Home' Ships and Shipping : August 2009 Contents The following survey has been excerpted from the DVB Bank February 2009
cruise industry report: "The Secret to Dancing with Waves". DVBank has a
very strong record of in-depth and accurate shipping research
In recent years, cruise lines have enjoyed glowing success in the
sense that every market segment has been in a growth mode.
During the past year and a half, however, warning signs were
omnipresent, yet the dramatic turn of events in the second half of
2008 seem to have come as a surprise to many. It was not
downturn itself so much as the depth to which market indicators
and sentiment fell. Market swings and downturns are a part of the
capitalist system that we all embrace. It comes with some
undesirable, albeit necessary happenings, as market forces compel
uncompetitive firms to restructure or exit the marketplace.
However, the disappearance of household names from the
financial landscape that have been with us for over a century is
indeed dramatic and places the recent series of events as one that
we are not likely to experience again in our professional careers.
At the time of writing, the full extent of the measures proposed
by governments worldwide is yet to appear; and may never be in a
"final" form. The challenges within the financial system are taking
a toll on what projects can be financed and progressed. It remains
to be seen when this situation will resolve itself. As a result we
have seen some newbuilding cancellations and the postponement
of delivery schedules, with some cancellations on contracting that
were subject to financing being on the cards.
Furthermore, it is not clear as to how many vessels will in fact
exit the international cruise marketplace following the Safety of Life
at Sea (SOLAS) regulations coming in force in 2010. These issues
cloud any accurate determination of vessel supply with as much as
twelve percent of the 326 cruise ships in the active fleet which
could be eliminated from the international cruise ship market.
The unique situation cruise lines find themselves in is a
weakening global environment which has prompted them to move
vessels closer to their primary market, the United States. At the same
time, the US consumer is facing uncertain times. Job losses are at
decades-high levels, home equity wealth has vanished, credit lines
which are so important to US consumers are still being restricted.
The cruise industry's resilience has meant that it has always found
efficiencies, kept ticket prices low and achieved high passenger
satisfaction levels despite events external to the industry. These
include punitive port regulations, more stringent operational
legislation, rising fuel prices, terrorism and, more recently, piracy.
The industry's secret to dancing with waves has been a measure of
"Cruise Marmalade". A little known origin of the word marmalade
portrays a physician, whose concoction of crushed sugar with
oranges successfully treats Mary, Queen of Scots, for sea-sickness. He
named it "Marie est malade," or "Mary's illness" the term from which
marmalade derives its name.
In these choppy seas that the cruise industry finds itself, it could
indeed do with a dose of marmalade; but not just any marmalade,
but one that it develops from within and that which only the cruise
industry can deliver: maintaining its strengths of providing
outstanding value and creating memorable experiences while making
the tough decisions of conserving resources and positioning
themselves to be able to take advantage of longer term opportunities
--"Cruise Marmalade" if you may!
Most cruise lines began 2008 well with robust passenger
bookings for the first five months; at which time they were ahead
of the previous year's booking levels for period. These earlier
bookings salvaged what would have been otherwise a dismal year
as booking levels fell dramatically in subsequent months.
The last downturn in the market in 2001-02 saw several cruise
lines fold. Among the many reasons included were
under-capitalisation, high liabilities, old vessels that were either
difficult to market or had substantially higher operating costs
and/or were reliant on a particular geographical niche. Niche
players tend to be smaller companies, typically with much reliance
on the founder and limited corporate structure.
The industry's systemic risks are seasonality in cash flows,
greater susceptibility to external events that impact consumer
sentiment and a general downturn in world economic activity.
Furthermore, with the current constraints in the financial system,
the ability to obtain financing on terms that are consistent with
the cruise line's expectations is going to be an ongoing challenge.
Smaller cruise lines could well be forced to drop prices to
unsustainable levels given that they lack the economies of scale of
some of their competitors. This could pave the way for
acquisitions, mergers or changes in the ownership structures of
these cruise lines.
Significantly lower levels of consumer confidence spurred by
decreasing home equity, reducing stockmarket wealth, diminishing
job security, tightening credit conditions, have all led to weakened
household balance sheets. The significant loss in personal wealth
through equity losses around the world has taken its toll on luxury
and expedition cruising. While pricing in both these segments will
be challenged, they are expected to see a turnaround before the
other cruise segments.
The financial crisis is impacting the very wealthy as well and is
evidenced in that the market for smaller yachts up to 20 metres in
length has completely collapsed; with the 20-40 metre market
being sluggish as well. Even ultra-luxury cruising is not immune to
the current crisis. All indications are that the current downturn can
be expected to worsen as the year progresses.
Even before the year began, the dividend moratorium by
Carnival and RCCL was seen by many as indicative of the bleak
outlook for cruising. The reality probably has more to do with
the tight debt market, the collapse of the syndications market
and the overall restrictive environment to raise large amounts of
capital through the banking system. Ironically, it is this
restrictive environment that has stifled lending on the corporate
level which has seen financial institutions tighten consumer
lines of credit.
It is indeed apparent that cruise lines face some challenging
times ahead. Additional supply in the form of new cruise ships of
around 25,000 lower berths in each of the next three years will
join the fleet. Although not particularly significant for the main
contemporary segment of the cruise market dominated by large
ships, around 38 smaller older cruise ships can be expected to exit
the internationally deployed fleet in 2010 as a result of amended
SOLAS regulations coming into force.
We see many cruise lines moving vessels back to the major
source market, the US. The industry has responded to the sharp
drop in bookings by significantly discounting fares and raising
travel agent commissions in an effort to maintain reasonable
occupancy levels in 2009.
Cruise lines are being forced to amend their 2009 schedules and
redeploy vessels from Europe either back to the Caribbean or to
Australasia. The cruise industry, being a subset of tourism overall,
can gain from reviewing how other players in the hospitality
industry have responded to falling demand. The over-riding need,
of course, is to make it easier for potential cruisers to book cruises
by way of eliminating surcharges such as that for fuel, providing
promotions that lower the total price of packages, incentives to
commit early along with lower deposits and easy cancellations.
All indications are that it will take until the second half of 2010
before there is a visible shift in consumer sentiment and with it the
fortunes of the cruise lines. What will be important for cruise lines
will be the commitment to move forward with a clear understanding
of their defined target market, along with product differentiation,
innovative marketing, rigorous yield management systems and
financial resources to sustain the company's long term strategy.
August 2009 SHIPS AND SHIPPING
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