Cruise Line Industry Outlook: Growth, Markets, and Strategy

Introduction

The cruise line industry, along with the entire travel segment, suffered considerable losses in revenue immediately following the September 11, 2001 World Trade Center attacks. This drop in ticket sales, coupled with a weak economy, severely hurt the cruise line industry. Some companies filed for bankruptcy, and there were many buyouts and mergers as a result of recent events. In the short run, things looked bleak for the cruise line industry. However, the long-term outlook paints a different picture for three main reasons.

First, the cruise line industry had been a leader in the steady growth experienced by the entire travel segment over the previous ten years. Second, the industry was seeing expanding markets in Europe and new markets emerging in Asia. Third, cruise lines were offering customers a wider variety of packages at different lengths and price ranges, helping them to expand their market to lower-income clients. Cruises are no longer a luxury reserved for the wealthy. These three factors support an expectation of 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), the cruise line industry added $11.5 billion to the U.S. economy in 1997 (ICCL, 1997). By 1999, this figure had grown to $15.5 billion (ICCL, 1999), and by 2000 it had reached $17.9 billion (ICCL, 2000).

The ICCL hired PricewaterhouseCoopers (PwC) and Wharton Economic Forecasting Associates (WEFA) to comment on future industry growth. Their analysis was presented in the 1997 report 1997 Economic Study of the Cruise Industry, which forecasted growth from 1998 to 2002 by examining macroeconomic indicators, industry trends, strengths, and weaknesses. The report reflected a strong expectation that industry growth would continue at a steady rate (ICCL, 1997).

Although sales had been growing, so had expenditures needed to expand capacity in anticipation of future demand. This resulted in reduced margins for some operators. The recent economic downturn, combined with lower sales revenues following the terrorist attacks, placed some companies in low-leverage positions. While this created difficulties for some, it created opportunities for others. Carnival Corporation recently acquired several ailing cruise lines, strengthening its position as an industry leader. The acquisition of the premier European line Princess gave Carnival access to the ever-growing European markets (U.S. Business Outlook, 2000).

In 2000, Carnival Corporation also bought out the remaining 50% of Costa Cruises, giving the company full ownership of Europe's leading cruise line by market share. The European cruise line industry had been experiencing rapid growth over the prior two years. The overcapacity and consequential deep discounting experienced by Carnival and other large Caribbean cruise operators had 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% — more than twice the rate of capacity growth experienced over the previous five-year period (ICCL, 1997). In 1997, over 3 million passengers departed from the ports of Miami, Everglades, Canaveral, and Tampa, while a significant number also embarked from ports in Alaska, California, Louisiana, New York, Texas, and Massachusetts. 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, the 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).

The 1999 ICCL survey also found that the North American cruise industry's passengers from other countries increased by almost 50% between 1993 and 1998, indicating that the cruise industry was attracting more foreign vacationers to North America (ICCL, 2000). Comparing 1998 to 1990, cruise ship embarkations from North American ports increased by almost 70%. In 1998, over 3.2 million passengers embarked from Florida ports alone — Miami, Everglades, Canaveral, Palm Beach, and Tampa — while an additional 1.1 million passengers boarded at non-U.S. ports, primarily Vancouver and Montreal, Canada, and San Juan, Puerto Rico (ICCL, 2000).

Conclusion

J. Cogan of Banc of America believes "the cruise line industry is especially positioned to prosper in the next few years. The cruise line sector has been rated by the industry the #1 group in his travel and leisure coverage" (Banc of America, 1999).

Glenn Curtis of TheStreet.com agrees, stating: "I believe the industry will recover quite as quickly this time because of overcapacity issues. But given favorable demographics and the average American's penchant for adventure, cruise lines still look favorable in the long run" (Curtis, 2001).

According to Broderick Perkins, writing for American City Business Journals, the attacks on the World Trade Center hurt the travel industry broadly, and the cruise line industry was no exception — primarily because passengers typically fly to meet their ships. Nevertheless, the cruise line industry recovered quickly, and within three weeks was booked to 65–75% of normal capacity (Perkins, 2001).

The cruise industry has seen steady growth over an extended period of time. Although recent economic events had a negative impact, the industry made many positive strides in new market expansion. The rapid recovery following the World Trade Center attacks is evidence of the industry's underlying resilience. Individual companies may come and go, but on the whole the industry remains strong. The strongest players will continue to be those that balance expansion into new markets with effective risk management. Over the long term, the industry will continue to experience healthy growth — even when, for the moment, it faces stormy seas.

Works Cited

Banc of America Securities. Travel and Leisure Companies Poised to Fare Well in 2000 Due to Steady Growth in Economy. Hotel Online Special Report. San Francisco, October 1, 1999.

Curtis, Glenn. "Despite Stormy Seas, Cruise Industry Will Rebound." TheStreet.com. September 25, 2001. http://www.thestreet.com (accessed March 2002).

DP Information Network PTE Ltd. 1999. Author unknown. http://www.dpgroup.com.sg/dpinfo/articles/cruise1.htm (accessed March 2002).

International Council of Cruise Lines (ICCL). Cruise Industry: A Partner in America's Economic Growth — 1999 Economic Study. (accessed March 2002).

International Council of Cruise Lines (ICCL). 1997 Economic Study of the Cruise Industry: A Partner in America's Economic Growth — Impact of North American Cruise Industry on U.S. Economy in 1997. (accessed March 2002).

International Council of Cruise Lines (ICCL). Benefits of North American Cruise Industry to the U.S. Economy in 2000. (accessed March 2002).

Molineaux, Charles. "Cruise Industry Predicts Record Year for Passengers." CNN Financial News. New York, 2000.

Nichols, Katherine. "A Faltering Workhorse, Tourism Slow to Regain Pace." Business Outlook. January 20, 2002.

Perkins, Broderick. "Rough Seas for Cruise Line Industry as Air Travelers Stay Jittery." American City Business Journals. October 19, 2001 (print edition).

Farley, Robin M. The Wall Street Transcript. July 9, 2001. Wall Street Transcripts. http://www.twst.com (accessed March 2002).

U.S. Business Outlook: CTO Monthly Tourism Industry Management Tool. Volume 5, Issue 4. August 2000.