Opinion: Cruises face a choppy voyage back to profitability

May 28, 2021

OPINION:

Cruising is back. Last week, enthusiastic travellers flocked aboard the UK’s first post-Covid cruise, and the US Congress passed a law that will allow Alaska journeys to resume in late July.

The three big listed cruise companies — Carnival, Royal Caribbean and Norwegian — are reporting strong early bookings for 2022 despite limited advertising, and surveys suggest that three-quarters of “cruisers”, as regulars are known, plan to go to sea again in the next few years.

The news comes as a relief after desperate passengers quarantined aboard the Diamond Princess became an early symbol of the pandemic, and all three groups were forced to let crews go and take on massive new debt piles to stay solvent.

The sector has been one of tourism’s big success stories, especially in the US. Until last year’s shutdown, passenger numbers had grown more than 5 per cent annually for three decades to a record 29.7m travellers, half of them North American, in 2019. Four companies (including the privately held MSC) control more than 80 per cent of berths and post margins of 25 to 30 per cent.

The industry has bounced back before, from recessions and the 2012 sinking of the Costa Concordia, which killed 32 people. “It’s important to remember the resilience of Americans and travel. We have short memories and people want to go on vacation. If you were a cruiser, you are going to be a cruiser again someday,” says Pete Trombetta, senior analyst at Moody’s.

But recovery will be particularly choppy this time. After more than a year of near total shutdown, companies will need months to retrain and vaccinate crews and reactivate ships. New health guidelines will limit capacity and constrain routes, at least temporarily. And restrictions on international travel will make it harder for those crucial North American customers to take cruises that start in other countries.

Last week’s maiden voyage by the MSC Virtuosa from Southampton called only at one other British port and was limited by government rules to 1,000 UK residents even though the ship can hold more than 6,000. Though the EU plans to welcome vaccinated travellers, countries such as Canada and the Seychelles have banned cruise ships until at least next year.

These constraints will hit profits for an industry with high fixed costs and make it harder to attract new customers. Historically, one in three passengers has been a first timer, and cruise lines have ordered more than 100 new ships that will launch in the next five years.

Demographic changes also pose hurdles. Despite efforts to attract more young people with more adventurous activities, 51 per cent of 2019 passengers were at least 50 years old, slightly more than four years earlier.

Younger potential customers are twice as likely to worry about the environmental impact of their purchases, a McKinsey survey found. That’s a problem for an industry that relies on high-sulphur fuel and has been repeatedly fined for pollution. Though many ships have installed scrubbers to clean their exhaust, most discharge acidic waste water full of hydrocarbons, which is particularly problematic in popular ports.

The cruise lines say they are trying to improve. Carnival recently launched two ships that use liquefied natural gas, Norwegian is boosting fuel efficiency and 14 ports worldwide now offer plug-in power, allowing docked ships to turn off their engines. The companies also scrapped 22 ships last year, nearly 6 per cent of capacity, including some of the oldest and dirtiest vessels.

The pandemic pause has also created a rare opportunity to change the sector’s economics. Right now, most passengers rely on travel agents to help them sort through the myriad choices of ships, itineraries and staterooms. Morgan Stanley estimates that commissions consume 15 per cent of revenue.

While regulars tend to book well ahead, cruise lines offer discounted last-minute sales to fill up ships. The later the booking, the smaller the opportunity to tailor the passenger’s journey and sell onboard extras such as drinks packages and shore excursions. Poorly advised first-time customers may end up on a cruise that is not a good fit and be permanently put off.

With reduced capacity and pent-up demand in the short term, cruise lines won’t have to discount as much and can revamp their online sites to cut out the middlemen, charge more and improve passenger experience all at the same time. “This is the chance for the category to rebuild demand in a new way,” says McKinsey partner Bo Finneman.

If that happens, cruising won’t just be back but will be better than ever.

Written by: Brooke Masters

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