in Europe as in the United States.

Restructuring

Hegnar outlined the restructuring of Kloster Cruise to make it a more profitable cruise company. He also noted that the actual net addition of berths into the market in 1991 was much less than regurarly reported and that further capacity growth is also likely to be less than now projected. He also said that the capacity growth will be tapering off to none at all in 1995.

Hegnar said that in 1995 there could actually be a decrease in berths with the withdrawal or repositioning of older vessels.

Niche Products

William Vervaeke, Senior Vice President, Sales and Marketing, Club Med, said that alternative cruise products must work harder at educating agents; produce brochures that are more attractive and interesting than mainline cruise literature; and hold more agency educational seminars to explain the features, advantages and benefits of their products versus others. He said that the unique selling points must be emphasized over and over.

Product Quality

Lawrence Rapp, Vice President, Hotel Operations, Seabourn Cruise Line, said that most cruise lines today are not sufficiently stressing service.

Rapp said the cruise industry was almost solely price competitive. According to Rapp, none of the major operators has succeeded in developing a product so unique that it is able to maintain or increase its tariff in the face of discounts by competitors.

What is needed is a "quantum leap" in quality, according to Rapp. He also identified obstacles including lack of qualified personnel. He said that new generations need to be motivated differently, while their supervisor often would be yesterday's waiter or cook who has been promoted. He often expects to continue the "kick in a--" policy that he was subjected to. That does not work today, Rapp said.

Rapp also noted the importance of employee retention which he suggested could be achieved by giving staff permanent employee status, insurance and other social benefits.

Lewis Fraser, President of World-Wide Catering, said that older tonnage can compete by offering better onboard hotel services.

Fraser noted that the cruise lines recruit some 50,000 hotel staff members a year and would need to find as many as 100,000 by the year 2000. He suggested that new labor sources may be found in the former Soviet Union and the United States.

Safety

Representatives for the IMO and classification societies discussed safety issues focusing on proposed new legislation for fire protection and the retroactive application of SOLAS 90 to older vessels.

Rear Admiral Thimio Mitropoulos, Senior Deputy of the International Maritime Organization, noted that "adverse trading conditions, high costs, shortages of trained personnel and changes in the structure of the shipping industry posed threats to safety improvements."

Future

Pam Conover, Vice President and Head of Cruise Shipping at Citibank NA, said that she believed that by the year 2000 there will only be three cruise companies dominating in North America with more than 90 percent of the market.

Conover noted that the three companies did not have to be three comranies that exist today. She said that one or two of the companies could be companies that exist today while the third company would be a merger of two existing companies. She said that the three companies could incorporate several brand names.

Conover also said that although the industry's performance in 1991 was a remarkable achievement in view of the depressed economic environment, the growth was only achieved through a large reduction in yield. She said she did not anticipate any strong immediate recovery in yields.

According to Conover, with the introduction of new tonnage, yields must be sacrificed to generate passenger growth. She also noted that the growing industry needs to broaden its market base, which also means lower yields. Conover predicted a recovery by 1993/94.

The biggest threat to the industry, according to Conover, comes from Washington, D.C., in terms of legislative proposals focusing on employment practices, vessel deployment, and taxation. If enacted, such legislation could lower the profitability of the cruise lines, Conover said.

Conover said she saw only two bases for competition in the near and mid term: low cost and true product differentiation. She also said that in the view of Citibank only cruise lines which enjoy economies of scale are expected to succeed in the mass market. The remaining lines are likely to pursue either a growth-via-merger strategy or a niche strategy.