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Cutting Costs - Not Quality

Roberto Giorgi managing director V. Ships Leisure

Cutting costs without harming the cruise experience is the new mantra of the industry, but is it really possible? Can one reduce the shipboard cost structure behind the scenes - while still providing passengers with the quality of cruise experience they expect? The answer seems to depend on who you ask.

Nevertheless, several executives and suppliers offered examples of how costs could indeed be reduced, without affecting the product. The common thread among them is “efficiency:” developing more efficient hardware and maintaining it more effectively, using hardware and software (crew) more wisely, and streamlining all procurement systems.

Ship Operations

Gwynne Lewis, operations director for BMT SeaTech, explained how fuel consumption could be decreased by using software to monitor the roughness of the hull and the propeller, to make slight changes in ballast to optimize the trim, and to provide guidance to captains and allow them to sail the ship in a more fuel-efficient way.

According to Lewis, there now exists software tools that can take into account the various variables and truly compare how efficiently one captain sails his vessel versus another. Fuel consumption can be decreased, explained Lewis, “if the captain keeps the throttle at the same level for the duration of the cruise,” versus constantly changing speeds. Software options allow ship owners to determine whether a ship’s efficiency - or lack thereof - is the result of equipment issues, or piloting issues.

On the technical front, Colin Anderson, business development manager for International Paint, explained how the proper anti-fouling treatments can decrease fuel consumption, increase speed, decrease engine wear and hull corrosion, lead to less frequent drydockings - and when used on the propellers, decrease vibrations.

And when repairs do need to be made, Grand Bahama Shipyard CEO Chris Millman explained how costs could be further cut. Looking at the overall refurbishment equation, he explained, “Labor is the only real area where a shipyard could conceivably contribute towards cost savings, and the total (refurbishment) labor cost for a typical ship comes out to about $300,000 per year. The amount of revenue a typical ship makes in a single day is also around $300,000." Therefore, cruise lines shouldn’t cut refurbishment costs by seeking yards where labor costs are lowest. “It’s clear they must focus on saving time (to save money),” said Millman. To do so, he suggests cruise lines seek to reduce transit times (i.e., use yards closest to cruising grounds), reduce docking time itself (by using riding crews, etc.), increase the periods between drydockings (through more efficient onboard maintenance), and reduce unplanned downtime “by focusing on quality and not exclusively on cost” when purchasing technical supplies.

Concluded Millman, “Reducing lost revenue days is the key to achieving savings.”

Crewing

Beyond the equipment itself, the method of ship management - whether inhouse or contracted - can also lead to cost savings while not impacting the cruise experience.

Roberto Giorgi, managing director of V. Ships Leisure, explained that third-party management has increased its market penetration from 10 percent of the world’s shipping fleet in the early 1980s to 25 percent in 2002, noting, “The rate of growth for outsourcing is consistently greater than the rate of ship growth.” He said seven percent of the current cruise fleet outsources its deck and engine crew; with hotel operations staff included, that figure increases to 13 percent.

The advantage to the ship owner of third-party management, according to Giorgi: a leaner organization, lower fixed costs, more flexibility, and greater purchasing and bargaining power (considering that larger ship management companies like V. Ships handle hundreds of vessels), as well as a larger crew roster to choose from.

Ship owners who can benefit from cost reduction through third-party management, according to Giorgi, include smaller operators with one to four vessels; larger operators in new markets overseas; new entrants; tour operators; and financial institutions. “Outsourcing is becoming a serious alternative for all segments of the cruise market to reduce overhead,” he said.

Optimizing the Supply Chain

Finally, whether it’s marine or hotel- related, the key to keeping supply costs as low as possible is to dissect every aspect of the supply chain itself. One doesn’t necessarily have to purchase lower-grade materials to cut costs; rather, one can cut costs by purchasing more effectively.

Jonathan Hunt, principal consultant of hospitality and leisure practices for PricewaterhouseCoopers, divides the supply chain into six main stages: demand planning, strategic sourcing, purchasing, logistics, receiving and inventory management, and payment.

Looking down that segmented line, Hunt sees several potential opportunities to cut costs without affecting quality. A cruise line can rationalize its supplier base through systematic vendor evaluations and through the development of a preferred vendor program; it can improve communications with planners to allow for more accurate ordering; and create more cross- business-unit cooperation in supply chain issues, which in turn will result in reduced inventory, improved planning, and valuable information sharing.

Mark Barnard, manager of onboard revenue for Holland America Line, also stressed how important it is to keep a close watch on the supply chain in any effort to cut costs effectively. “Our motto at Holland America is that if you can measure it, you can manage it,” he said.

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