Cruise Executives Tackle "The Economy"

At Seatrade's State of the Industry

Cruise industry executives discussed the economy and other issues at the recent Seatrade Cruise Shipping Convention in Miami Beach, FL.*

Cruise industry executives tackled some tough issues during a "State of the Industry" panel discussion at the recent Seatrade Cruise Shipping Convention in Miami Beach in March. 

Following is the lead-off portion of that discussion focused on the weakening U.S. economy. Executives gave their views on both short- and long-term impact, the industry's appeal to consumers, and how the cruise industry will navigate this economic storm.

Editor's Note: Generally, this is a verbatim transcript of the discussion. However, in the few instances where the audio tape was unclear we used [brackets] to show the intent but perhaps not the exact wordage the speaker used. Also, in some cases, we edited to shorten repetitive sections, eliminate "hanging" phrases or dovetail with our format/style.  

Question: How Will the Cruise Industry Fare in This Current Economic Environment?

Comments by Gerry Cahill, president and CEO, Carnival Cruise Lines

Editor's Note: In his first appearance at Seatrade's "State of the Industry" panel discussion, Cahill -- newly appointed at Carnival's top executive -- showed a good sense of humor. Cahill recently took over for Bob Dickinson, the line's former president and CEO, who retired late last year. Dickinson was a fixture at past Seatrade conferences for his hard-hitting and free-wheeling comments. At right, Cahill is shown with his Bob Dickinson mask!

Here are Cahill's comments...

If anybody looks at the news today, we’re flooded with information about the state of the economy. Unfortunately, all of the information that we hear and read today is negative.

Clearly, the U.S. Dollar has sunk to a historic low against many currencies. The housing market is in sort of a downward spiral. And now the job market has also fallen.

And on top of that U.S. consumers are paying more at the gas pump to fill up their cars and they’re paying more at the grocery store and they’re paying more to buy [more goods]. And we have the stock market which [has plummeted] about 15 to 20 percent.

So while the economists among us debate whether or not the country is in a recession or is about to go into recession, I think if you ask most middle-income consumers they will tell you that they are already feeling the effects of many of these trends that I’ve mentioned.

From a perception point of view, the U.S. Consumer Expectation Index, which basically measures consumers’ views on the outlook for the next six months, has now reached a 16-17 year low.

So what does all that mean to those of us who work in the cruise industry?

First, we have to remember that cruising is a discretionary expenditure. No one has to take a cruise. It’s not like food or shelter. So with a weakening economy, I’m not going to tell you that cruising won’t be affected. It will be.

And if you look at the stock prices of the publicly traded cruise companies today they are certainly reflecting those fears. However, there are a number of reasons to believe that the cruising has much greater resilience during economic downturns than many people realize.

• First: past results during periods of economic downtown.

• Second: the inherent value of a cruise compared to other vacations.

• Third (a recent thing the past 10 years): cruising has become global.

The last two recessions were 1990-1991 and 2001. Coincidentally during both of those periods of time, there were also heightened concerns about travel because of a fear of terrorism.

In spite of both of those concurrent problems, the cruise industry increased the number of guests carried by 15 percent in 1990 and by 4 percent in 2001.

And during those same periods of time, Carnival Corp. reported decreases in revenue yields of about 2-3 percent, much less than most people expected – demonstrating the resilience of cruising both in terms of economic downturn and fear of travel.

From the perspective of the value of a cruise, I don’t think there’s any vacation alternative that offers the same value as a cruise. When you compare cruise pricing to comparable land based vacations, depending upon who does the math, you’ll find generally that it is about 20-to-50 percent cheaper for a cruise vacation than a comparable land vacation.

And in fact, in recent years, that gap has really widened. What has happened is that cruise pricing has been relatively stable in recent years while -- as many of us know -- some of the resort properties, the hotel properties, some of those have really skyrocketed [in price].

And that provides great opportunity for us in the cruise business. Because in times of economic downturn, Americans don’t like to give up their vacation plans. What they do is they look for greater value.

And in a recent survey by AIG Travel Guard, 72 percent of the respondents say they do not plan to cut back on the number of vacations they take in 2008.

However, 47 percent of those same respondents are planning changes to save money – traveling with emphasis on less expensive meals, traveling closer to home, reducing vacation length and driving not flying.

So as many American consumers focus on ways to trim their vacation budgets through the measures I just touched on, the tremendous value of a cruise whether it’s in Europe or the Caribbean positions us very well to capture that business.

The third factor is globalization. This is recent – I’d say probably within the past 10 years -- the cruise industry has become much more global. And what that does is provides us with a potential new source of potential cruisers.

Cruising is clearly catching on in Europe. Recent data from the European Cruise Council indicates that between 1995 and 2006, the number of Europeans taking cruises more than tripled from 1 million to 3.4 million. And the European Cruise Council is now predicting that 4.1 million people will take cruises from Europe by 2010.

Now, some of those cruises that are being sold to Europeans are also being sold from North American cruise lines. To some extent, that’s partially due to the weak dollar. For instance, when Carnival Corp. & PLC’s brands sail in European waters, 30 percent of the guests are sourced from European countries.

In fact, for the full year 2007, Carnival Corp. reported that 46 percent of its revenue was sourced from guests located outside of the United States. And we know that similar trends are occurring at other cruise companies.

So the interestingly global nature of the cruise industry is working very much to our advantage and generating many new potential cruisers even as the US economy gets weaker.

So what do we expect looking forward? Clearly there is a awful lot of concern regarding the direction of the U.S. economy and its effect on discretionary consumer spending.

[But], if you look at the last public reports by the two largest cruise companies (when they last reported earnings), both companies indicated that advance bookings for 2008 are well ahead of the same period last year in terms of both [numbers] and pricing.

Travel agents are very optimistic for 2008. Given those situations and those other factors I’ve already discussed, it’s my guess is that cruise pricing will once again turn out to be more resilient than many of the doomsayers expect.

And it most likely again fare well compared to other consumer discretionary products and services.

In the case of my own particular brand, Carnival Cruise Lines -- with more than half of our fleet on itineraries of five days or less and with sailings from 18 different North American home ports within an easy drive from millions of American consumers -- we feel that we’re very well positioned to withstand uncertain economic times.

Follow-Up from Other Executives

Executive panelists at the recent Seatrade Cruise Shipping Convention debate the issues.*

In follow-up, Moderator Chris Hayman, managing director, Seatrade, asks:

If, for example, some European markets were to go into recession, what would be the effect on the industry?

Adam Goldstein, President and CEO, Royal Caribbean International: Well, clearly the more markets that feel the pressure of a macro-economic [downturn], the more stress there will be on our value equation.

But I think everybody up here likely would agree that the value proposition that cruising represents today is something that is attractive to people from all around the world. And globalization allows us to bring that message of the value in your vacation to a wider audience around the planet.

So while we will feel that stress, I think that value message is one of the most powerful assets we have as an industry and I don’t see that changing for the foreseeable future.

Rick Sasso, president and CEO, MSC Cruises USA: The value proposition allows us to do something that we’ve been trying to do aggressively for decades, and that is to take market share from land-based holidays.

And as our value proposition grows it makes it a little easier to get people to decide to take a cruise versus maybe their traditional land-based holiday.

So that has always been a challenge to us to move marketshare (and increase market penetration) and I think that challenge becomes even easier for us as this value proposition keeps increasing.

Colin Veitch, president and CEO, Norwegian Cruise Line: I agree with all that’s been said. I don’t see any long-term issues for the fundamentals of our business; they’re as strong as they’ve always been.

There may be short-term downturns or short-term upturns in our business but the fundamentals of this business are very strong.

The population is aging. The population has disposable income. Most people are employed. Most people want to take a vacation

We have one of the best value vacations and one of the highest guest satisfaction vacations around, and we have a [small] percentage of the total market, so the potential to grow is huge.

[That said], if the recession were to turn into a worldwide depression lasting 10 years, clearly it would be foolish of me to say we wouldn’t be impacted. But I think the signs we see at the moment are of a slight softening here or there at the same time as many other markets are emerging and -- as with Europe --booming to counterbalance that.

So I don’t see any reason to be concerned about the fundamentals of our long-term [outlook]. Indeed, I’m as encouraged as ever.

Stein Kruse, president and CEO, Holland America Line:  I wholeheartedly subscribe to the value [message] mentioned by everybody here. It serves my keen interest to look at where we are and compare that to where we’ve come from.

I entered this industry in 1981-82, so I went back to some Holland America Line brochures from those days, and I took some brochures from the 1990s and compared them to [brochures from today].

It's almost disappointing to see that we’re still selling cruises today at the same rates that we charged [back then]. When you go on the U.S. government’s Web site and you look at the inflation index over that period of time, $1,000 in 1980 would be $2,600 today.

So the value that we’re talking about here is why those numbers [CLIA’s projections for accelerated growth, increased bookings and a positive market picture], have continued [to rise]. I agree the long-term prognosis is very [robust].

Editor's Note: This concludes our Top Story coverage of Seatrade, but we'll continue to add smaller vignette stories on various issues over the next few months. Look for them on the Cruising Trends & Stats topic page in the upper-right corner of this site.

*Photos are owned, copyrighted and used with permission of Andy Newman. All rights reserved. Please do not link to nor copy these photos. Thank you.