For the past decade cruise lines have been ordering dozens of new vessels with many lines taking deliveries of multiple ships within a single year. Unfortunately, high gasoline prices and a slumping economy have put a damper on leisure travel and the timing couldn’t be worse for the cruise lines. With 35 vessels on order over the next four years at a total cost of 22 billion some cruise lines are cutting back their fleets, laying off employees, and holding off from ordering new ships.
With all the economic uncertainty most cruise lines are cutting the biggest expense of all — new ships. All of the new ships coming on line within the next few years were ordered several years ago when the dollar had a favorable exchange rate.
Carnival Corporation chairman Micky Arison says soaring fuel and steel costs combined with a weak dollar have made it virtually impossible to put together a new ship building project past 2012 for any of Carnival Corporation’s North American brands: Carnival Cruise Lines, Princess, and Holland America Line.
“We have not put one together for over a year,” Arison said during last month’s press conference for the launch of Carnival’s newest ship, Carnival Splendor.
Cruise lines price the cost of building their ships by the number of berths (or beds) onboard. For example, Carnival Splendor cost Carnival Corp. $640 million or $212,000 for the 3006 berths. Arison says Carnival looked at the current cost per berth for ships and concluded that if they ordered now, they would not meet their return requirement. He noted that with better conditions the company’s next orders would undoubtedly have been in place by now.
On the other hand, Carnival’s biggest competitor, Royal Caribbean International, has remained more bullish when it comes to new ship orders. The company, which encompasses Royal Caribbean, Celebrity Cruises and Azamara, has placed orders for the largest and most innovative ships ever to be constructed. Not surprisingly, they are the most expensive.
When the first Genesis-class ship, Oasis of the Seas, launches next year it will have cost the company $1.65 billion and will top the scales at 220,000 tons and will carry 5,400 passengers. Oasis will dwarf the line’s Freedom-class vessels that are currently the world’s largest. Royal Caribbean estimated the cost per berth of the Genesis-class ships to be $260,000. Contrast this with the upcoming 122,000-ton, 2850-passenger Celebrity Solstice at $320,000 per berth and the expense is huge. It’s so big that Carnival’s Arison noted in an interview with British cruise publication Lloyd’s List that those high per-berth figures imply that the projected return is likely to be below the cost of debt.
Indeed, Royal Caribbean’s lavish spending habits in the wake of high oil prices and continued weak cruise pricing have made the company rethink its business plan to focus more on controlling costs. Two weeks ago, the company laid off 400 workers that included many high level executives a number whom had decades of service with the company.
Norwegian Cruise Line is the only cruise line to be in the red. The company lost $257 million in 2007 and has reduced its fleet size along with laying off hundreds employees. But the company received a billion dollar infusion when Apollo Management invested in a 50 percent stake of the company.
Tweaking the product
The cruise lines’ tightening of the cruise coffers won’t affect the consumer too much in the short term; it just means getting used to seeing less new ships launched after 2012. Still, most cruise lines are trying to keep their current fleet fresh and full of new on-board offerings. Arison said that instead of the line investing in over-ambitious newbuilds it’s opted to invest $250 million in refurbishing its eight Fantasy-class ships.
What cruise executives are betting big on is their core belief that cruises offer more bang for the traveler’s buck. “Current fuel prices and the economy are actually attracting new travelers that never seriously considered a cruise vacation because of the overall value and total costs of alternative vacations,” says Stewart Chiron, a cruise industry expert who is nationally recognized as .
On top of that more cruise lines are offering more home ports in North America. By doing this the ships are taken nearer to the passengers, eliminating the need to fly – a big cost savings for cruisers.
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