- Email: [email protected]
Analysis of the US cruise line industry
Analysis of the US cruise line industry
J.S. Perry Hobson
The cruise line industry has been through a metamorphosis. From being a declining mode of travel in the 1960s, the cruise line industry turned the corner in the 1970s and became one of the fastest growing segments of the wider tourism industry during the 1980s. This paper examines the reasons behind this growth, the current structure of the US cruise industry and the issues facing the industry in the 1990s as it heads towards the next century.
J.S. Perry Hobson is a Lecturer in the Department of Hotel and Tourism Management at Hong Kong Polytechnic, Hung Horn, Kowloon, Hong Kong. Submitted August 1992; accepted January
For many years the cruise industry was seen to be a moribund segment of the tourism industry. Yet, more people are cruising today than during the supposed heyday years of the industry. While the US hotel industry is struggling to attain a 60% occupancy rate, the cruise line industry is operating with a 90% rate.~ However, the cruise line industry is facing numerous indigenous problems, such as foreign flagging and the exploitation of Third World labour. The industry could also be facing the same problems that are plaguing its land-based sister industry. The market is rapidly being segmented and a multitude of new capacity is entering the market. During the 1980s the industry added capacity at an average of 8.3% per annum, and is planning to add capacity at a rate of over 7.5% until 1995. Like the hotel industry, the cruise line industry may be in danger of being 'overbuilt'. This article examines the changes the US-based cruise line industry has been through, and the challenges it faces as it looks towards the next century.
1993
Metamorphosis of the cruise line industry
~C. Booth, 'Against the tide', Time, 17 February 1992, pp 54-56. 2R.C. Mill, Tourism - The International Business, Prentice Hall, New Jersey, 1990. 3Cruise Line Industry Association, The Cruise Industry: An Overview (marketing edition), CLIA, New York, 1992.
Just as the automobile led to a rapid decline in travel by train, the airline industry led to a rapid decline in the number of ocean liner passengers. In 1957 over 1 million people travelled across the Atlantic by sea. The following year more people crossed the Atlantic by plane than by ship. Between 1960 and 1975,0 ) p~ssenger departures from New York fell from 5 0 0 0 0 0 a y e a r to 50 (0. As ocean liner traffic declined many operators attempted to reposition their liners as cruise ships. Several new cruise ships were launched but most of these were moderate in size, carrying between 850 and 1200 passengers. Cruising was perceived to be the preserve of the exclusive and for the affluent. It became known fl)r appealing to the 'newly-weds" or the 'nearly-deads'. It was not until the mid-1970s that market positioning of cruises in North America began to change. As a result of the changes, the late 1970s - and then the 1980s - were decades of growth for the cruise line industry, and the market grew faster than any other major sector in the tourism industry. As the Cruise Lines International Association (CLIA) 3 data reveal (see Table 1), between 197{) and 1980 passenger numbers saw a 190% increase. During the 1980s the industry reported an annual average growth of 9.8% per annum. By 1990 the market had grown to 3.6 million passengers, an overall increase of 155% for the decade.
0261-5177/93/060453-10 © 1993 Butterworth-Heinemann Ltd
453
Anal.ysis ¢{/'the US cruise line induslrv Table 1. Number of passengers taking a cruise lasting more than two days. Year 1970 1980 1990 1992
Passengers 500 000 1.4 million 3.6 million 4.4 million (est.)
4R. Mclntosh and C. Goeldner, Tourism: Principles, Practices and Philosophies, 6th edn, Wiley, New York, 1990, p 100. SOp cit, Ref 3. 60p cit, Ref 1. 70p cit, Ref 4.
454
Factors behind tlte growth Behind this growth, a number of strategic and tactical marketing-related factors can be isolated. First, C L I A was formed in the early 197fls OUI o1" a need to develop an industry organization to develop and p r o m o t e the concept of cruising. C L I A exists to 'educate, train, promote and explain the value, desirability and profitability of the cruise product'. 4 ( ' I . I A information and statistics only represent cruise lines that market their ships in the USA and currently they represent 97% of the North American cruise market capacity. Second, the cruise lines began to work much closer with their mare channel of distribution: travel agencies. As travel agents book over 98'}',, of all cruises, they are the most vital channel of distribution for the cruise lines. C L I A and the cruise lines began to work more closely with their travel agency affiliates to promote cruises, and to expand thc overall size of the market. In 1972 there were only 7900 affiliated travel agencies; by 1991 this had grown to 19 952. 5 Selling a cruise package is generally more profitable for travel agents than other packages or even individual itineraries. When a cruise is booked, 85-90% of the total COSt of the trip is paid for through the travel agent, versus 40-45% for lhe typical land-based trip. (~ Thus cruises tend to generate higher average commissions for travel agencies than other comparable packages. The vast increase in the numbers of cruise passengers, the healthy commissions and the ease of booking the cruise package have now led some travel agencies to specialize in cruise-only business. So many travel agencies have turned to cruise-only business that the National Association of Cruise Only Agencies ( N A C O A ) was set up to provide promotional and m a n a g e m e n t assistance to its members. The third factor was the repositioning of the cruise product to new market segments and the changing perception of what cruises were all about. In 1974 Carnival Cruise Lines entered the market ahmg with their 'fun ship' concept and promotional strategy. This was a complete departure from the staid image that the established cruise lines were presenting, and was specifically designed to attract a new, younger (18-30) market segment. Other new market segments such as families with young children became targeted by companies such as Premier Cruise Lines. Premier position themselves as 'the official cruise line of Walt Disney World' and carry a host of Disney characters on board. These new approaches were also coupled with the exposure cruise ships received with the successful television series "The Love Boat'. This series gave the appearance of cruises representing the perfect vacation for the average American, not just those who are very affluent. Although difficult to measure, it is probable that this series did more for the image of the cruise industry than either 'tlotel" or 'Cheers" have done for the hospitality industry. Fourth, the industry changed how it packaged and offered its product. Cruise lines began to package and promote the cruise product with inclusive airline tickets. The development of the 'fly-cruise* product helped spur the ew)lution of the industry in several ways. To begin with, it lowered the cost to the consumer. Cruise lines were able to bulk purchase scheduled airline seats, or, as in the case of Carnival, start their own charter airline operation. This enabled the cruise lines to bc able to quote an inclusive package price to the consumer. This made comparable price promotions and booking considerations casier. It also allowed the cruise lines to reposition their ships and departure ports. By packaging the fly-cruise product it allowed the ships to be closer to their main sailing areas. This allowed for the length of the cruise time to be cut, and for the highly successful mini-cruise product (2-5 days" duration) to be developed. Fifth, recognizing that there were several untapped market segments TOURISM M A N A G E M E N T December 1993
Amdy~'is of/he US crui,se line indu.vtrv
such as families and singles, the industry not only segmented its markets but then targeted specific niches within these markets. As Showker s has observed, 'one of the strongest trends of the 1990s: [is] segmentation • . . almost all the cruise lines have a sharply defined product designed to fill a niche, a need or a special interest. The large established lines are also beginning to look like Detroit automakers, with new divisions and delineated products." Many of these cruises base their activities on a particular sport, hobby or subject. For example, Norwegian Cruise Lines offers a 'floating jazz festival' and Royal Viking Cruises offers p r o g r a m m e s through the School of Foreign Service of Georgetown University in Washington DC. '; Segmenting the cruise market
During the 1970s and 1980s it became apparent that the market for cruising could be segmented using a multitude of methods - demographic, psychographic, behaviouralistic or geographic. Currently there are 122 =° cruise ships serving North America. Therefore, it is difficult to give an overall picture of the current cruise product offered to the market, without undue detail about each ship or specifics about each market segment. It is simplest to use a basic social-class-structure market analysis ]~ to understand how the cruise ships are roughly positioned in terms of price and facilities to their markets. At its simplest, the market can be divided into four broad categories, ttowever, it should be noted that, within each of these broad categories, a market position may be taken by an entire cruise line, such as Premier, or by an individual ship, such as the Q E 2 , to specific markets, submarkets or niches. T h e m a s s m a r k e t : the market for these cruises tends to come from the lower-middle social class category. Companies that operate in this part of the market tend to have the larger (over 1200 passenger) ships, offer a totally organized itinerary and activities, a range of night clubs and tend to offer shorter cruises• Income of passengers tends to be in the $2(>39 000 range and the average daily cost per person is somewhere between $125 and $200 depending on factors such as length of cruise and type of cabin, • T h e m i d d l e m a r k e t : this aims to serve the upper-middle social class. As this is the largest part of the market there is considerable diversity here. A variety of sizes of ship is used to service this market, ranging from 500-2200 passengers. However, as a rule they tend to be the medium-sized ships, generally ranging from 75(>10()0 passengers. Income of passengers is usually in the $4(>59 0()0 range and the daily cost is about $200-350. • T h e l u x u r y m a r k e t : serves the lower-upper and upper-upper social class. The ships offer a high staff-to-passenger ratio, superior cabin appointments and more space for the passengers. The ships tend to be smaller in size, averaging around 700 passengers. Income of passengers tends to be in the $60 0()0+ range. The average daily cost starts at $350. • The specialty m a r k e t : this segment caters to the adventurer and to the very exclusive through smaller ships and large yachts. These ships normally average around 5(>150 passengers. This category covers ships that come equipped with dive experts and amphibious marine equipment, through to cruise lines that operate tall ships once owned by well-known people such as Aristotle Onassis. •
8K. Showker, 'Cruising into the nineties',
American Heritage, November 1990, p 91. 9'Cruising need not be mindless', Chicago Tribune, 5 April 1992, p 22, section 12. ~°Op cit, Ref 3. ~Louis E. Boone and D. Kurtz, Contemporary Marketing, Dryden Press, Hinsdale, IL, 1986, p 162. ~eOp cit, Ref 1.
Changes within the cruise market The effects of growth, the recognition of new markets and segmentation
TOURISM M A N A G E M E N T December 1993
455
Analysis of the US cruise line indu.strv Table 2. Changing age by sex of those having ever cruised compared with new cruisers (cruising for the first time between 1988 and 1990),
Age
Ever cruised a (%)
New cruiser b
33 29 38 100
43 32 25 100
29 30 39 100
41 43 16 100
(%)
Males: 25.-40 40-59 60+ Total
Females: 25-40 40-59 60+ Total
Note: Total numbers: amales - 41, females 59; bmales = 44, females - 56. Table 3. Average family income of cruisers, 1988-90, Income $20-39 999 $40-59 999 $60 000 +
Cruisers (%) 35 35 30
within the cruise industry has brought several notable changes to li~c market composition of those taking cruises.
The changing demographics of the cruise market There has been a dramatic shift in the demographics of those taking cruises. In 1985 the median age was 58, by 1991 it had dropped to just under 43.~2 Furthermore, more married couples are cruising. Betwcen 1988 and 1990 the percentage of married couples increased by 6% over the statistics for other past cruisers, and increasingly they are cruising with their children. Of those families with children, 6(1% of them brought their children with them on the trip. ~3 According to the 199(I C L I A National Market Profile Study, '4 the fastest growing passenger segment, for both males and females, is between the ages of 25 and 40. As can be seen in Table 2, the over 60s market has declined significantly in overall percentage terms. Cruising was once seen as the preserve of the affluent. This has now changed. As can be seen from Table 3, between 1988 and 199(I, 35% of those cruising had a family income of less than $411 000. A further 35% earned $40-59 999.
Changes within the cruise industry Not only have the demographics of the market changed but the industry has changed in order to meet the demands of the new market segmcnts that it is now targeting.
Size of ships Most of the traditional cruise ships built in the 1960s and 1970s were in the mid-size category, and they could hold between 75(1 and 1200 passengers. As the market segmented in the 1980s, an increasing number of both larger and smaller ships began to appear. For example, the Monarch of the Seas (positioned to the middle market segment) can currently accommodate 2300 passengers. At the other end of the scale there has also been development of the mini-cruise or ultra-yachts, which may have as few as 15 passengers. Estimates show that several American flag companies regularly operate mini-cruisers on the two coasts. 15
Activities and facilities
~30p cit, Ref 3. 140LIA, National Market Profile Study, CLIA, New York, 1990. ~sc. Gee, J. M a k e n s and D. Choy, The Travel Industry, Van Nostrand Reinhold,
Today's standard cruise ship offers a full range of facilities such as swimming pools, jacuzzis, workout rooms, casinos, golf ranges and night clubs. The quality of the facilities and the service vary and are tailored to the market segment they are serving. For example, Carnival's 'fun ships', which are targeted at the mass market segment, offer multiple-occupancy rooms, plenty of organized activities and games, slot-machine gambling, and a wide variety of night clubs. Others, of course, are more exclusive and targeted at the luxury market. For example, the Radisson Diamond, which was launched in 1992, is a smaller ship with 354 lowers (berths), and a passenger to staff ratio of virtually 2:1. The ship features a five-storey atrium with glass elevators and 177 luxury-class cabins, most with balcony. All the staterooms feature television and video-recorder, sitting area and full bathrooms. The ship comes equipped with the usual casino and golf facilities, as well as a hydraulic marina and helipad. It was recently completed at a cost of $125 million. For a seven-night cruise the cost is approximately $4200. '~
New York, 1989, p 226. ~S'Diamond is shaped in Finnish yard', Travel Weekly, 9 December 1991, p 12, section C.
456
Length of cruise The trend in North America during the 1980s was towards shorter T O U R I S M M A N A G E M E N T December 1993
Analysis of the US cruise line indu.stry Table 4. Length of cruise by market share and percentage change. Duration (days) 2-5 6-8 9-17 18+ Total
1980 (%) 24.3 59.1 15.4 1.2 100.0
1990 (%) 38.3 50.0 11.1 0.6 100.0
Change (%) + 140 - 9.1 -4.3 -0.6
vacations 17 and, as has already been noted, cruises have mirrored that trend. While there are more people actually cruising in all categories, the 2-5 day cruise has gained popularity and grown from having a 24.3% market share in 198(I, to having a 38.3% market share by 1990 (see Table 4).
Shift in embarkation ports In 1990 the five major US cruise ports were Miami, San Juan, Port Everglades (Fort Lauderdale), Port Canaveral and Los Angeles. However, there was a shift in traffic patterns during the 1980s. The traditional old port cities have seen their embarkation numbers eroded. For example, between 1982 and 1990 Seattle saw embarkations decline by 81%, San Francisco by 35% and New York by 19%. On the other hand, San Juan PR saw its embarkations grow by 603%, Port Everglades by 436%, New Orleans by 288%, Palm Beach by 278% and San Diego by 212%. Today Florida accounts for approximately 65% of all US embarkations, Puerto Rico for 13% of all embarkations and California for about 10%. I~ As has been stated, much of this has been due to the development of the fly-cruise product, which allowed ships to depart from ports closer to their sailing waters. As would be indicated by the location of the above-mentioned departure ports, the Caribbean continues to be the number one destination for North American cruise passengers. In 1991, the total Caribbean market, comprising the Caribbean, Bahamas and Eastern Mexico areas, accounted for a 56.6% share of capacity placement. Other leading areas attracting the US market were Western Mexico with 7.2%, Alaska 6.9%, the Mediterranean 6.8%, Trans Canal Cruises 3.8%, Europe 2.5%, Bermuda 3.5% and Hawaii 2.1°/,,. TM Cruise lines periodically reposition their ships around North America and the world as the seasons change, and often specialize in certain geographical areas. For example, Holland-America Cruise Lines specializes in Alaska cruises, American Hawaii Cruises specializes in cruises around the Hawaiian islands and Carnival specializes in the Caribbean.
Increasing concerns at the 'ports of call'
7D.C. Frechtling, 'Key issues in tourism futures', Tourism Management, Vol 8, No 2, 1987, p 107. ~80p cit, Ref 3.
191bid 2°D. Owens, 'Cruise craze crowds Bahamas, Caribbean Islands', Journal of Commerce and Commercial, 24 August 1989, p 3B.
2~lbid. 22'Some port fees go up', Chicago Tribune, 12 April 1992, p 17, section 12.
With the increase of cruise traffic in the Caribbean, many islands have seen substantial growth in tourism numbers. Howcver, due to the limited number of suitable deep-water ports that can reasonably be reached from the main US departure ports, pressure is being placed on several specific destinations. As one business and community leader on St Thomas in the US Virgin Islands stated, 'success is spoiling the very things that put the island on the cruise maps', z" This tiny island has become the busiest port of call in the Caribbean. Only 13 miles long by 2.5 miles wide, the island can host 7-80(10 cruise passengers on the busiest days of the winter season. The dock master is expecting 1.5 to 2 million per annum by the year 2000. Although passengers made up more than half of the island's visitors in 1988, they accounted for less than one-third of all tourist dollars. Furthermore, the money they spend is less likely to remain in the local economy as they tend to buy 'duty-free" goods or souvenirs. The massive influx of visitors causes traffic congestion in the town centre for several hours during the main part of the day. Some vocal residents and hoteliers "bclievc that the crowding is scaring away the island's bread and butter business', 2~ and arc activcly campaigning to stop further port developments. Other Caribbean island destinations havc recently raised their port taxes to the lcvels of their island hotel tax to help incrcase government revenues from cruise tourism. 22 Many of the northern ports of the upper Caribbean area are beginning to look carefully at the growing numbers
TOURISM MANAGEMENT December 1993
457
Analysis of the US cruise line industry
of cruise tourists, and are questioning whether this type of tourism is appropriate and sustainable. Many cruise companies already own their own small paradise islands developments, and in the future they may well be growing vertically by providing more of their own port and island developments.
The international issues within the industry
23M. Mentzer, 'Factors affecting cruise ship fares', Transportation Journal, Fall 1989, p 1. 240p cit, Ref 3. 25B. Nevins', 'Crews on luxurious cruise ships face tough working conditions', Journal of Commerce and Commercial, 14 July 1989, p 3 B. 261bid. 271bid. ZST. Rice, 'How Carnival stacks the decks', Fortune, 16 January 1989, pp 108-116. 29D. Lunberg, The Tourist Business, 6th edn, Van Nostrand Reinhold, New York, 1990.
458
The cruise line industry is truly an international industry. However, it should be noted that much of the capacity operating from the USA is foreign owned, and that the vast majority of US owned ships are foreign registered. As Mentzer 23 pointed out, 'cruise ship owners have begun to turn to "flags of convenience" to avoid health and safety inspections, high fees and maritime unions from high wage countries'. As a result, most ships operating from the USA are registered in one of the following five countries: Panama, Liberia, Bermuda, Cyprus and the Bahamas. Just as with the rest of the hospitality industry, service is integral to the product being offered. In a recent C L I A survey 24 being ' p a m p e r e d by the staff' was rated as the most important characteristic to describe a successful cruise vacation. Cruise ships are labour intensive and the costs can make up a substantial part of the operating expenses of a ship. However, the aforementioned countries often have no or few labour laws and restrictions, which means that cruise companies can employ crew at minimal costs and avoid labour laws in the USA. The industry has received much criticism for its labour policies and its hiring of cheap Third World labour. The crews depend on passenger tips for the majority of their income. Many cruise ships give passengers daily reminders of tipping and often suggest per day tipping rates. As Nevins 25 pointed out, 'crews on these ships often toll up to 100 hours per week, sometimes for less than $1 per hour . . . jobs for seamen on the deck, engine and catering sections of the ship usually provide no health insurance or other benefits'. As one Miami attorney who represents more than a hundred crewmen annually put it, 'they treat crewmen like an orange. They squeeze and squeeze until there is nothing left and then throw away the peel .26 During an investigation of cruise ships' working conditions it was found that 'crews work in noisy engine rooms without earplugs, clean sooty boilers without face masks, and operate machinery without goggles, according to court records'. 27 It was also found that crew m e m b e r s were housed up to ten in a cabin, bunking up to three deep in less than 100 square feet of space. On Carnival Cruise Lines the catering staff come from over 50 nations. The National Maritime Union ( N M U ) has accused Carnival of exploitation and overworking. However, the President of Carniwd believes that his cruise line is being singled out, as it is the biggest cruise line with all the ships carrying foreign flags. 'We are the e n e m y ' , he stated. He counters the accusations by pointing out that 'the fact is, we couldn't have the "fun ship" product if the crew wasn't happy'. 2s The company points out that the length of service records show that catering employees remain with the company for an average of eight years. As Lunberg 29 succinctly noted, 'the typical cruise ship sailing from an American port is owned and officered by northern Europeans, manned by southern Europeans, and filled with middle and upper-class Americans'. However, being a foreign-registered vessel does place restrictions on cruise routings. Thanks to cabotage restrictions, non-US ships may only e m b a r k and disembark passengers from one US port. Consequently, most cruises will start from a US port and then 'call' at the other ports. Many of the shorter two-day cruises will not actually call in at any ports, and are simply p r o m o t e d as 'cruises to nowhere'.
TOURISM
MANAGEMENT
December 1993
Analysis of the US cruise line industry
Increasing market consolidation and domination
3°A. Fins, 'Batten down the hatches and rev up the jacuzzis', Business Week, 19 August 1991, pp 88-89. 3~Op cit, Ref 28. 32'Carnival to buy Premier', Travel Weekly, 22 April 1991, pp 1, 2. 33'Carnival marks 20th year', Travel Weekly, 19 March 1992, pp 1, 4.
340p cit,
Ref 29.
35'Cunard parents denies report', Travel Weekly, 7 May 1992, p 4, section 1.
The late 1980s and early 1990s have been a time of consolidation in many segments of the tourism industry, and the cruise industry was not unaffected. By mid-1992, three major cruise line operators accounted for a 47% market share, and the top six for over 66%. Interestingly, many of the companies have extensive interests in the hotel industry, though there appears to be little operational cross-over between the two sectors. The largest and most aggressive operator is Carnival Cruise Lines (CCL) with approximately a 20% market share. CCL operates the nine larger Carnival 'fun ships' aimed at the younger mass market. As Business Week observed, Carnival has experienced its growth 'by tapping into the 25 to 39 year olds'. 3° Its success with this market can be seen in its 1987 figures when Carnival's load factor was reportedly 112%. 31 CCL also owns Windstar Sail Cruises, which operates three smaller exclusive sailing ships aimed at the more adventurous well-to-do specialty cruise market. CCL has acquired Holland America Line, which operates four mid-size ships aimed at the older up-market cruiser. In 1991, CCL tried to acquire Premier Cruise Lines, which operates three mid-size, middle-market ships, 32 but that acquisition fell through. Not to be deterred, in March 1992, CCL announced that it was taking an interest in the Seaborn Cruise Line, which operates two small luxury ships. 33 The company is quoted on the American Stock Exchange, though a controlling interest in CCL is held by the Israeli-based Arison family. The company also owns the Crystal Palace Resort and Casino in Nassau, Bahamas. As Lunberg 34 pointed out about the company, 'Ultimately, Arison hopes to have four brand names, segmenting the markets as has been done by Marriott, Holiday, and others among the hotel chains'. The second largest operator is privately owned by the Pritzker family of Chicago, who are also the owners of the Hyatt Hotels management group, with a 15% market share. They own Royal Caribbean Cruises, with a total of 10 larger ships, including the 2300 passenger Monarch o f the Seas. They also own the smaller Admiral Cruises with two mid-size ships. The third largest operator is P&O plc, a British shipping conglomerate, which owns the nine Princess Cruises ships (of 'Love Boat' notoriety) with a 12% market share. P&O has extensive shipping interests; it also owns a number of resort hotels, particularly in the Australian market. The fourth largest operator is now Kloster Cruise Ltd, once the largest cruise company. It is owned by Vard, a Norwegian company, and currently has a 9'/0 market share. The company owns Royal Cruise Lines, with three medium-sized ships, Norwegian Cruise Lines with six large ships and Royal Viking line currently with one medium-sized ship. They also own the Bahamian out-island, San Salvador, bought for $3.5 million in the early 1980s. The fifth largest operator is the privately owned Greek company Chandris with a 5.5% market share. The company is owned by two brothers who also have interests in hotels in Greece. The company recently formed Celebrity Cruises to add to its mass market Fantasy Cruises. They currently operate six ships. The sixth largest company is Cunard Line, owned by Trafalgar House pie, a British construction conglomerate, with a 5% market share. The company operates the only scheduled ocean liner, the QE2, as well as six other ships. The company has extensive resort and hotel interests, and owns amongst others the landmark Ritz Hotel in London. In April 1992, Trafalgar House plc announced that it would restructure and return to its core business, which is in construction. However, in May 1992 it was denied by the company that it was planning to divest itself of its cruise ship interests. ~5
TOURISM M A N A G E M E N T December 1993
459
Analysis of the US cruise line indust O,
Rough seas ahead? Overall, 1992 started off well for the cruise lille industry in comparison with other sectors of the tourism industry. During what is known as 'wave week' (usually the second week in January), Carniwd Cruise Lines saw a record 65 00(1 individual bookings. Royal Caribbean reported 60 000 bookings during the s a m e w e e k . 36 By the end of January total bookings for the two companies had reached an all-time high of 615 000. 37 C L I A 3x predicts that, by the year 2000, as many as 8 million passengers per year will be cruising. According to their research findings, taking a cruise is a ' d r e a m ' of nearly 60% of all adults with the highest interest being exhibited by the baby boomers. Yet only 5% of the US population has ever taken a cruise. The cruise industry offers some appealing features to US consumers. The main advantages can be summed up as convenience and ease. Cruises are easy to book, are offered with a virtually 'totally inclusive' package price and afford minimum effort and maximum relaxation. They also provide programmes for children, and the tourist can visit a number of foreign destinations with minimum inconvenience. Furthermore, the cruise product continues to diversify. New ship designs, themes and activities are reaching out to new market segments. With only 5°/,, of the US population having taken a cruise, there is huge market potential given the price-value relationship that the cruise companies can offer. Furthermore, a large percentage of repeat cruisers show high satisfaction with the experience. Looking into the future, C L I A predicts that, by 1995, the number of berths will rise to 120 000 from its current 89 000. In 1991 and 1992 alone, some 15 000 lowers have been added. Some analysts concur with C L I A and see the future being bright. Temple, Barker and Sloane, market consultants, stated that 'fatter marketing budgets, price discounts and expected growth of key cruising segments like the older affluent vacationer, could keep the industry growing at a 10-11% clip annually through the 19 9()s ' .~~v Other analysts have a different view of the future. Some see the overcapacity in the industry leading to discounting wars, which will force out the weaker cruise lines and ultimately lead to less competition. The beginning of 1992 did see a tremendous amount of discounting in the market-place for cruises. As Mr Fishkin of Cruise Line Inc. in Miami - one of the biggest cruise industry discounters - observed, 'there's a flood of bargains despite the demand for space . . . Carnival Cruise Lines is advertising prices ]that existed] back in 1982". ~ Discounting cruise space could suggest that demand is not keeping up with the excessive capacity that is entering the market. Rod McLeod, executive vice president of sales, marketing and passenger services for Royal Caribbean, citing an oversupply of berths in the market, said "that steep discounts in the [Caribbean] area would continue until supply and demand balance o u t ' . 41 Increasing c o n s o l i d a t i o n 36A. Borcover, 'Bookings rise, but vacationers are cruising for bargains', Journal of Commerce and Commercial, 4 February 1992, p 5 B. 370p cit, Ref 1. 380p cit, Ref 3. 390p cit, Ref 20. 4°Op cit, Ref 3. 4~E. Blum, 'Carnival marks 20th year with a bright outlook', Travel Weekly, 19 March 1992, pp 1, 4.
460
On the other hand, the current wave of steep discounting could suggest a strategic move by the large operators to further dominate the industry, and to ensure their future profits and stability. In an industry that has high barriers to entry, driving out the competition now should make way for a less competitive operational environment in the future. The current wave of discounting could be part of that strategy, in an attempt to repeat the consolidation that has been seen in the US airline industry. Ms Pam Conover, a Vice President of Citibank in charge of cruise shipping, believes that 'by the year 2000, as few as three cruise lines
TOURISM
MANAGEMENT
December 1993
Analysis of the US cruise line industry
could dominate the North American market, with a combined share of over 90%'. 42 Financing for cruise lines is becoming increasingly scarce. In the past, most financing has come from export finance agencies of shipbuilding countries, many of whom are looking at subsidizing their shipbuilding industries. But, as interest rates have lowered, cruise ship companies have been looking elsewhere. However, as increased capital requirements are imposed by banks and as new international safety regulations seem set to put up the cost of ships, it will become much harder to raise money in the future. Conover noted that cruise lines' current tendency is to finance 90-100% of new ships with medium-term debt, which creates strain and instability within the industry. She points out that 'smaller older vessels are uncompetitive with superliners despite lower capital costs . . . given these economies, new [ship] buildings can only be absorbed by larger, established operators whose existing fleets generate sufficient operating cash flow to support investment in future returns'. 4~ Nevertheless, 1992 saw 12 new ships entering the cruise market. While some brand names are being withdrawn, several entirely new cruise lines have emerged - such as Majesty, Radisson (Diamond) and Seaquest. Currently they are only small, and it is questionable as to whether these companies can successfully position themselves clearly in a market niche and communicate this to travel agents and the market. But what it does show is that new competition is still entering the market.
Increasing regulation
42L. Myers, 'Cruise consolidation seen as finances dwindle', Journal of Commerce and Commercial, 19 March 1992, p 1 B. 431bid. 44E. Blum, 'Davidoff urges petition drive against cruise subsidy bill', Travel Weekly, 30 March 1992, pp 1, 2.
Cruise ship operations are governed by a variety of international laws, regulations and conventions. This creates several legal anomalies as ships are considered to be the property of foreign countries and therefore subject to foreign laws. However, the increasing predominance of 'foreign flagging', often in order to avoid stricter regulations in such areas as health and sanitation, insurance and working hours, has led the US government into making several regulation changes. For example, due to the number of complaints about sanitation on many cruise ships, the US government now subjects all cruise ships that dock in America to US health and sanitation regulations. The issue of foreign subsidy of ship construction has also become a political issue. In 1992, the US Congress considered a bill that would penalize cruise lines for ships that were built in foreign-subsidized yards. The American Society of Travel Agents (ASTA) believes that the proposed law would add $100-200 to the cost of a cruise and the result might be the offshore basing of cruise ships, 44 In the mid-1990s new international regulations will come into effect with regard to design and safety. Many of the older ships do not have modern safety equipment on board and some of the newer ships have designs, such as atriums, which were not considered in previous safety regulations. There will also be more attempts by individual governments to regulate the industry as it continues to grow and the legal anomalies of foreign flagging become more noticeable. It is expected that the US government will try to impose more regulations on those ships that dock in its ports in terms of issues such as health and safety regulations. In addition, as congestion at various destination ports grows, several ports may begin to regulate the size and number of cruise ships docking at any one time. It is likely that in the future there will be increasing attempts to regulate the operations of the industry. Conclusion In conclusion, given the amount of new capacity entering the market-
TOURISM MANAGEMENT December 1993
461
Analysis of the US cruise line indust O,
place within the next few years, it is likely that discounting will bec~mlc ~l feature of the cruise market in the near future. Given the number ot acquisitions and mergers that has already been seen in the industry, linked with spiralling costs and lower profit margins, further consolidation also seems likely. As with all markets there will be limits t~ expansion and it is unlikely that the industry can continue its pace of unparalleled growth for much longer. Yet, it must be acknowledged that there is a huge untapped market of potential cruisers. It is expected thal there will be continued but more modest growth as the industry heads towards the next century. Will the cruise line industry face the overcapacity nightmares many hoteliers are dealing with? It must be r e m e m b e r e d that the cruise line industry has one major advantage over the oversupply problems that its land-based sister industry is experiencing. Location is not fixed, and the capacity space can be moved elsewhere in the world, such as to Europe or Asia, if demand weakens from the US market.
462
TOURISM M A N A G E M E N T December 1993
J.S. Perry Hobson
The cruise line industry has been through a metamorphosis. From being a declining mode of travel in the 1960s, the cruise line industry turned the corner in the 1970s and became one of the fastest growing segments of the wider tourism industry during the 1980s. This paper examines the reasons behind this growth, the current structure of the US cruise industry and the issues facing the industry in the 1990s as it heads towards the next century.
J.S. Perry Hobson is a Lecturer in the Department of Hotel and Tourism Management at Hong Kong Polytechnic, Hung Horn, Kowloon, Hong Kong. Submitted August 1992; accepted January
For many years the cruise industry was seen to be a moribund segment of the tourism industry. Yet, more people are cruising today than during the supposed heyday years of the industry. While the US hotel industry is struggling to attain a 60% occupancy rate, the cruise line industry is operating with a 90% rate.~ However, the cruise line industry is facing numerous indigenous problems, such as foreign flagging and the exploitation of Third World labour. The industry could also be facing the same problems that are plaguing its land-based sister industry. The market is rapidly being segmented and a multitude of new capacity is entering the market. During the 1980s the industry added capacity at an average of 8.3% per annum, and is planning to add capacity at a rate of over 7.5% until 1995. Like the hotel industry, the cruise line industry may be in danger of being 'overbuilt'. This article examines the changes the US-based cruise line industry has been through, and the challenges it faces as it looks towards the next century.
1993
Metamorphosis of the cruise line industry
~C. Booth, 'Against the tide', Time, 17 February 1992, pp 54-56. 2R.C. Mill, Tourism - The International Business, Prentice Hall, New Jersey, 1990. 3Cruise Line Industry Association, The Cruise Industry: An Overview (marketing edition), CLIA, New York, 1992.
Just as the automobile led to a rapid decline in travel by train, the airline industry led to a rapid decline in the number of ocean liner passengers. In 1957 over 1 million people travelled across the Atlantic by sea. The following year more people crossed the Atlantic by plane than by ship. Between 1960 and 1975,0 ) p~ssenger departures from New York fell from 5 0 0 0 0 0 a y e a r to 50 (0. As ocean liner traffic declined many operators attempted to reposition their liners as cruise ships. Several new cruise ships were launched but most of these were moderate in size, carrying between 850 and 1200 passengers. Cruising was perceived to be the preserve of the exclusive and for the affluent. It became known fl)r appealing to the 'newly-weds" or the 'nearly-deads'. It was not until the mid-1970s that market positioning of cruises in North America began to change. As a result of the changes, the late 1970s - and then the 1980s - were decades of growth for the cruise line industry, and the market grew faster than any other major sector in the tourism industry. As the Cruise Lines International Association (CLIA) 3 data reveal (see Table 1), between 197{) and 1980 passenger numbers saw a 190% increase. During the 1980s the industry reported an annual average growth of 9.8% per annum. By 1990 the market had grown to 3.6 million passengers, an overall increase of 155% for the decade.
0261-5177/93/060453-10 © 1993 Butterworth-Heinemann Ltd
453
Anal.ysis ¢{/'the US cruise line induslrv Table 1. Number of passengers taking a cruise lasting more than two days. Year 1970 1980 1990 1992
Passengers 500 000 1.4 million 3.6 million 4.4 million (est.)
4R. Mclntosh and C. Goeldner, Tourism: Principles, Practices and Philosophies, 6th edn, Wiley, New York, 1990, p 100. SOp cit, Ref 3. 60p cit, Ref 1. 70p cit, Ref 4.
454
Factors behind tlte growth Behind this growth, a number of strategic and tactical marketing-related factors can be isolated. First, C L I A was formed in the early 197fls OUI o1" a need to develop an industry organization to develop and p r o m o t e the concept of cruising. C L I A exists to 'educate, train, promote and explain the value, desirability and profitability of the cruise product'. 4 ( ' I . I A information and statistics only represent cruise lines that market their ships in the USA and currently they represent 97% of the North American cruise market capacity. Second, the cruise lines began to work much closer with their mare channel of distribution: travel agencies. As travel agents book over 98'}',, of all cruises, they are the most vital channel of distribution for the cruise lines. C L I A and the cruise lines began to work more closely with their travel agency affiliates to promote cruises, and to expand thc overall size of the market. In 1972 there were only 7900 affiliated travel agencies; by 1991 this had grown to 19 952. 5 Selling a cruise package is generally more profitable for travel agents than other packages or even individual itineraries. When a cruise is booked, 85-90% of the total COSt of the trip is paid for through the travel agent, versus 40-45% for lhe typical land-based trip. (~ Thus cruises tend to generate higher average commissions for travel agencies than other comparable packages. The vast increase in the numbers of cruise passengers, the healthy commissions and the ease of booking the cruise package have now led some travel agencies to specialize in cruise-only business. So many travel agencies have turned to cruise-only business that the National Association of Cruise Only Agencies ( N A C O A ) was set up to provide promotional and m a n a g e m e n t assistance to its members. The third factor was the repositioning of the cruise product to new market segments and the changing perception of what cruises were all about. In 1974 Carnival Cruise Lines entered the market ahmg with their 'fun ship' concept and promotional strategy. This was a complete departure from the staid image that the established cruise lines were presenting, and was specifically designed to attract a new, younger (18-30) market segment. Other new market segments such as families with young children became targeted by companies such as Premier Cruise Lines. Premier position themselves as 'the official cruise line of Walt Disney World' and carry a host of Disney characters on board. These new approaches were also coupled with the exposure cruise ships received with the successful television series "The Love Boat'. This series gave the appearance of cruises representing the perfect vacation for the average American, not just those who are very affluent. Although difficult to measure, it is probable that this series did more for the image of the cruise industry than either 'tlotel" or 'Cheers" have done for the hospitality industry. Fourth, the industry changed how it packaged and offered its product. Cruise lines began to package and promote the cruise product with inclusive airline tickets. The development of the 'fly-cruise* product helped spur the ew)lution of the industry in several ways. To begin with, it lowered the cost to the consumer. Cruise lines were able to bulk purchase scheduled airline seats, or, as in the case of Carnival, start their own charter airline operation. This enabled the cruise lines to bc able to quote an inclusive package price to the consumer. This made comparable price promotions and booking considerations casier. It also allowed the cruise lines to reposition their ships and departure ports. By packaging the fly-cruise product it allowed the ships to be closer to their main sailing areas. This allowed for the length of the cruise time to be cut, and for the highly successful mini-cruise product (2-5 days" duration) to be developed. Fifth, recognizing that there were several untapped market segments TOURISM M A N A G E M E N T December 1993
Amdy~'is of/he US crui,se line indu.vtrv
such as families and singles, the industry not only segmented its markets but then targeted specific niches within these markets. As Showker s has observed, 'one of the strongest trends of the 1990s: [is] segmentation • . . almost all the cruise lines have a sharply defined product designed to fill a niche, a need or a special interest. The large established lines are also beginning to look like Detroit automakers, with new divisions and delineated products." Many of these cruises base their activities on a particular sport, hobby or subject. For example, Norwegian Cruise Lines offers a 'floating jazz festival' and Royal Viking Cruises offers p r o g r a m m e s through the School of Foreign Service of Georgetown University in Washington DC. '; Segmenting the cruise market
During the 1970s and 1980s it became apparent that the market for cruising could be segmented using a multitude of methods - demographic, psychographic, behaviouralistic or geographic. Currently there are 122 =° cruise ships serving North America. Therefore, it is difficult to give an overall picture of the current cruise product offered to the market, without undue detail about each ship or specifics about each market segment. It is simplest to use a basic social-class-structure market analysis ]~ to understand how the cruise ships are roughly positioned in terms of price and facilities to their markets. At its simplest, the market can be divided into four broad categories, ttowever, it should be noted that, within each of these broad categories, a market position may be taken by an entire cruise line, such as Premier, or by an individual ship, such as the Q E 2 , to specific markets, submarkets or niches. T h e m a s s m a r k e t : the market for these cruises tends to come from the lower-middle social class category. Companies that operate in this part of the market tend to have the larger (over 1200 passenger) ships, offer a totally organized itinerary and activities, a range of night clubs and tend to offer shorter cruises• Income of passengers tends to be in the $2(>39 000 range and the average daily cost per person is somewhere between $125 and $200 depending on factors such as length of cruise and type of cabin, • T h e m i d d l e m a r k e t : this aims to serve the upper-middle social class. As this is the largest part of the market there is considerable diversity here. A variety of sizes of ship is used to service this market, ranging from 500-2200 passengers. However, as a rule they tend to be the medium-sized ships, generally ranging from 75(>10()0 passengers. Income of passengers is usually in the $4(>59 0()0 range and the daily cost is about $200-350. • T h e l u x u r y m a r k e t : serves the lower-upper and upper-upper social class. The ships offer a high staff-to-passenger ratio, superior cabin appointments and more space for the passengers. The ships tend to be smaller in size, averaging around 700 passengers. Income of passengers tends to be in the $60 0()0+ range. The average daily cost starts at $350. • The specialty m a r k e t : this segment caters to the adventurer and to the very exclusive through smaller ships and large yachts. These ships normally average around 5(>150 passengers. This category covers ships that come equipped with dive experts and amphibious marine equipment, through to cruise lines that operate tall ships once owned by well-known people such as Aristotle Onassis. •
8K. Showker, 'Cruising into the nineties',
American Heritage, November 1990, p 91. 9'Cruising need not be mindless', Chicago Tribune, 5 April 1992, p 22, section 12. ~°Op cit, Ref 3. ~Louis E. Boone and D. Kurtz, Contemporary Marketing, Dryden Press, Hinsdale, IL, 1986, p 162. ~eOp cit, Ref 1.
Changes within the cruise market The effects of growth, the recognition of new markets and segmentation
TOURISM M A N A G E M E N T December 1993
455
Analysis of the US cruise line indu.strv Table 2. Changing age by sex of those having ever cruised compared with new cruisers (cruising for the first time between 1988 and 1990),
Age
Ever cruised a (%)
New cruiser b
33 29 38 100
43 32 25 100
29 30 39 100
41 43 16 100
(%)
Males: 25.-40 40-59 60+ Total
Females: 25-40 40-59 60+ Total
Note: Total numbers: amales - 41, females 59; bmales = 44, females - 56. Table 3. Average family income of cruisers, 1988-90, Income $20-39 999 $40-59 999 $60 000 +
Cruisers (%) 35 35 30
within the cruise industry has brought several notable changes to li~c market composition of those taking cruises.
The changing demographics of the cruise market There has been a dramatic shift in the demographics of those taking cruises. In 1985 the median age was 58, by 1991 it had dropped to just under 43.~2 Furthermore, more married couples are cruising. Betwcen 1988 and 1990 the percentage of married couples increased by 6% over the statistics for other past cruisers, and increasingly they are cruising with their children. Of those families with children, 6(1% of them brought their children with them on the trip. ~3 According to the 199(I C L I A National Market Profile Study, '4 the fastest growing passenger segment, for both males and females, is between the ages of 25 and 40. As can be seen in Table 2, the over 60s market has declined significantly in overall percentage terms. Cruising was once seen as the preserve of the affluent. This has now changed. As can be seen from Table 3, between 1988 and 199(I, 35% of those cruising had a family income of less than $411 000. A further 35% earned $40-59 999.
Changes within the cruise industry Not only have the demographics of the market changed but the industry has changed in order to meet the demands of the new market segmcnts that it is now targeting.
Size of ships Most of the traditional cruise ships built in the 1960s and 1970s were in the mid-size category, and they could hold between 75(1 and 1200 passengers. As the market segmented in the 1980s, an increasing number of both larger and smaller ships began to appear. For example, the Monarch of the Seas (positioned to the middle market segment) can currently accommodate 2300 passengers. At the other end of the scale there has also been development of the mini-cruise or ultra-yachts, which may have as few as 15 passengers. Estimates show that several American flag companies regularly operate mini-cruisers on the two coasts. 15
Activities and facilities
~30p cit, Ref 3. 140LIA, National Market Profile Study, CLIA, New York, 1990. ~sc. Gee, J. M a k e n s and D. Choy, The Travel Industry, Van Nostrand Reinhold,
Today's standard cruise ship offers a full range of facilities such as swimming pools, jacuzzis, workout rooms, casinos, golf ranges and night clubs. The quality of the facilities and the service vary and are tailored to the market segment they are serving. For example, Carnival's 'fun ships', which are targeted at the mass market segment, offer multiple-occupancy rooms, plenty of organized activities and games, slot-machine gambling, and a wide variety of night clubs. Others, of course, are more exclusive and targeted at the luxury market. For example, the Radisson Diamond, which was launched in 1992, is a smaller ship with 354 lowers (berths), and a passenger to staff ratio of virtually 2:1. The ship features a five-storey atrium with glass elevators and 177 luxury-class cabins, most with balcony. All the staterooms feature television and video-recorder, sitting area and full bathrooms. The ship comes equipped with the usual casino and golf facilities, as well as a hydraulic marina and helipad. It was recently completed at a cost of $125 million. For a seven-night cruise the cost is approximately $4200. '~
New York, 1989, p 226. ~S'Diamond is shaped in Finnish yard', Travel Weekly, 9 December 1991, p 12, section C.
456
Length of cruise The trend in North America during the 1980s was towards shorter T O U R I S M M A N A G E M E N T December 1993
Analysis of the US cruise line indu.stry Table 4. Length of cruise by market share and percentage change. Duration (days) 2-5 6-8 9-17 18+ Total
1980 (%) 24.3 59.1 15.4 1.2 100.0
1990 (%) 38.3 50.0 11.1 0.6 100.0
Change (%) + 140 - 9.1 -4.3 -0.6
vacations 17 and, as has already been noted, cruises have mirrored that trend. While there are more people actually cruising in all categories, the 2-5 day cruise has gained popularity and grown from having a 24.3% market share in 198(I, to having a 38.3% market share by 1990 (see Table 4).
Shift in embarkation ports In 1990 the five major US cruise ports were Miami, San Juan, Port Everglades (Fort Lauderdale), Port Canaveral and Los Angeles. However, there was a shift in traffic patterns during the 1980s. The traditional old port cities have seen their embarkation numbers eroded. For example, between 1982 and 1990 Seattle saw embarkations decline by 81%, San Francisco by 35% and New York by 19%. On the other hand, San Juan PR saw its embarkations grow by 603%, Port Everglades by 436%, New Orleans by 288%, Palm Beach by 278% and San Diego by 212%. Today Florida accounts for approximately 65% of all US embarkations, Puerto Rico for 13% of all embarkations and California for about 10%. I~ As has been stated, much of this has been due to the development of the fly-cruise product, which allowed ships to depart from ports closer to their sailing waters. As would be indicated by the location of the above-mentioned departure ports, the Caribbean continues to be the number one destination for North American cruise passengers. In 1991, the total Caribbean market, comprising the Caribbean, Bahamas and Eastern Mexico areas, accounted for a 56.6% share of capacity placement. Other leading areas attracting the US market were Western Mexico with 7.2%, Alaska 6.9%, the Mediterranean 6.8%, Trans Canal Cruises 3.8%, Europe 2.5%, Bermuda 3.5% and Hawaii 2.1°/,,. TM Cruise lines periodically reposition their ships around North America and the world as the seasons change, and often specialize in certain geographical areas. For example, Holland-America Cruise Lines specializes in Alaska cruises, American Hawaii Cruises specializes in cruises around the Hawaiian islands and Carnival specializes in the Caribbean.
Increasing concerns at the 'ports of call'
7D.C. Frechtling, 'Key issues in tourism futures', Tourism Management, Vol 8, No 2, 1987, p 107. ~80p cit, Ref 3.
191bid 2°D. Owens, 'Cruise craze crowds Bahamas, Caribbean Islands', Journal of Commerce and Commercial, 24 August 1989, p 3B.
2~lbid. 22'Some port fees go up', Chicago Tribune, 12 April 1992, p 17, section 12.
With the increase of cruise traffic in the Caribbean, many islands have seen substantial growth in tourism numbers. Howcver, due to the limited number of suitable deep-water ports that can reasonably be reached from the main US departure ports, pressure is being placed on several specific destinations. As one business and community leader on St Thomas in the US Virgin Islands stated, 'success is spoiling the very things that put the island on the cruise maps', z" This tiny island has become the busiest port of call in the Caribbean. Only 13 miles long by 2.5 miles wide, the island can host 7-80(10 cruise passengers on the busiest days of the winter season. The dock master is expecting 1.5 to 2 million per annum by the year 2000. Although passengers made up more than half of the island's visitors in 1988, they accounted for less than one-third of all tourist dollars. Furthermore, the money they spend is less likely to remain in the local economy as they tend to buy 'duty-free" goods or souvenirs. The massive influx of visitors causes traffic congestion in the town centre for several hours during the main part of the day. Some vocal residents and hoteliers "bclievc that the crowding is scaring away the island's bread and butter business', 2~ and arc activcly campaigning to stop further port developments. Other Caribbean island destinations havc recently raised their port taxes to the lcvels of their island hotel tax to help incrcase government revenues from cruise tourism. 22 Many of the northern ports of the upper Caribbean area are beginning to look carefully at the growing numbers
TOURISM MANAGEMENT December 1993
457
Analysis of the US cruise line industry
of cruise tourists, and are questioning whether this type of tourism is appropriate and sustainable. Many cruise companies already own their own small paradise islands developments, and in the future they may well be growing vertically by providing more of their own port and island developments.
The international issues within the industry
23M. Mentzer, 'Factors affecting cruise ship fares', Transportation Journal, Fall 1989, p 1. 240p cit, Ref 3. 25B. Nevins', 'Crews on luxurious cruise ships face tough working conditions', Journal of Commerce and Commercial, 14 July 1989, p 3 B. 261bid. 271bid. ZST. Rice, 'How Carnival stacks the decks', Fortune, 16 January 1989, pp 108-116. 29D. Lunberg, The Tourist Business, 6th edn, Van Nostrand Reinhold, New York, 1990.
458
The cruise line industry is truly an international industry. However, it should be noted that much of the capacity operating from the USA is foreign owned, and that the vast majority of US owned ships are foreign registered. As Mentzer 23 pointed out, 'cruise ship owners have begun to turn to "flags of convenience" to avoid health and safety inspections, high fees and maritime unions from high wage countries'. As a result, most ships operating from the USA are registered in one of the following five countries: Panama, Liberia, Bermuda, Cyprus and the Bahamas. Just as with the rest of the hospitality industry, service is integral to the product being offered. In a recent C L I A survey 24 being ' p a m p e r e d by the staff' was rated as the most important characteristic to describe a successful cruise vacation. Cruise ships are labour intensive and the costs can make up a substantial part of the operating expenses of a ship. However, the aforementioned countries often have no or few labour laws and restrictions, which means that cruise companies can employ crew at minimal costs and avoid labour laws in the USA. The industry has received much criticism for its labour policies and its hiring of cheap Third World labour. The crews depend on passenger tips for the majority of their income. Many cruise ships give passengers daily reminders of tipping and often suggest per day tipping rates. As Nevins 25 pointed out, 'crews on these ships often toll up to 100 hours per week, sometimes for less than $1 per hour . . . jobs for seamen on the deck, engine and catering sections of the ship usually provide no health insurance or other benefits'. As one Miami attorney who represents more than a hundred crewmen annually put it, 'they treat crewmen like an orange. They squeeze and squeeze until there is nothing left and then throw away the peel .26 During an investigation of cruise ships' working conditions it was found that 'crews work in noisy engine rooms without earplugs, clean sooty boilers without face masks, and operate machinery without goggles, according to court records'. 27 It was also found that crew m e m b e r s were housed up to ten in a cabin, bunking up to three deep in less than 100 square feet of space. On Carnival Cruise Lines the catering staff come from over 50 nations. The National Maritime Union ( N M U ) has accused Carnival of exploitation and overworking. However, the President of Carniwd believes that his cruise line is being singled out, as it is the biggest cruise line with all the ships carrying foreign flags. 'We are the e n e m y ' , he stated. He counters the accusations by pointing out that 'the fact is, we couldn't have the "fun ship" product if the crew wasn't happy'. 2s The company points out that the length of service records show that catering employees remain with the company for an average of eight years. As Lunberg 29 succinctly noted, 'the typical cruise ship sailing from an American port is owned and officered by northern Europeans, manned by southern Europeans, and filled with middle and upper-class Americans'. However, being a foreign-registered vessel does place restrictions on cruise routings. Thanks to cabotage restrictions, non-US ships may only e m b a r k and disembark passengers from one US port. Consequently, most cruises will start from a US port and then 'call' at the other ports. Many of the shorter two-day cruises will not actually call in at any ports, and are simply p r o m o t e d as 'cruises to nowhere'.
TOURISM
MANAGEMENT
December 1993
Analysis of the US cruise line industry
Increasing market consolidation and domination
3°A. Fins, 'Batten down the hatches and rev up the jacuzzis', Business Week, 19 August 1991, pp 88-89. 3~Op cit, Ref 28. 32'Carnival to buy Premier', Travel Weekly, 22 April 1991, pp 1, 2. 33'Carnival marks 20th year', Travel Weekly, 19 March 1992, pp 1, 4.
340p cit,
Ref 29.
35'Cunard parents denies report', Travel Weekly, 7 May 1992, p 4, section 1.
The late 1980s and early 1990s have been a time of consolidation in many segments of the tourism industry, and the cruise industry was not unaffected. By mid-1992, three major cruise line operators accounted for a 47% market share, and the top six for over 66%. Interestingly, many of the companies have extensive interests in the hotel industry, though there appears to be little operational cross-over between the two sectors. The largest and most aggressive operator is Carnival Cruise Lines (CCL) with approximately a 20% market share. CCL operates the nine larger Carnival 'fun ships' aimed at the younger mass market. As Business Week observed, Carnival has experienced its growth 'by tapping into the 25 to 39 year olds'. 3° Its success with this market can be seen in its 1987 figures when Carnival's load factor was reportedly 112%. 31 CCL also owns Windstar Sail Cruises, which operates three smaller exclusive sailing ships aimed at the more adventurous well-to-do specialty cruise market. CCL has acquired Holland America Line, which operates four mid-size ships aimed at the older up-market cruiser. In 1991, CCL tried to acquire Premier Cruise Lines, which operates three mid-size, middle-market ships, 32 but that acquisition fell through. Not to be deterred, in March 1992, CCL announced that it was taking an interest in the Seaborn Cruise Line, which operates two small luxury ships. 33 The company is quoted on the American Stock Exchange, though a controlling interest in CCL is held by the Israeli-based Arison family. The company also owns the Crystal Palace Resort and Casino in Nassau, Bahamas. As Lunberg 34 pointed out about the company, 'Ultimately, Arison hopes to have four brand names, segmenting the markets as has been done by Marriott, Holiday, and others among the hotel chains'. The second largest operator is privately owned by the Pritzker family of Chicago, who are also the owners of the Hyatt Hotels management group, with a 15% market share. They own Royal Caribbean Cruises, with a total of 10 larger ships, including the 2300 passenger Monarch o f the Seas. They also own the smaller Admiral Cruises with two mid-size ships. The third largest operator is P&O plc, a British shipping conglomerate, which owns the nine Princess Cruises ships (of 'Love Boat' notoriety) with a 12% market share. P&O has extensive shipping interests; it also owns a number of resort hotels, particularly in the Australian market. The fourth largest operator is now Kloster Cruise Ltd, once the largest cruise company. It is owned by Vard, a Norwegian company, and currently has a 9'/0 market share. The company owns Royal Cruise Lines, with three medium-sized ships, Norwegian Cruise Lines with six large ships and Royal Viking line currently with one medium-sized ship. They also own the Bahamian out-island, San Salvador, bought for $3.5 million in the early 1980s. The fifth largest operator is the privately owned Greek company Chandris with a 5.5% market share. The company is owned by two brothers who also have interests in hotels in Greece. The company recently formed Celebrity Cruises to add to its mass market Fantasy Cruises. They currently operate six ships. The sixth largest company is Cunard Line, owned by Trafalgar House pie, a British construction conglomerate, with a 5% market share. The company operates the only scheduled ocean liner, the QE2, as well as six other ships. The company has extensive resort and hotel interests, and owns amongst others the landmark Ritz Hotel in London. In April 1992, Trafalgar House plc announced that it would restructure and return to its core business, which is in construction. However, in May 1992 it was denied by the company that it was planning to divest itself of its cruise ship interests. ~5
TOURISM M A N A G E M E N T December 1993
459
Analysis of the US cruise line indust O,
Rough seas ahead? Overall, 1992 started off well for the cruise lille industry in comparison with other sectors of the tourism industry. During what is known as 'wave week' (usually the second week in January), Carniwd Cruise Lines saw a record 65 00(1 individual bookings. Royal Caribbean reported 60 000 bookings during the s a m e w e e k . 36 By the end of January total bookings for the two companies had reached an all-time high of 615 000. 37 C L I A 3x predicts that, by the year 2000, as many as 8 million passengers per year will be cruising. According to their research findings, taking a cruise is a ' d r e a m ' of nearly 60% of all adults with the highest interest being exhibited by the baby boomers. Yet only 5% of the US population has ever taken a cruise. The cruise industry offers some appealing features to US consumers. The main advantages can be summed up as convenience and ease. Cruises are easy to book, are offered with a virtually 'totally inclusive' package price and afford minimum effort and maximum relaxation. They also provide programmes for children, and the tourist can visit a number of foreign destinations with minimum inconvenience. Furthermore, the cruise product continues to diversify. New ship designs, themes and activities are reaching out to new market segments. With only 5°/,, of the US population having taken a cruise, there is huge market potential given the price-value relationship that the cruise companies can offer. Furthermore, a large percentage of repeat cruisers show high satisfaction with the experience. Looking into the future, C L I A predicts that, by 1995, the number of berths will rise to 120 000 from its current 89 000. In 1991 and 1992 alone, some 15 000 lowers have been added. Some analysts concur with C L I A and see the future being bright. Temple, Barker and Sloane, market consultants, stated that 'fatter marketing budgets, price discounts and expected growth of key cruising segments like the older affluent vacationer, could keep the industry growing at a 10-11% clip annually through the 19 9()s ' .~~v Other analysts have a different view of the future. Some see the overcapacity in the industry leading to discounting wars, which will force out the weaker cruise lines and ultimately lead to less competition. The beginning of 1992 did see a tremendous amount of discounting in the market-place for cruises. As Mr Fishkin of Cruise Line Inc. in Miami - one of the biggest cruise industry discounters - observed, 'there's a flood of bargains despite the demand for space . . . Carnival Cruise Lines is advertising prices ]that existed] back in 1982". ~ Discounting cruise space could suggest that demand is not keeping up with the excessive capacity that is entering the market. Rod McLeod, executive vice president of sales, marketing and passenger services for Royal Caribbean, citing an oversupply of berths in the market, said "that steep discounts in the [Caribbean] area would continue until supply and demand balance o u t ' . 41 Increasing c o n s o l i d a t i o n 36A. Borcover, 'Bookings rise, but vacationers are cruising for bargains', Journal of Commerce and Commercial, 4 February 1992, p 5 B. 370p cit, Ref 1. 380p cit, Ref 3. 390p cit, Ref 20. 4°Op cit, Ref 3. 4~E. Blum, 'Carnival marks 20th year with a bright outlook', Travel Weekly, 19 March 1992, pp 1, 4.
460
On the other hand, the current wave of steep discounting could suggest a strategic move by the large operators to further dominate the industry, and to ensure their future profits and stability. In an industry that has high barriers to entry, driving out the competition now should make way for a less competitive operational environment in the future. The current wave of discounting could be part of that strategy, in an attempt to repeat the consolidation that has been seen in the US airline industry. Ms Pam Conover, a Vice President of Citibank in charge of cruise shipping, believes that 'by the year 2000, as few as three cruise lines
TOURISM
MANAGEMENT
December 1993
Analysis of the US cruise line industry
could dominate the North American market, with a combined share of over 90%'. 42 Financing for cruise lines is becoming increasingly scarce. In the past, most financing has come from export finance agencies of shipbuilding countries, many of whom are looking at subsidizing their shipbuilding industries. But, as interest rates have lowered, cruise ship companies have been looking elsewhere. However, as increased capital requirements are imposed by banks and as new international safety regulations seem set to put up the cost of ships, it will become much harder to raise money in the future. Conover noted that cruise lines' current tendency is to finance 90-100% of new ships with medium-term debt, which creates strain and instability within the industry. She points out that 'smaller older vessels are uncompetitive with superliners despite lower capital costs . . . given these economies, new [ship] buildings can only be absorbed by larger, established operators whose existing fleets generate sufficient operating cash flow to support investment in future returns'. 4~ Nevertheless, 1992 saw 12 new ships entering the cruise market. While some brand names are being withdrawn, several entirely new cruise lines have emerged - such as Majesty, Radisson (Diamond) and Seaquest. Currently they are only small, and it is questionable as to whether these companies can successfully position themselves clearly in a market niche and communicate this to travel agents and the market. But what it does show is that new competition is still entering the market.
Increasing regulation
42L. Myers, 'Cruise consolidation seen as finances dwindle', Journal of Commerce and Commercial, 19 March 1992, p 1 B. 431bid. 44E. Blum, 'Davidoff urges petition drive against cruise subsidy bill', Travel Weekly, 30 March 1992, pp 1, 2.
Cruise ship operations are governed by a variety of international laws, regulations and conventions. This creates several legal anomalies as ships are considered to be the property of foreign countries and therefore subject to foreign laws. However, the increasing predominance of 'foreign flagging', often in order to avoid stricter regulations in such areas as health and sanitation, insurance and working hours, has led the US government into making several regulation changes. For example, due to the number of complaints about sanitation on many cruise ships, the US government now subjects all cruise ships that dock in America to US health and sanitation regulations. The issue of foreign subsidy of ship construction has also become a political issue. In 1992, the US Congress considered a bill that would penalize cruise lines for ships that were built in foreign-subsidized yards. The American Society of Travel Agents (ASTA) believes that the proposed law would add $100-200 to the cost of a cruise and the result might be the offshore basing of cruise ships, 44 In the mid-1990s new international regulations will come into effect with regard to design and safety. Many of the older ships do not have modern safety equipment on board and some of the newer ships have designs, such as atriums, which were not considered in previous safety regulations. There will also be more attempts by individual governments to regulate the industry as it continues to grow and the legal anomalies of foreign flagging become more noticeable. It is expected that the US government will try to impose more regulations on those ships that dock in its ports in terms of issues such as health and safety regulations. In addition, as congestion at various destination ports grows, several ports may begin to regulate the size and number of cruise ships docking at any one time. It is likely that in the future there will be increasing attempts to regulate the operations of the industry. Conclusion In conclusion, given the amount of new capacity entering the market-
TOURISM MANAGEMENT December 1993
461
Analysis of the US cruise line indust O,
place within the next few years, it is likely that discounting will bec~mlc ~l feature of the cruise market in the near future. Given the number ot acquisitions and mergers that has already been seen in the industry, linked with spiralling costs and lower profit margins, further consolidation also seems likely. As with all markets there will be limits t~ expansion and it is unlikely that the industry can continue its pace of unparalleled growth for much longer. Yet, it must be acknowledged that there is a huge untapped market of potential cruisers. It is expected thal there will be continued but more modest growth as the industry heads towards the next century. Will the cruise line industry face the overcapacity nightmares many hoteliers are dealing with? It must be r e m e m b e r e d that the cruise line industry has one major advantage over the oversupply problems that its land-based sister industry is experiencing. Location is not fixed, and the capacity space can be moved elsewhere in the world, such as to Europe or Asia, if demand weakens from the US market.
462
TOURISM M A N A G E M E N T December 1993