More May Be Too Much : Rapid Growth Could Spell Rough Waters for Cruise Industry

Something might have to be done about the berth rate.

That’s because so many bottles of champagne are being hurled at the bows of new cruise ships, sending them sliding down the ways. And, while cruising out of American ports is booming, there is a danger that before long there might be more liners than passengers to fill them.

It is a trend that will probably result in cheaper cruises for vacationers, but it could spell doom for some cruise companies.

“Overall, the cruise industry is expanding too fast,” said Oivind Mathisen, editor and publisher of Cruise Industry News, a newsletter published in New York. “But those companies which have the marketing muscle and market support are likely to succeed, while the weaker lines--those not strong financially who don’t have a clear marketing focus--may experience some rough seas ahead.”

Cruise line operators deny that there are any real danger signals. They say public demand for cruises will continue to keep pace with capacity and that no real glut will develop.

Einar Kloster, chairman of Miami-based Kloster Cruise Ltd., owner of Norwegian Cruise Line and Royal Viking Line and a subsidiary of a Norwegian holding company, said, “As (ship) operators, we would not be very intelligent if we closed our eyes and said there will never be an overcapacity. But we still see a steady growth in the market. This industry is capacity-driven. Every time a new ship comes on, the base is widened.”

Others tend to agree.

“So far, the rate of building has been pretty much in sync with the demand growth,” said James G. Godsman, president of the Cruise Lines International Assn., a trade group representing 33 cruise lines serving North America. “Any time you have a period of building, you are going to have periods where you are going to have a little bit of excess supply, and there are going to be periods when you will have a little bit of undersupply. Right now, there is a little bit of excess.”

But, for now, the figures look good for the industry. The association says 3 million passengers took cruises from American ports in 1987 and 3.5 million more are expected this year.

Tim Harris, president of Los Angeles-based Princess Cruises, noted that “in any business, from time to time there develops an imbalance between demand and supply. Whether there is a short-term imbalance (in the cruise business) will be determined by the economy.”

But Princess seemingly has faith that more good times for the industry lie ahead. It is negotiating with a foreign shipyard for construction of a ship similar to its Royal Princess for delivery in 1991.

Other lines are also moving quickly to increase capacity: Before the end of this year, a dozen new ships for the American cruise market will have entered service. Eight more new ships are to begin cruising next year, and there will be 10 more in 1990 and four more in 1991. The 1988 newcomers include Royal Caribbean Cruise Lines’ Sovereign of the Seas, which went into service in January and carries more cruise passengers than any ship in history: 2,250.

In times of emergency, of course, passenger ships can be modified to carry much greater numbers. According to the book “The Great Liners” by Melvin Maddocks, the greatest number of people embarked on one vessel was the 16,683 soldiers that the famed Queen Mary carried on one World War II voyage from New York to Scotland in July, 1943. The liner’s normal passenger capacity was 1,904.

The Sovereign might not hold its cruise passenger capacity record for long. Among ships in the planning stages is one called the Ultimate Dream, which would carry 3,000 passengers. Another, the Phoenix, would be able to accommodate 5,000.

40 New Ships

The shipbuilding frenzy has been going on for some time.

According to Cruise Lines International Assn., the decade ending in 1989 will be “the most prolific in a generation” for shipbuilding, and 1988 will be the decade’s busiest year. Forty new ships will have made their debuts in the 1980-89 period, according to CLIA.

Almost all of the major cruise lines have either just taken delivery or are expecting one or more liners in the near future. Los Angeles-based Sitmar Cruises, for example, is awaiting three new $150-million vessels beginning next January. And it seems clear that they will be needed to meet the demand: Observers say that about one-fifth of all cruise passengers come from California.

The first of Sitmar’s new liners, the 1,470-passenger FairMajesty, is under construction by the Chantiers de l’Atlantique shipyard in St. Nazaire, France, and will be delivered early next year. The other two, as yet unnamed, are being built in Italy and will be delivered in 1990 and 1991. The three ships will boost Sitmar’s total passenger capacity by a whopping 265%, according to William L. Smith, the company’s senior vice president of sales and marketing. Sitmar already has three ships serving the North American market.

Miami-based Carnival Cruise Lines, already the nation’s biggest with seven ships serving the Caribbean and the Mexican Riviera, will add three new 2,050-passenger vessels beginning next year: the Fantasy, the Ecstasy and the Sensation. The 6,150 berths will boost the line’s capacity by 75%, according to Bob Dickinson, senior vice president for sales and marketing.

According to a study by Cruise Industry News, by the end of 1988 alone, the number of cruise ship berths to be marketed in the United States will grow by 11%, to 80,183. And that, the publication said, will result in a 30% industrywide oversupply of space by the year-end.

Sophisticated Consumer

If the supply and demand projections (based on confirmed orders for new berths) materialize, along with an increase of only 5% in demand, the newsletter added, the oversupply will rise to 32.5% in 1990 and 33% in 1991. Worse yet, if all the ships planned but for which contracts have not yet been signed are actually built, the oversupply might rise as high as 45% by 1992.

Competition is forcing the cruise operators to order all the new liners. “The most sophisticated consumer in the world is the American consumer,” Kloster said. “They require that the major cruise lines have the latest and the best.” (The average life of a cruise ship is 30 years, shipping executives say).

Another reason for the surge in cruise shipbuilding is the advantageous financing the operators are getting. Foreign shipyards are building all of the ships being constructed for U.S. cruise lines--in such places as Finland, France, Italy, Germany, Japan and South Korea.

Many of these countries, to keep workers employed, subsidize their shipyards, which in turn pass the benefits along to their customers in the form of lower prices and low interest rates on loans.

Few of the cruise ship companies serving U.S. ports are American-owned, and most of the ships are registered in such places as Panama, Liberia and the Bahamas, mainly for tax reasons. Every so often, the foreign registration causes concerns about safety because U.S. regulators are powerless in such cases. But the head of the National Transportation Safety Board said recently that his agency is studying the U.S. responsibility for cruise ship safety.

If there is to be a cruise liner glut, the worst of it is expected in the early 1990s. It could create bankruptcies and consolidations of cruise lines and a bonanza of lower rates, special rates and discounts for cruise passengers.

“While the oversupply will make things tough for the cruise lines, it will create a paradise for passengers,” said Mathisen of Cruise Industry News. “Prices will be drastically reduced. Travelers will have their pick.”

It is estimated that if demand is to keep up with the building of cruise ships, the market must continue to grow by about 10% a year over the next five years.

Business Brisk

However, a recent study by Temple, Barker & Sloane, a Massachusetts research firm specializing in the cruise industry, concluded that supply will outpace demand through 1992 and that this will result in a decline in the industry’s average load factor to 73%, compared to the current average of about 90%.

In 1992, the growth of demand will begin to exceed supply growth as the rate of new ships going into service declines. But it will still take until the year 2000 for the cruise industry to recover to a load factor of 77%, the research firm says.

For the present, however, business is brisk.

According to Kloster, the two companies that he heads have increased their capacity by a third with the recent introduction of Norwegian Cruise Line’s 1,500-passenger Seaward and Royal Viking Line’s 740-passenger Royal Viking Sun. Kloster said load factors are running at about 103%--which is possible because ship occupancy is based on two in a cabin but there are pull-down berths in many cabins.

Cruise operators contend emphatically that there are so many people “out there” who might take cruises that no serious oversupply of ships will develop and that the market they can tap is vast.

“The industry has demonstrated that it has a very high growth rate,” said Harvey Katz, shipping analyst with the Salomon Bros. investment firm. So far, he added, cruise line operators have reached only a few of the Americans who, according to statistical analysis, might go on cruises.

Shipping lines maintain that only about 4% of the more than 30 million people who would be able to take a cruise (according to such criteria as age and income) have ever done so.

“There have been misconceptions that cruising has been for the old, the overweight and for people who like to be bored,” Godsman, head of the CLIA trade group, said. “Today’s cruise is anything but.”

Observers say that, although there are millions of potential cruise customers waiting on land, the cruise companies must put great effort into promoting their product. And many are turning increasingly to television advertising.

“Unless major changes are made in the way cruise lines sell themselves,” said Jay Lewis, who heads Market Scope, a Miami research firm specializing in the cruise industry, “their growth in popularity as a holiday option may stagnate, and the industry will be left with severe overcapacity on its hands into the 1990s.”

But officials of many lines insist that even an economic downturn will not greatly affect the popularity of cruising. Demand continued to grow during the recession of the early 1980s, they point out.

One major reason that cruising is so popular is that it often provides good value for the money. For as little as $175 to $200 per day, passengers can get air fare to the port where the voyage begins, room, food, entertainment and visits to several attractive ports.

“A land-based vacation . . . can cost $1,000 a day,” said Ram Capoor, shipping analyst with Morgan Stanley & Co., a New York investment firm. “One can take Carnival Cruise--the Chevrolet of the industry--for $1,000 a week.”