The Cruise Industry

Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

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1. Emergence of the Cruise Industry

From the mid-19th century liner services supported long distance passenger transportation between continents, particularly between Europe and North America. The need to accommodate a large number of passengers of different socioeconomic status for at least a week led to the emergence of specific ship designs radically different from cargo ships where speed and comfort (at least for the elite) were paramount. The emergence of the cruise industry can be traced to the demise of the ocean liner in the 1960s as it was replaced by fast jet services for which it could not compete. The last liners became the first cruise ships as it took more than a decade to see the complete demise of liner services with the final realization that long distance travel was now to be assumed by air transport and also considering the 30 years lifespan of a liner. The availability of a fleet of liners which utility was no longer commercially justifiable incited their reconversion to form the first fleet of cruise ships.

For instance, one of the last purposely designed liners, the SS France, operating between 1961 and 1974, was mainly used for the conventional transatlantic service between Le Havre and New York. With rising oil prices and more efficient jet liners, including the 747 (introduced in 1970), the liner was no longer able to effectively compete over the transatlantic route. While a jet plane could link Paris or London to New York in about 8 hours, it took about 4 days for a liner to cross the Atlantic, excluding a train segment between London and Southampton (or Paris and Le Havre). Considering one round trip per day, a 747 could carry about 3,200 passengers across the Atlantic in the time it took the SS France to carry 2,000 passengers on a single journey. Unable to generate enough revenue to justify its operating costs the SS France was mothballed in 1974 and purchased by the Norwegian Cruise Line (renamed the SS Norway). Its final commercial years between 1980 and 2003 were spent as a cruise ship. However, liners were not particularly suitable to the requirements of the emerging cruise industry. For instance, since many liners were designed to operate on the North Atlantic throughout the year for scheduled passenger services, their outdoor amenities such as boardwalks and swimming pools were limited. Additionally, they were built for speed (which was their trademark) with the related high levels of fuel consumption.

The modern cruise industry began in the late 1960s and early 1970s with the founding of Norwegian Cruise Line (1966), Royal Caribbean International (1968) and Carnival Cruise Lines (1972), which have remained the largest cruise lines. The early goal of the cruise industry was to develop a mass market since cruising was until then an activity for the elite. A way to achieve this was through economies of scale as larger ships are able to accommodate more customers as well as creating additional opportunities for onboard sources of revenue. The first dedicated cruise ships began to appear in the 1970s and could carry about 1,000 passengers. By the 1980s, economies of scale were further expanded with cruise ships that could carry more than 2,000 passengers. The current large cruise ships have a capacity of about 6,000 passengers. The market for the cruise industry was by then established and recognized as a full-fledged touristic alternative directly competing with well-known resorts areas such as Las Vegas or Orlando.

2. Market Dynamics

The global cruise industry carried about 19.1 million passengers in 2011, up from 7.2 million in 2000. The global growth rate of the cruise industry has been enduring and stable, at around 7% per year in spite of economic cycles of growth and recession. For instance, the financial crisis of 2008-2009 has not impacted the demand for cruises. This underlines that the industry has been so far fundamentally supply based; the ships are built and the customers are found to fill them through various marketing and discounting strategies. The possibility for cruise ship operators to successfully follow a supply push strategy makes the cruise industry quite different from other shipping markets, such as container shipping. Hence, in most shipping markets the shipping activity is a clear derived activity of trade and demand is rather price inelastic. As mentioned earlier, demand in the cruise business is ‘created’ through pricing and branding/marketing. Cruise operators are challenged to develop competitive cruise packages which involve a high-quality stay onboard, an array of shore-based activities offering access to a variety of cultures and sites and easy transfers to/from the vessel.

The construction of cruise ships tends to take place in cycles where several ships are ordered and enter the market within a short time frame. Since the cruise industry is a relatively small segment of the touristic sector, it has so far been very successful at finding customers to fill a greater number of ever larger ships. The cruise product has become diversified to attract new customers and to respond to the preferences of a wide array of customer groups. In view of fulfilling the desires of its guests, the cruise industry has innovated through the development of new destinations, new ship designs, new and diverse onboard amenities, facilities and services, plus wide-ranging shore side activities. Most cruise ship operators work around specific cruise themes and voyage lengths can vary to meet the changing vacation patterns of customers. Its highest level of market penetration is in North America with about 3% of the population taking a cruise each year. This includes people who may take more than one cruise in a year so actual figures are actually lower.

The market drivers of the cruise industry are similar to those that have fostered the growth of tourism after World War II, particularly the rising affluence of the global population and the growing popularity of exotic and resort destinations. The general aging of the population is also a factor in favor of cruise shipping as the main market remains older adults, albeit customers are getting significantly younger. While in 1995 the average age of a cruiser was about 65 years, this figure dropped to 45 years by 2006. What is novel with cruising is that the ship represents in itself the destination, essentially acting as a floating hotel (or a theme park) with all the related facilities (bars, restaurants, theaters, casinos, swimming pools, etc.). This permitted cruise lines to develop a captive market within their ships as well as for shore-based activities (e.g. excursions or facilities entirely owned by subdiaries of the cruise line).

Some cruise operators go very far in developing new entertainment concepts on board of their vessels, including surf pools, planetariums, on-deck LED movie screens, golf simulators, water parks, demonstration kitchens, multi-room villas with private pools and in-suite Jacuzzis, ice-skating rinks, rock-climbing walls, bungee trampolines and other. Onboard services account between 20 and 30% of the total cruise line revenues. The average customer spends about $1,700 for their cruise, including ship and off-ship expenses for goods and services. The majority of these expenses are captured within the cruise ship as passengers spend on average $100 per port of call. The Caribbean has been the dominant deployment market of the cruise industry since its inception, but the Mediterranean cruise market has grown substantially in recent years. Both markets offer a variety of cultures in close proximity and are thus ideality suited. Furthermore, strong niche markets have developed focusing on, for instance, history (Hanseatic cities in northern Europe) or natural amenities (Alaska).

The cruise industry has a very high level of ownership concentration, since the four largest cruise shipping companies account for 96% of the market (Carnival Lines, Royal Caribbean, Norwegian Cruise Line and MSC Cruises). High levels of horizontal integration are also observed since most cruise companies have acquired parent companies but kept their individual names for the purpose of product differentiation. For instance, Royal Caribbean Cruises, which is the world's second largest cruise company behind Carnival Lines, accounts for 24% of the global market serviced under 6 different brands such as Celebrity Cruises (which caters to a higher end customers) and Azamara Club Cruises (smaller ships servicing more exotic destinations with shore stay options). Cruise shipping is increasingly capital intensive as each new cruise ship class comes with better amenities. A ship of the latest Oasis class, which is able to carry more than 6,000 passengers, costs about 1.2 billion dollars and can take 4 years to be delivered. Larger ships command higher booking prices since they offer more amenities, but current trends indicate that the cruise industry has no ships larger than the Oasis class in its order books. Optimal economies of scale may have been reached.

3. Networks and Ports of Call

The cruise industry sells itineraries, not destinations, implying a greater flexibility in the selection of ports of call. The selection of an itinerary is the outcome of several commercial considerations including potential revenue generation, distance between ports of call (cruise ships can cover 200 nautical miles per night), brand positioning (exotic ports of call for premium services), guest satisfaction (customer oriented industry), economic trends and market research such as evaluating changes in disposable incomes and the demographics of the customer base. Three main types of itineraries can be found:

• Perennial. The region covered by the itinerary is serviced throughout the year as the demand remains resilient, which is associated with stable (subtropical) weather conditions as well as stable itineraries. There may be significant seasonal variations in the number of ships deployed but the market remains serviced throughout the year. The Caribbean is the foremost perennial cruise market (summer low season), but the Mediterranean is also serviced year-round with a winter low season.
• Seasonal. Weather is the dominant factor explaining seasonality, implying that some regions have a market potential only during a specific period or season. This is particularly the case for Baltic, Norwegian, Alaskan and New England cruises that are serviced during summer months. Inversely, South American and Australian itineraries are serviced during the winter months.
• Repositioning. Because of the seasonality of the cruise industry the repositioning of ships between seasons is required. Cruise companies are increasingly using this opportunity to offer customers lower costs cruises for the inconvenience of having to book air travel arrangements for the return trip since the beginning and ending ports of call are not the same. This mainly takes place across the Atlantic as ships move from the winter Caribbean peak season to the summer Mediterranean peak season (and vice-versa). The beginning and the end of the Alaska season are also combined with a Hawaiian cruise as ships get repositioned. Barcelona and Dubai are emerging repositioning hubs since the Mediterranean and the Indian Ocean are growing faster than the conventional Caribbean market.

Cruise ships tend to have a low draft since they do not carry cargo; they are more volume than weight. This confers the advantage of being able to access a large number of ports and therefore multiplying itinerary options since the setting of a pure cruise port leans on criteria that are different from commercial ports. Cruise ports tend to be located close to either city centers (cultural and commercial amenities) or to natural amenities (e.g. a protected beach). These sites do not have on average very deep drafts and dredging would be socially or environmentally unacceptable. For instance, ships of the Oasis class, which as of 2011 accounted for the largest cruise ship class, have a draft of 31 feet. Comparatively, a containership of 2,500 TEUs requires a draft of 33 feet, while a sovereign class containership of 8,400 TEUs requires a draft of 46 feet. Draft issues that have plagued container ports are a much more marginal constraint for cruise shipping. Additionally, cruise ships have the option to anchor and use tendering services.

Ships are constantly moving between ports of call and shore leaves are of low duration; 4.3 hours on average in the Caribbean. A standard cruise itinerary is a loop beginning and ending at a hub port (also called a turn port) and typically lasting 7 days with 3 to 5 ports of call depending on their respective proximity. Cruises of 10 to 21 days are also offered but they tend to have lower profit margins as customers are inclined to spend less as the cruise progresses. For most customers, a cruise involves two travel segments, the first being air travel to the hub port (with a return trip) and the second is the cruise itself. It is therefore important that the hub port is serviced by a well-connected airport, with significant airlift capacity and which represents in itself a touristic destination. This is the case for Miami, Fort Lauderdale and San Juan that are respectively well connected airports and act as hub ports for Caribbean itineraries. Barcelona and Civitavecchia (near Rome) are major hub ports for the Mediterranean which are well serviced by air transportation. Poorly connected airports are commonly associated with higher airfares, which impair the competitiveness of the city for mass tourism.

Cruise ports come into three main categories depending of the role they serve within their regions. They can be a destination port where there are few, if any, excursions taking place outside the port area, a gateway port that mostly serves as a point of embarkment or a balanced port offering a combination of port area amenities as well as inland excursions. Each of these categories implies different development strategies to service the market.

There has been a growing number of hub ports where passengers in whole and in part can begin or end their journey, so the future of the cruise industry main include more itineraries that are partially undertook by passengers. An emerging trend, where possible, has been the setting of dedicated facilities where the cruise shipping company is directly involved in the development of the cruise terminal as well as co-located amenities. In some instances, private ports of call reserved exclusively for a cruise company have been developed, such as Labadee (Royal Caribbean) in Haiti, Coco Cay (Royal Caribbean), Half Moon Cay (Holland), Castaway Cay (Disney), Princess Cay (Princess) and Great Stirrup Cay (Norwegian) in the Bahamas. These private facilities are all within one cruise day from the home ports of Florida, offering the option of short 3-4 days cruises to a quiet and safe destination. The cruise industry is expanding to provide more options for passengers, particularly for niche markets where higher prices can be commended than in the competitive mass markets of the Caribbean and the Mediterranean. For instance, cruises are set up for the Antarctic, the Hudson Bay and the South Pacific.

4. Emerging Capacity Constraints?

The cruise industry has emerged to become a significant niche to the global tourism industry. The selection of ports of call and itineraries are carefully pondered to maximize the commercial potential and utilization of the ship assets. From a market perspective, the cruise industry has the following unique characteristics usually not found in other segments of the tourism industry:

• Supply push strategy of cruise operators as they aim at ‘creating’ demand simply by providing new capacity (ships) and finding customers to fill them.
• Offer itineraries where the whole is essentially greater than the sums of its parts. Specific regional and cultural experiences can be offered through a combination of sailing time and choice of ports of call.
• Expand and capture revenue streams by offering on board goods and services as well as shore-based excursions.
• Adapt to seasonal and fundamental changes in the demand by repositioning their ships (seasonal) and changing the configuration of their port calls (fundamental). One significant change concerns the rise in fuel prices, which account for 15% of the operational expenses. For instance, Cunard announced in 2012 that it will lengthen the crossing time of its transatlantic cruise by one day, from seven to eight days.

Since the cruise industry appears fundamentally to be driven by supply, it is likely that supply saturation, as opposed to demand saturation, will constrain future developments and impose a maturity on an industry that has continued to grow rapidly. While large hub ports have the capacity to accommodate additional port calls, it is the smaller ‘exotic’ or ‘must see’ ports that cruisers are seeking to visit that present challenges for additional capacity. Berth availability and the capacity of small communities to accommodate large tourist influxes of short duration has become a salient issue. This is likely to incite the additional involvement of the cruise industry in terminal operations, a trend that has already taken place with the setting of private port / resort areas. The next step will involve the development of new cruise terminals co-located with service amenities such hotels, attractions, condominiums and shopping malls. Paradoxically, a similar trend was observed in container shipping in recent decades as several shipping lines became, through parent companies, terminal operators. While a further fragmentation of itineraries is likely to take place, a closer integration between the cruise port and the cruise shipping industry is to be expected.