Cruise line executives speaking at the recent Cruise Op conference in Miami surprised no one when they said that 1991 has been a difficult year and 1992 may be more of the same.

Identifying future growth opportunities, executives pointed to the baby boomer generation, now starting to tum 50, the incentive market, as well as Europe and the Far East. A word of caution was also given, however, underlining that the cruise product must be adapted in order to meet the needs of new markets.

Niche markets, which have attracted many start-up operations in recent years, were candidly said to offer less potential than previously thought.

Fewer First-Time Passengers in 1991

According to Bob Dickinson, Senior Vice President, Sales and Marketing for Carnival Cruise Lines, "1991 has not been a stellar year for the travel industry."

Dickinson, the keynote speaker at the conference, said that in 1991, the industry will lose 10 percent of its first-time cruisers, which means fewer people to spread the word about cruising and also less repeat passengers in the future.

In a separate interview with Cruise Industry News, Dickinson said that while the absolute number of first-timers was up in 1991 over 1990, he estimated that first-timers represented 45 to 50 percent of all cruise passengers in 1991 compared to 50 to 55 percent in 1990. He said that too much focus on price attracted more past passengers. He said that people who have not cruised before and do not know what a cruise is, will not buy a cruise because it costs less.

Dickinson said he was worried that the industry has "lost" a significant number of first timers in 1991. He estimated that to maintain last year's mix of first-timers versus past passengers, the cruise lines should have attracted another 200,000 new passengers. "This means there will be 200,000 fewer past passengers out there next year; Dickinson said.

According to Dickinson, in the "halcyon days" when capacity was even with demand, the primary message was the desirability of a cruise. Now the primary message is price, whereby passengers can buy a seven-day cruise for the same price of a four-day cruise a few years ago.

Dickinson said that the year was marked by heavy discounting by cruise lines and rebating by travel agents. He pointed to the war and recession as the primary reasons for this and not over-capacity.

It is not an issue of over-capacity, but one of under-demand," Dickinson said. "We have not developed the demand necessary; he continued. He noted that cruise lines such as Carnival, Royal Caribbean Cruise Line and Celebrity Cruises, amongst others, are looking at the long range view of demand as they invest in new tonnage.

1992: Concern

While Dickinson pointed out that the cruise industry is the only sector of the travel industry to show positive growth this year, he added that the outlook for next year is "not necessarily a pretty picture." He felt that the industry will face the same challenges as this year - with possibly a third ripple of the recession - although there will be more security in travel as long as the Mideast stays quiet. While many contend that there is pent-up demand for European itineraries, Dickinson doubted whether middle-America will be as quick to return to Europe.

Cruise lines will also continue to consolidate next year, according to Dickinson, with more executive turn-over as lines continue to look for new ideas on how to generate income.

Future Markets

Al Wallack, Senior Vice President, Marketing and Passenger Services for Celebrity/Fantasy Cruises, said that cruise lines need to direct themselves to the baby boomers as their future market. Wallack said that at present, 38 percent of all cruisers are 50 to 65 years old, and that in 1995/96, the first of the baby boomers generation will turn 50. A recent consumer study showed a number of recurring characteristics of baby boomers, including: less availability of time; high stress levels; increased debt; quest for value; and willingness to spend money on experiences rather than goods.

Wallack also said this means that "increasingly there are no traditional passengers." He noted that lines need to change their attitudes towards those they are marketing to since "the 50-year-olds of the 1990s are different from those of the 1970s." Wallack said that today's 50-year-olds still consider themselves young and therefore are more interested in active rather than passive vacations.

European Markets

Adam Goldstein, Vice President, International Sales and Marketing for RCCL, identified Europe and Asia as arenas for future growth. According to Goldstein, Europe represents "tangible growth" whereas Asia represents "tangible interest."

"I think the game is wide open; it all depends on the penetration each line makes," Goldstein said. He felt that there is a substantial market in Europe, particularly in Northern Europe where RCCL is concentrating its marketing efforts.

Goldstein had six observations concerning the market in Europe. 1) The U.S. product is acceptable to Europeans. 2) Flexibility is key; lines must find different ways to package themselves to Europeans. 3) Development will not be pan-European; instead lines have to look at Europe country by country. 4) Since each country represents a market, lines have to invest directly in a few markets and not just have general sales agents as their primary marketers. Goldstein noted that RCCL has had an office in London for years, is on the verge of opening one in Oslo, and plans to open one in Frankfurt in January. 5) Automated reservation systems are essential for overcoming time and currency differences. 6) A medium-range price is important.

Far East Marketing

Goldstein also felt that Asians have entry-level interest in cruising. Some of the reasons for limited interest are: small concentrations of wealth at the top; inclination towards shorter cruises; lower per diems; and primary interest in cruising California and Mexico, since the Caribbean is considered too far away.

With 10 million Japanese traveling annually, Goldstein felt that "Western operators need to go to work" in order to tap this potential market. He said that at this point, cruising is a small part of the large Japanese travel market but noted that "there should be room for both Western and Japanese products in Japan."

He acknowledged that while RCCL is intending to position a ship in the Far East in the future, it is not a high volume market at present for Americans. Some of the reasons for this are air costs, traveling time and instability of the region. Goldstein noted, however, that Europeans are more accustomed to traveling to Asia than Americans. He also added that while Australia is still a small market, it is experiencing an "outstanding" growth rate.

Goldstein concluded that tapping the Far East as both a destination and source of future passengers is still a long-term process.

Incentive Marketing

According to Terry Wall, President and COO for Pinnacle Motivation & Travel, the trend in incentive groups is for participants to travel with spouses and children. Therefore he noted, lines with children's programs will benefit.

Wall said that cruise lines capture only five percent of the $2-1/2 to $3 billion incentive travel market annually. While incentive business receives some of the best per diem yields, it still only represents five to 15 percent of cruise line revenue. In addition, Wall pointed out that incentive groups have the lowest attrition factors of groups, in the five to seven percent range.

In tracing the history of incentive travel, Wall noted that Norwegian Cruise Line was the first cruise line to be active in incentive travel in the early 1970s. Today, as cruise lines are becoming more aware of the potential of these groups, new ships are being built with more meeting rooms, board rooms, personal computers and facsimile machines. Wall also said that the bi-level stages on many of the new ships are suitable for multi-image presentations.

Niche Marketing

Paul Duynhouwer, President of Clipper Cruise Line, candidly spoke about marketing niche products. He said that Clipper is one of the few small cruise lines which has not been sold to a second owner or has not gone bankrupt.

Duynhouwer compared his company with RCCL and cited that while, next year, RCCL will carry over 800,000 passengers, Clipper only carries 10,000. Therefore, Clipper's advertising budget, which is $2.2 million, cannot sustain television advertising, whereas half of RCCL's $70 to $80 million advertising budget is spent on television ads. In addition, while Clipper's advertising budget is 10 percent of its gross revenue, RCCL's is approximately 15 percent, according to Duynhouwer and panelist Adam Goldstein.

Duynhouwer said that with niche products, lines cannot rely on travel agents as the primary distribution system. Therefore, 80 percent of Clipper's advertising budget is spent on direct mail, which generally consists of a brochure and cover letter. While Clipper goes directly to consumers, brochures advise passengers to see their travel agent for bookings.

Clipper uses its past passenger list for mailings, as well as a house list which is compiled by giving list brokers passenger profiles, which includes interests, age, and zip code. In addition, Clipper also generates half of its business from alumni and museum groups, which are also targeted through direct mail.

While niche marketing has to be more exact than mass marketing, Duynhouwer said there are benefits. "We were not affected by the Gulf War and the recession due to the way we relate to people's lifestyle and educational level."

Issues

The biggest challenge in the industry is Washington, D.C., according to Dickinson. Many of the issues at the forefront in Washington are proposals which would extend U.S. legislation over foreign-flagged ships in areas ranging from labor laws to Coast Guard investigatory power.

The cruise lines should be concerned about the Clay Bill which focuses on application of U.S. labor standards and wages to foreign-flagged vessels, according to Gerald Seifert of Galland, Krarasch, Morse and Garfinkel. However, Seifert added that in his viewpoint, the labor bill "stands little chance of passing".

In addition, Seifert said that the Miller bill will soon be introduced to Congress which would call for the favoring of U.S. operators over foreign-flag shipowners in granting coveted Glacier Bay permits. In addition, it suggests a way of introducing U.S. built cruise ships to the market by providing a 90 percent guaranteed mortgage.

Seifert said that all this legislation is an effort to put U.S.-flagged operations on par with foreign flag cruise lines and restore jobs for U.S. seamen.

Gambling: According to Seifert, cruise lines which have concentrated on the gambling aspect also "have something to worry about." The Taylor Bill, or gambling bill, is two-fold. First, it calls for the repeal of the gambling prohibition for U.S. flag vessels and secondly it prohibits operation of cruise ships sailing less than 24 hours which have at least one casino. The Justice Department is concerned with the infiltration of organized crime into these so called gambling ships. However, Seifert said that the bill prohibiting one-day gambling ships may possibly not be passed since the federal government has less money these days, leaving states to generate more revenue; gambling is a prime way to make money.

Investigatory Power: Another bill which questions the authority of foreign-flag jurisdiction is the Jones causality reporting bill which would empower the U.S. Coast Guard to investigate accidents in international waters on foreign-flagged ships carrying American passengers. This bill was passed by the House Merchant Marine Fisheries Committee and now has to be voted on by the Senate. Lawrence Winson, past council to Carnival Cruise Lines and chairperson of the legal and financial issues panel at Cruise Op, felt that the bill will be passed and that the Coast Guard will handle the authority responsibly.

A general consensus of the lawyers and government appointees speaking at Cruise-Op was that the National Transportation Safety Board (NTSB) is not as politically responsible nor as professional in pursuing investigations as the Coast Guard. One lawyer said that the NTSB generally tries to get involved in cases so as to fulfill a political agenda. An example was given of the Celebration accident in which crewmen aboard a Cuban tanker were killed. The NTSB was allowed to investigate, however, according to Winson, the NTSB was not co-operative in the investigation. The case is still pending arbitration scheduled for next year.

EEOC: Stanley Kiszkiel Acting Regional Attorney for the Equal Emloyment Opportunity Commission (EEOC), discussed the commission's policy which covers employment of aliens including those working on ships which sail out of the U.S. regularly carrying American passengers.

He cited two recent cases involving former Bermuda Star Lines and Kloster Cruise Ltd. in which the two cruise lines felt they were exempt from Title VII age and discrimination act since they were foreign-owned. In both cases, the EECO won jurisdiction; in the Kloster case, the EEOC won the ruling for a subpoena and Kloster recently turned over documents concerning the case to the commission.

Fire Safety: Fernando Plaza, Senior Deputy Director of the IMO, pointed out that in the last three years, a number of accidents have changed IMO's thinking and therefore more stringent fire safety regulations will be voted on next year.

Some of the pending regulations include fire alarm detectors; improvement of signage; abandon ship drills; and sprinklers. Sprinklers are not supported by most cruise lines nor the Coast Guard due to the difficulty in testing the systems and the cost of installation.

Next April, the committee will vote on these regulations with enactment scheduled for 1994, 1996, and 2000.

Ship Security: Kenneth Hawkes, Vice President, Maritime Security for The Wackenhut Corporation, predicted that terrorism activities are likely to occur on an American passenger vessel in the future.

Hawkes said that cruise lines and ports will probably not implement appropriate security measures if not mandated by the IMO. Citing the Achille Lauro hijacking, the bomb threat on board the Oceanos, and the arsonist aboard the Scandinavian Star, Hawkes said that the industry has failed to improve security on its own and therefore the government should intervene.

In addition, he felt that the Caribbean "is not the collection of quaint, safe tourist spots it once was." He said that crime is on the increase in many Caribbean islands and gave statistics on increased murders, kidnappings, and robberies.

Steps that Hawkes sees necessary include: background checks of all personnel and agents; x-raying of all baggage; portable x-ray equipment for cruise ships to use in ports-of-call; and armed shipboard personnel.

If a crisis does arise - be it a terrorist attack, fire, or accident - the media must be handled immediately, according to Ray O'Rourke, Executive Vice President of Burson-Marsteller.

O'Rourke defined key principles necessary in handling the media in a crisis situation. These include: 1) do not lie about what happened; 2) define the real problem; 3) try to attack the problem visually and verbally; 4) centralize and control the information flow.

He cited that with the Oceanos sinking, the problem was that the media's story should have been on the remarkable rescue mission but instead it focused on the captain's actions. Hawkes said that the person in front of the cameras should tell the right story and with authority.

Financial: Commissioner Francis Ivancie of the Federal Maritime Commission (FMC) outlined the procedure used during the FMC cruise line hearings on the increased $15 million bond ceiling, which covers passengers in the case of cruise line non-performance.

Commissioner Ivancie noted that the FMC extended its deadline to November 14 for cruise lines to respond to the FMC's proposed rule making. Ivancie said the FMC will probably loosen the requirements since the cruise industry has had a good record since the 1960s. He said that restrictions on self-insurance may be eased since at present all assets have to be here in the U.S., although the majority of cruise lines are foreign owned.

Mark Jaffe of Hill, Betts & Nash said that although the IRS seems to be scrutinizing cruise lines more, lines can still minimize tax exposure through a number of avenues, including maintenance of proof of qualified exempt ownership. He also advised that a foreign-flagged cruise line should move towards consolidation of its separate companies (those created to oversee the hotel aspect, casino, etc.) to further protect it from taxation.

Another pending legal issue is the Gibbons bill which calls for an end to foreign-built ship subsidies. The House Ways and Means Committee recently amended and approved the bill, which was originally intended to be introduced to the full House. However, the Merchant Marine Fisheries Committee has requested a referral so that the bill may have to go through the sub-committee first before reaching the House floor.

Financing: Rolf Wikborg, Senior Vice President of American Marine Advisors said that there is concern in the industry over the increased credit crunch due particularly to the problems at Citibank and Christiana Bank, two major cruise industry financers.

"Banks are getting extremely cautious" particularly in lending money to new operators, Wikborg said. He said that it was almost impossible to raise financing for a single new ship operation. In addition, he noted that he has seen over 30 business plans for new cruise lines in the last three years and few have gone through. Therefore, he advised those intending to start a new cruise line with new ships, to approach an existing shipowner or a hotel group to buy in on the venture. He cited the examples of Radisson Hotels' joint venture with Diamond Cruise Line, as well as the Hyatt Hotel/Pritzker group and RCCL.