Cruiseline Industry Term Paper

Excerpt from Term Paper :

Future of the Cruise Line Industry

The cruise line industry, along with the entire travel segment, suffered considerable losses in revenue immediately following the September 11, 2001 World Trade Tower attacks. This drop in ticket sales, coupled with a weak economy, has severely hurt the cruise line industry. Some companies have filed bankruptcy and there have been many buy-outs and mergers as a result of recent events. In the short run things look bleak for the cruise line industry. However, the long-term paints a different picture for three main reasons. First, the cruise line industry has been a leader in the steady growth being experienced by the entire travel segment for the last ten years. Second, the industry is seeing expanding markets in Europe and new markets emerging in Asia. The third reason to expect long-term growth is that the cruise lines are now offering their customers a wider variety packages at different lengths and price ranges. This has helped them to expand their market into lower income level clients. Cruises are no longer a luxury reserved for the wealthy. These three factors would lead us to expect long-term growth, despite current problems in the industry.

An Industry Overview

According to periodic studies conducted by the International Council of Cruise Lines (ICCL), in 1997 the cruise line industry added $11.5 billion dollars to the U.S. Economy (ICCL, 1997). By 1999 this grew to $15.5 billion dollars (ICCL, 1999). One year later, in 2000, this figure had grown to $17.9 billion dollars added to the U.S. By the cruise line industry (ICCL, 2000).

The ICCL hired the firm PricewaterCoopers (PwC) and Wharton Economic Forecasting Associates (WEFA) to offer their comments on future industry growth. This was presented in the 1997 report, 1997 Economic Study the Cruise Industry. This report forecasted growth from 1998 to 2002. They took into account economic growth factors such as macroeconomic indicators and industry trends, strengths and weaknesses. This report reflects a strong opinion that industry growth will continue to grow at a steady rate. (ICCL, 1997).

Although sales have been growing, so have expenditures needed to expand capacity for expected future growth. This has resulted in reduced margins for some, as can be expected when purchases are made in anticipation of future long-term growth and returns. The recent downturn in the economy, combined with lower sales revenues due to the terrorist attacks has placed some into low leverage positions. While this has placed some companies in precarious positions, it has created opportunities for others. Carnival has recently acquired several ailing cruise lines, strengthening its position as an industry leader. The acquisition of the top European line Princess has given it access to the ever-growing European markets (U.S. Business Outlook, (2000).

In 2000, Carnival Corporation bought out the remaining 50% of Costa Cruises, giving them ownership of Europe's number one cruise line in market share. The European cuise line industry has been experiencing rapid growth over the last two years. The over capacity and consequential deep discounting experienced by Carnival and other large Caribbean cruise line operators has not been mirrored on the other side of the Atlantic (U.S. Business Outlook, (2000)..

Cruise Lines Lead Travel Industry Growth

According to the 1997 ICCL report, the industry's strong growth throughout the 1990s spurred expansion of the fleet of cruise vessels serving markets worldwide (ICCL, 1997). For the years 1998 through 2002, the industry planned to introduce 41 new vessels and increase passenger capacity by 43%. This is more than twice the rate of growth in capacity experienced by the industry over the previous five-year period (ICCL, 1997). In 1997, over 3 million passengers left from the Ports of Miami, Everglades, Canaveral, and Tampa. However, a significant number of passengers also embarked from ports in Alaska, California, Louisiana, New York, Texas and Massachusetts. In 1997, an additional 3.5 million passengers boarded cruise vessels from ports outside North America (ICCL, 1997).

During this same period global capacity increased by almost 50%. The top cruise destination markets were the Caribbean, Alaska, the Mediterranean, Europe, Trans-Canal (Panama), Mexico, and Bermuda (ICCL, 1997). According to the 1999 ICCL report the Caribbean islands (including the Bahamas) remained the most popular destination for cruise passengers, accounting for almost 43% of the destination capacity of the cruise industry in 1999 (ICCL, 1999).

According to the 1999 ICCL survey, the North American cruise industry's passengers from other countries increased by almost 50% between 1993 and 1998. Consequently, the cruise industry is continuing to attract more and more foreign vacationers to North America and the U.S. In particular to embark on cruises (ICCL, 2000).

In comparing 1998 to 1990, cruise ship embarkations from North American ports increased by almost 70%. The major U.S. ports of call are located in Florida, where in 1998 over 3.2 million passengers embarked from the Ports of Miami, Everglades, Canaveral, Palm Beach and Tampa (ICCL, 2000). However, a significant number of passengers also embarked from ports in Alaska, California, Louisiana, New York, Texas and Massachusetts. In 1998, an additional 1.1 million passengers also boarded in non-U.S. ports, which were primarily Vancouver and Montreal, Canada, and San Juan, Puerto Rico (ICCL, 2000).

Foreign Market Expansion

A significant opportunity to enter into new and expanding markets lies in markets outside the U.S. Many cruise lines are reaping the benefits of this new growth opportunity. The European market (including the Mediterranean) has experienced the strongest growth in capacity since 1997, 53% over the two-year period. By the end of 1999, this region accounted for 20.2% of the capacity of the North American fleet, up from 15.5% in 1997 (ICCL, 1999). The North American cruise industry's passengers from other countries increased 50% between 1995 and 2000 (ICCL, 2000).

According to DP Information Network, Asia holds an untapped market for the cruise line industry. Singapore was voted as one of the world's top three ports for the cruise business in a 1997 poll of the world's cruise line managers and executives. Singapore has recently spent 23 million dollars to improve their port to make it more attractive to visitors. In a bid to tap this potential, many international cruise lines such as Seaborne Cruise Line and the Royal Caribbean Cruise have already begun moving into the Asian region (DP Information Network PTE Ltd. 1999.).

Wider Variety equals Larger Market

According to Financial news correspondent, Charles Molineaux, an estimated 6.5 to 7 million people were expected to take a cruise in 2000. By comparison, an estimated 6 million travelers booked passages on cruise ships in 1999. Competitive pricing and a variety of entertainment options are driving the industry. "Holland America Line, for example, offers seven-day cruises to Alaska starting about $900. Princess Cruises advertises forays to Europe at around $1,200. A small $1,600 will buy you a 14-night cruise to Panama with Celebrity Cruises" (Molineaux, 2000). This trend is being echoed throughout the industry, more options means more appeal to a greater number of passengers. Different pricing schemes open the market to a wider variety of passengers, as well. This trend is the key to expanding the existing domestic market.

Porter's Forces

The risk of new entry by potential competitors is extremely low. Entry into the cruise line industry requires a large amount of capital. A new ship costs over one million dollars as a low estimate. This does not include staff, supplies, fuel, licensing, and other costs associated with start-up and operation. This high cost of entry makes it possible for only wealthy investors to enter into the market. The cost of insurance is extraordinarily high, due to the risks associated with ocean travel. This makes entry into the market for new businesses extremely low.

The degree of rivalry among competitors in the industry is high. Companies are always having price wars, massive advertising campaigns, and other tactics to draw customers away from the other companies. This is a highly competitive market arena.

The bargaining power of the buyers in this industry is high. If prices are too high, or economic conditions shake consumer confidence, buyers will decrease their spending and force the industry to lower prices to increase sales. Cruises are a luxury item and not a basic need, therefore they are one of the first items to go, when money is tight. Buyer behavior has a direct and immediate effect on pricing. Any variable such as bad media about accidents or safety can have a negative effect on price.

The bargaining power of suppliers is low. The cruise line industry has a high over head and because of the high bargaining power of the buyers, its margins are directly effected by factors beyond their control. Events, which shake consumer confidence, reduce revenues and the industry is at the mercy of the economic indicators. There is little that cruise lines can do to lower overhead, and revenues are at the mercy of the macroeconomy. With constant overhead and fluctuating revenues, margins are subject to fluctuate as well.

The threat of substitute products is an interesting…

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