Lower Fares Cloud the Waters for Cruise Lines

If you’ve considered taking a cruise but are worried about the price, you may want to reconsider.

New mega-ships have entered service in the last 24 months, with shorter cruise itineraries and more interesting cruise destinations.

Due to increased competition on many routes, cabin fares have gone down.

In some cases the cost of taking a cruise is cheaper than staying at a hotel--and often can be a lot more fun.

So, what’s the catch?

Brisk Bookings

As each ship enters service, bookings are brisk, berths are filled and capacity levels are reached.

“A lot has to do with people wanting to check out the new product,” a cruise line official said. “In the beginning that means you’ll almost always sail full. But what happens when the novelty of the new ship ends?”

A check of the ships inaugurated within the last year seems to confirm this trend. Royal Caribbean’s Sovereign of the Seas, Norwegian Caribbean’s Seaward and other new ships are sailing full.

But those such as Princess Cruises’ Royal Princess or Sitmar’s Fairsky, both launched within the last five years, have had some cabins available on many of their cruises.

On some ships so many cabins go unfilled that fare wars are beginning to break out. The law of supply and demand has been heavily tilted in favor of supply.

The inevitable result: It’s a buyer’s market on the high seas, and those seas promise to get rougher for cruise lines.

With a few seasonal exceptions (Christmas in the Caribbean, for example), cruise lines are discounting virtually every one of their itineraries. And the savings can be substantial, from $300 off per person per cabin to $2,000 per cabin on some transcanal excursions.

Revenues Lost

A cruise ship berth is a precious commodity. Once the ship sails with that cabin empty, the income from that cabin is lost.

For prospective passengers the benefits can be great.

“It gives you the option of being more selective in your cruise choices,” one travel agent said. “It also means that more people are waiting longer to make their cruise choices, because they know if they time it right, they can get great discounts on unsold cabins.”

Some cruise lines are even beginning to dump unsold cabins to consolidators, and, as a result, there’s a growing last-minute cruise business.

For the cruise industry that means leaner profit margins, more competition and more creative cruise itineraries designed to attract passengers. It also means that many are on the verge of reassessing their positions in the industry--or, in some cases, having that position reassessed for them.

Therein lies a looming problem that could easily parallel what’s been happening in the airline business.

Mergers Proliferate

In the last 10 years there have been an unprecedented number of mergers, acquisitions, consolidations and failures in the airline industry, as a result of deregulation, increased competition and fare wars. All the indicators seem to be present for a repeat performance in the cruise line business.

Since 1983 there have been 12 major cruise mergers and consolidations.

At the same time there has been more shipbuilding than ever.

Royal Viking, Royal Cruise Lines, Sitmar, Holland America, Norwegian Caribbean and Royal Caribbean Cruise Lines each boast at least one new ship, with others being built; 40 ships were built in the last decade, and one-fourth of them began service this year.)

“Everybody seems to be seeing the writing on the wall,” a cruise line executive said, “but no one seems to want to do anything about it.”

Older Ships Cost More

Of the two main reasons for all the shipbuilding, one is the substantial increase in the cost of operation of older ships.

“They’re becoming too costly,” Rod McLeod, president of Norwegian Caribbean Lines, said. For example, the deck and engine crew on the Norway (NCL’s oldest ship) consists of 100 people. But the deck and engine crew on McLeod’s newest ship, the Seaward, numbers only 60.

The second, more significant reason is a sort of demographic frenzy spearheaded by cruise line marketing departments.

“The industry sees that fewer than 10% of Americans have ever cruised,” a cruise line official said, “and all they see is the upside. So they all rush out, get financing and build ships. But the ships aren’t just new, they’re gigantic, and the number of available berths has already surpassed consumer demand. We’ve created our own demons. After all, what’s the limit? When is a ship just too big?”

Almost all of the new ships have double the capacity of their predecessors. Royal Caribbean’s Sovereign of the Seas can carry more than 2,600 passengers (plus crew) on seven-day Caribbean itineraries. Many believe that any ship carrying more than 2,000 people is unmanageable from the perspective of having a positive cruise experience.

“We feel the answer is no more than 1,500 passengers,” McLeod said. “At that level we can maintain the ambiance of the cruise product. But beyond that it gets out of control. Just think about a few things:

“How about the captain’s welcome cocktail party? After all, how many people can he shake hands with? The problem is that we’re all building more ships, developing more islands. But where is the infrastructure to support it, and how do we then meet the expectations of the passenger?”

Ports Don’t Have Space

The Port of Miami is growing so fast that some companies, including NCL, are looking at Ft. Lauderdale as an alternative embarking port. Miami, the world’s largest cruise ship port, has added its 25th permanently based ship.

Los Angeles, once considered a small cruise ship port, is booming, with cruise lines heading for the Mexican Riviera as well as shorter three- and four-day cruises to Mexico, with stops at San Diego and Catalina Island.

What does all this mean? If parallels can be drawn between the cruise ship business and the airline business, the time to take advantage of all these great deals is in the next two years. Because once the cruise industry shakes itself down, it’s likely that there will be fewer cruise lines, with those remaining operated by mega-companies.

“At that point,” one travel agent said, “you can almost bet on higher fares.”

Still, that thinking is not stopping the development and building of cruise ships.

At the top of the market there’s the Seabourn Pride, a new all-suite cruise ship that debuts later this year. Cruise tariffs for the spacious ship (which will accommodate only 212 passengers) are expected to be about $600 per person a day.

Twin Towers

And then there’s something on the drawing boards that looks more like a floating housing development than a cruise ship. It’s called the Phoenix, and passenger capacity estimates range as high as 5,000, with twin high-rise towers.