Cruise ships are potentially excellent investment vehicles as demonstrated by the Skyward which last month was given an estimated market value from $35 million to $45 million after having been built 22 years ago at a cost of $13 million.

Since the late 1960s there has been a steady escalation of both newbuilding prices and second-hand ship values although the latter increasingly depends on the ship's earnings capability.

Newbuilding prices have been driven up by the cyclical nature of the shlpbuilding business in which cruise ships represent a relatively small part. Second-hand ship values have increased as a function of rising newbuilding prices. Yet, there are ships that have proved difficult to sell for various reasons including asking price, passenger capacity, and operating abilities.

According to Ole Slorer, analyst at County Nat West, cruise ship newbuilding prices will continue to go up as long as yards are full since newbuilding costs are "a function of volume." He said that since 1989, shipyards have filled dramatically thereby driving up prices for all types of new ships.

Starting from under $20,000 per berth in the late 60s, construction prices rose during the 70s to reach $100,000 and more during the early 80s. Today, the per berth price of a medium-sized cruise ship is approaching $200,000.

For example, the 1,534-passenger Seaward which was delivered to Norwegian Cruise Line in 1988 cost $120 million, or $78,226 per berth, while the 1,600-passenger Crown Princess, whlch was delivered to Princess Cruises last year, cost $280 million, or $187,000 per berth, before subsidies.

Economies or Scale

While financing arrangements and subsidies often disguise the true cost of a vessel, by building larger ships, the cruise lines are achieving economies of scale in construction costs.

Looking at building cost alone, Royal Caribbean Cruise Line seems best poised in the present competitive cruise market. RCCL will take delivery of the 2,350-passenger Monarch of the Seas in October of this year at an estimated building price of about $270 million, or about $115,000 per berth. The Majesty is expected to cost a little more at $300 million, or nearly $128,000 per berth.

Carnival Cruise Lines was able to build the 2,050-passenger Fantasy at about $225 million, or $110,000 per berth; the Ecstasy cost $275 million, or some $134,000 per berth; while the Sensation will cost around $300 million, or $150,000 per berth.

Kloster Cruise is building two 1,200-passenger ships at a cost of $240 million, or $196,000 per berth.

Celebrity Cruises, meanwhile, took delivery of the 1,500-passenger Horizon last year, which was built at cost of $175 million, or $117,000 per berth. Next year, Celebrity will take delivery of the sister ship, the Zenith, being built at $200 million, or about $134,000 per berth.

In 1992 and 1993, Costa Cruise Line will take delivery of the 1,350-passenger Costa Classica and the Costa Romantica, each will cost $270 million, or $200,000 per berth, before subsidies.

Upscale Market

In the upscale market, while building costs have escalated, economies of scale are also obtainable. In 1988, for instance, Kloster took delivery of the 740- passenger Sun Viking at a construction cost of $125 million, or $169,000 per berth. Two years, later Crystal Cruises entered the market with the 960-passenger Crystal Harmony which was built at a cost of about $200 million, or about $210,000 per berth.

Smaller ships can also be built for the upscale market at costs that make them competitive as in the case of the Renaissance Cruises which built a fleet of eight 110-passenger ships at about $20 million each, or $181,000 per berth.

In negotiations presently underway for Renaissance, the highest bid is said to equal $14 million for each ship. The construction cost of each ship without subsidies has previously been calculated at more than $40 million.

On the other hand, small ships such as the 110-passenger Sea Goddess sister ships were built at a cost of $34 million each, or more than $283,000 per berth.

Then followed the Seabourn Cruise Line 212-passenger sister ships which were built in 1988 and 1989 at a cost of $50 million each, or $235,849 per berth.

Next year Kloster will take delivery of the 212-passenger Royal Viking Queen being built at a cost of $86.7 million, or some $410,000 per berth.

Also scheduled for delivery next year is the 354-passenger Radisson Diamond being built at a cost of $125 million, or $353,000 per berth.

Price per Berth is not all

Lower building costs, means lower capital costs, and presumably more flexibility in terms of price marketing.

While construction cost per berth is not all that counts, for start-up cruise lines it seems to be the determining factor in their survival. Yet in order to be successful, the ship must also have the amenities that the market demands; it must operate a popular itinerary; and its must be backed by a strong marketing organization.

If a product is superior, it can command a higher per diem, but history has shown that high capital costs are difficult to overcome mainly because they are fixed costs. As such, they require high per diems that are difficult to generate under the best of circumstances yet alone in a market suffering from a lingering recession, overcapacity, and other external factors such as acts of war and threats of terrorism.

Larger ships offer economies of scale in construction, yet economies of scale in operations tend to be a more elusive concept. The largest ships are also primarily intended for first-time cruisers. Moreover, they offer less flexibility in terms of choice of homeport and ports of call.

Investment Value

In the prospectus that Vard released in conjunction wlth the separation of its cruise and ferry interests into one company and its brokering and financial transactions into another company, two brokers estimated the market value on each of Kloster's ships. The 22-year old Skyward, for instance, which was built for $13 million in 1969, was given an estimated market value from $35 million to $45 million.

Furthermore, for Norwegian Cruise Line, the Sunward II was evaluated from $35 million to $40 million; Starward $35 million to $42.4 million; Southward $35 million to $40 million; and the Westward $60 million to $69 million. The Seaward, which was built a cost of $120 million in 1988, was evaluated from $185 million to $190 million, a 55 percent increase in net market value after three years of service.

In 1988, according to a broker's list then, the Starward was offered for sale for $35 million and the Sunward II for $25 million, but there were no takers.

The Norway, which was purchased in 1979 for $65 million and has since seen at least another $100 million in upgrading and refurbishment, was evaluated from $200 million to $225 million, clearly taking the ship's age into consideration.

The two newbuildings, under construction and scheduled for delivery in 1992 and 1993, were given market values from $240 million to $250 million compared to the net construction costs of $240 million, after deducting subsidies.

For Royal Cruise Line, the Crown Odyssey was evaluated from $180 million to $190 million; the Golden Odyssey at $35 million; and the Royal Odyssey (formerly the Royal Viking Sea) from $60 million to $69 million.

For Royal Viking Line, the RVL Sun was evaluated form $180 to $190 million; she was built in 1988 for about $125 million. The Royal Viking Sky was evaluated from $60 million to $69 million. The RVL Queen, which is under construction, was given a market value of $80 million. Since this is equal to or less than actual construction cost, the brokers seem less enthusiastic about this type of ship.

Buy and Sell Values

Recent acquisitions show a range of prices. In 1988, Princess Cruises acquired Sitmar and its three ships (2,952 berths) for $210 million, a per-berth price of just $71,000. Two of the ships were built in 1956, however.

Also in 1988, the Norwegian Anders Wilhelmsen Co. bought out its two partners in RCCL for $567 million which would give an estimated total value to RCCL (including Admiral Cruises) of $843 million. The-eight ship fleet with 9,488 berths was then given a per­ berth market value of nearly $89,000.

Holland America Line acquired the two vessels of Home Lines with a total of 1,980-berths for $250 million, or $126,000 per berth.

The same year, Regency Cruises acquired the Royal Odyssey from Royal Cruise Line for $22 million. The 816-passenger ship, which was built in 1964, was thus given a per-berth market value of $27,000.

In 1989, Carnival Cruise Lines acquired Holland America Line, including Windstar Cruises, for $635 million. Since the deal also included hotels, day-boats, rail cars and busses, the amount applicable to the cruise ships is estimated at 10 percent less or $571.5 million. The combined seven-ship, 5,126-berth fleet, was thus given a per­ berth market value of more than $110,000.

Also in 1989, Kloster Cruise acquired the 1,514-berth, two-ship Royal Cruise Line fleet for $225 million, or nearly $147,000 per berth.

And, Dolphin Cruise Line acquired the 1,100-passenger Star/Ship Royale for $16 million or less than $15,000 per berth.

That same year, Effjohn International acquired the aging three-ship, 2,129-berth Bermuda Star Line operation for a reported $20 million, or less than $10,000 per berth.

In 1990, the 600-passenger Monterey was auctioned for $14 million or about $23,000 per berth after considerably more had been invested in rebuilding the ship.

Paquet Cruises acquired Ocean Pearl and its two ships, the 460-passenger Ocean Princess and the 480-passenger Ocean Pearl for around $100 million, or about $106,000 per berth.

Last month Carnival withdrew a $220 million, or $75,000 per berth, bid for the three-ship, 2,950-berth fleet of Premier Cruise Lines. The market value of the Star/Ship Oceanic had been estimated from $80 million to $90 million.

Carnival would have assumed charter agreements on the other two vessels. Thus, Carnival would have paid another $1.30 million to $140 million for Premier's contract as the "official cruise line of Disney World" and its market position as the leading family-oriented cruise line.

A near-term lackluster earnings potential convinced Carnival to withdraw its offer.

Also this year, Fearnley & Eger's banking connection, which is holding a $200 million bad debt, has been struggling for several months to find buyers to that company's Renaissance Cruises' eight 110-passenger ship fleet.

The ships were built at a heavily subsidized cost of $20 million each which was said to represent at least a $40 million building cost without subsidies. The best offer so far has been $14 million per ship plus assumption of outstanding debt.

After two years on the market, the Lady Sarah and Lady Diana, which were built at a cost exceeding $45 million for each, have been offered at $27.5 million each by the building yard, after the Windsor Cruise Line backed out of the deal. The two sister ships have finally found a charterer in Travel Dynamics. Meanwhile Rauma Shipyards is seeking a new buyer for the 160-passenger Society Adventurer.

Clearly, second-hand ship values are a function of several factors, including the ship's age and earnings potential. Age could become more of a negative factor when and if the International Maritime Organization (IMO) puts new fire safety regulations into effect which could require expensive building modifications.

Second-ship values are also a function of market development. While high newbuilding prices and a growing cruise market would seem to have escalated second-hand values, the present recession and near-term overcapacity would seem to have a dampening effect on second-hand values.

Wait and See

The high prices of newbuildings are keeping new orders beyond 1994 at bay, but the entire economic slowdown and tight credit market has had its effects too.

According to John Stocker, President of the Shipbuilders Council of America (SCA), "government restrictions could be making owners hold off on placing orders." If passed, new fire safety requirements would have a severe impact on the industry. While this possibility may be slowing down orders at the moment, if enacted, cruise lines have to seriously weigh whether it is more cost effective to bring old ships up to new standards, or whether they should place orders for newbuildings instead.

This decision is further compounded by the predictions of rising newbuilding costs. According to Stocker, up until this past month, the SCA had also been predicting that as demand continues to escalate, so will prices.

Another factor in the "wait and see" attitude is the continuing trend of cruise line mergers and acquisitions. A shipyard executive pointed out that the reorganization of the cruise industry does not seem to have reached an end yet. With fewer, although larger, lines out there, there are not as many companies able to invest in newbuildings, which he termed "capital consuming vessels."

The other side to the merger and acquisition scenario is that it lends itself to acquisition of ships or entire companies rather than newbuildings. A prime example is Crystal Cruises, which paid $200 million for the 960-passenger Crystal Harmony last year and had an option this year to build a sister ship for $300 million, bringing the per berth cost up from $208,000 to $312,000. Instead, Crystal is looking at other options, such as acquiring other ships or companies due to these escalating costs. (By comparison, the market value of the RVL Sun has been estimated from $180 million to $190 million, a bargain compared to a newbuilding of the same quality.)

Passenger Demand

There are mixed feelings within the industry whether demand is there to warrant continued building boom as seen from 1990 to 1992. Some, such as Alesandro Bianchi, Cruise Vessel Business Director for Fincantieri-Cantieri Navali Italiani, felt that costs will not level out since passenger demand will continue to grow and lines will therefore be willing to build no matter the cost. He said that once passengers cruise on a new ship, they generally do not want to sail on an older vessel.

"Passengers want new products," Bianchi said. "They are now more sophisticated in their tastes; he continued.

Fincantieri has a full orderbook through 1994 as far as cruise ships are concerned. The shipyard's newbuildings include this year's Reaal Princess; Costa's 1,350-passenger sister ships, the Costa Classica and Costa Romantica, scheduled for delivery in 1992 and 1992; and three 1,250-passenger sister ships for Holland America Line, the Statendam, Maasdam and Ryndam, for delivery in 1992, 1993 and 1994.

Others in the industry, such as Stocker, are more skeptical about future passenger demand and projected continued growth of 10 percent annually.

"If passenger demand is really there, owners will place orders no matter what the cost," Stocker said. "But is the demand there?"

Slorer concurred by saying, "It's all a matter of price. The lines need a strong balance sheet and the returns are just not there at present."

With the rising costs, Slorer noted that the lines with the newest fleets "will find it difficult to make returns versus those which placed orders two to three years ago." Therefore he felt that lines will not be placing major orders until returns increase and capacity is absorbed. Slorer does not foresee absorption until the mid-1990s.

Future Ship Sizes

Those ships which will be ordered in the future are predicted to be of mid- to large-capacities, but not mega-sized as seen in 1990 through 1992. This is evidenced by Costa's 1,350-passenger newbuildings, Norwegian Cruise Line's 1,200-passenger new buildings for 1992 and 1993, and RCCL's plans to build a new generation of medium-sized vessels.

Industry sources felt that the small-sized vessel has yet to prove its profitability, while they said that the planned 5,600-passenger Phoenix may be logistically too large.

Some pointed out that ships' sizes depend on the future popularity of particular cruising regions. If the Caribbean continues to remain strong, large sized ships in the 1,500-passenger plus range will remain prevalent. If the Mediterranean does bounce back, more 300- to 800-passenger ships will be constructed, according to Bianchi. He said that the mid-sized ships in the future will have larger cabins while the larger ships will continue to have comparatively small cabins.

A shipyard executive predicted possible movement towards more incentive/convention oriented ships, such as the Diamond Radisson newbuildings. Such vessels, he felt, will have staterooms comparable to hotel rooms in size.

Bottom-Line

Ship values are closely linked to the state of health of the cruise market. In a growing market, successful operators will need more tonnage whether through newbuildings or acquisition of existing tonnage.

It is also a matter of strategy and fit. During the late 1980s when building costs were relatively low, successful cruise lines still acquired existing tonnage as a means of faster expansion.

As newbuilding prices have escalated, second hand values of relatively new ships have also escalated dramatically while even older ships have risen some 20 percent to 30 percent in estimated market value over the last three to four years.

In the case of NCL, the 676-passenger Sunward II was listed for sale in 1988 at $25 million. Last month, shipbrokers estimated its market value to be from $35 million to $40 million. After 20 years of service, the cruise line estimates that the ship has a remaining lifetime of 16 years.

Clearly, cruise ships have been excellent investments. Whether they remain to be so depends on the continued development of the North American cruise market. It is also noteworthy that single ship sales tend to bring lower prices than whole cruise lines which also tend to include market position, goodwill, etc.