Testing Times

Throughout 2008 and early 2009, the worsening state of the world’s economy has resulted in a bleak outlook for many industries, but in spite of grim predictions for tourism and leisure businesses, the cruise industry has remained upbeat about its prospects over the next 12 months.

In June 2008, a report by the Passenger Shipping Association (PSA) predicted that customer numbers will top 20 million by 2011, rising to 30 million by 2020, even allowing for a slowdown in growth. In January, the Cruise Lines International Association (CLIA) suggested that, despite the uncertain environment, the industry is ‘well-positioned for challenging times’, with 14 new vessels set to join the fleet this year at an estimated cost of $4.8bn.

In the last ten years, cruising has become one of the fastest growing segments of the tourism industry, and many believe its reputation as a value-for money holiday option will help protect it against the effects of recession. However, with consumers increasingly cautious about spending, others consider these expectations too optimistic. With the International Monetary Fund (IMF) warning that global economic growth is set to fall to just 0.5% this year, the lowest rate since the Second World War, can the industry really be immune to the downturn?

David Dingle, chairman of the European Cruise Council and CEO of Carnival UK, thinks there will be a hit on business this year, with a noticeable reduction in yields already becoming apparent.

“Clearly, the economic conditions are exerting some downward pressure,” he says. “However, I think there is a difference between the immediate and long term. There is a slowdown in yield compared with 2008, and Carnival is seeing a reduction of between 6% and 10%. However, in the short term, we have been blessed with lower fuel prices, which have helped to maintain profitability.”

Likewise, Royal Caribbean has said that it experienced a ‘substantial downturn’ in bookings in September, resulting in a net yield decline of 5.9% for the fourth quarter of 2008. In a statement released in January this year, the company’s chairman and chief operating officer, Richard D Fain, described the period as ‘an extremely difficult operating environment’.

Despite this decrease in bookings, Dingle believes that bigger operators at least will continue to post healthy profits this year. “The large cruise corporations will still return a good profit for 2009, albeit a little below 2008,” he says.

Previous downturns

John Zamora, global cruise sector leader at Deloitte, thinks that while operators will undoubtedly feel the effects of the harsh climate this year, they could have a better experience than other areas of tourism and hospitality. “The cruise sector is not recession-proof, however, the health of the industry is strong, particularly given the value that consumers receive for their dollar,” he says. Furthermore, cruising has already shown its strength in challenging circumstances. “If you look at the post-911 period, it held up pretty well. In 2002, the industry grew by 4%, even in a downturn. As it emerged, the global cruise sector went on to grow by 15% the following year.”

Dingle agrees. “The industry seemed to come through quite well in 2001,” he says. “In the recession of the early 1990s, it also pulled up well. This is an unusual industry, and new ships are committed to well in advance, so they have to come into service whether we like it or not. When there is a mild recession, we pull back on ordering ships, and demand outstrips supply. This means large corporations build a lot of resilience, so that when the economic climate goes the other way, we are strong enough to withstand it.”

It is also widely believed that the Industry’s reputation for good value gives it an advantage over other hospitality and tourism businesses, particularly with consumer confidence at what seems like an all-time low.

“In any economic situation, value for money is terribly important,” says Carol Marlow, president and managing director of Cunard. “When you look at comparisons such as accommodation on land versus that on a cruise ship, I have yet to find an instance where the latter does not offer better value. It holds a good position in a recession, just as it does in a boom time.”

Booking trends

Historically, most cruises have been booked between five and seven months in advance, but according to CLIA research, one noticeable trend of the economic downturn has been a tendency amongst passengers to defer commitment until much closer to the sailing date. “Most bookings take place during this period, and cruise operators are responding with offers, promotions, special prices and credits,” says Zamora. “While the economy is in a slump, we will continue to see this happening.”

It is the industry’s rapid period of growth to date that allows it to offer its customers low prices, according to Dingle. “Over many years, the regular growth in the industry’s capacity has meant that we have enjoyed economies of scale in two ways,” he explains. “Firstly, the businesses got bigger, with promotions and more efficient overhead expenditure. Secondly, the ships themselves became larger and more cost-efficient to operate. As a result, we were able, where necessary, to be more competitive in terms of price, resulting in greater value for money.”

It is also better to discount sooner rather than later, adds Dingle. “At this time of year, we are working hard to maintain a booking curve, so we put the offers out now. It is better to give low prices at this stage rather than getting to a late booking period when we could find we need to reduce prices even harder,” he says.

With customers increasingly cautious about spending, Dingle also thinks cruise companies have a further advantage in terms of stability and reliability of pricing. “Our prices have very high levels of inclusivity,” he says. “When a passenger pays for their ticket in sterling or dollars, they have locked in virtually all of their holiday spend. There is less exposure to fluctuation in foreign currency and more predictability as to the true cost of the holiday.”

Furthermore, Cunard believe its customers are reluctant to give up cruising, in spite of the downturn. “People want their holidays,” says Marlow. “The good thing about a cruise is that it is bought in your own currency, unlike a land holiday, so if the euro moves against you, it doesn’t matter because everything is catered for.”

Looking forward

A recent tourism, hospitality and leisure outlook by Deloitte indicates that the sector as a whole will be under considerable duress throughout 2009, and it will be the businesses that use innovative and cost effective initiatives to increase customer loyalty and drive demand which are likely to emerge unscathed. “Operators need to be very focused on incentives,” says Zamora. “If they do this well, we will see people getting onto new ships, with the older ships able to reduce their prices.”

With some of the largest vessels ever seen due for launch this year, operators will certainly be hoping this is the case. Indeed, Royal Caribbean reported in January that early booking indications were encouraging, although the company is still predicting a weak revenue outlook for the year, with net yields down between 9% and 13%.

“The situation is a strong stimulus to get our cost base as efficient as possible,” says

Dingle. “However, we continue to have the demographic on our side. The growing part of the global population is in the age group that tends to go on cruises, and these people are often more affluent.”

CLIA statistics show that from 1980 to the present, the industry in North America grew by an average of 7.4% each year.

The cruise industry is keen to build upon this trend, but with the current economic climate described as the worst in 60 years, the true cost of the recession will only become apparent with time.