China redeployments could help boost Caribbean cruise prices

Posted on 20 May, 2014 by Spacejunkie2

By Tom Stieghorst

China is suddenly the hot spot for large new cruise ships, a development that could help cure the plague of overcapacity and low prices seen in the Caribbean market this winter.

The latest ship to join the fleet cruising from China is the Costa Serena, which will be stationed in Shanghai, starting mid-2015.

At 3,780 passengers, the Serena will be the largest of three Costa vessels operating year-round from China and the largest Carnival Corp. asset in the region. The company’s Princess Cruises subsidiary plans to offer a summer of sailings from Shanghai on the Sapphire Princess, starting May 21.

The Costa move comes on the heels of a head-turning announcement by Royal Caribbean International that it will put the as-yet-undelivered Quantum of the Seas year-round in Shanghai, after a six-month stint at Bayonne, N.J.’s Port Liberty from November to May.

Robin Farley, a leisure industry analyst at UBS Securities, said that, taken together, the moves have implications beyond the Asia market.

“We believe the emergence of China as a major sourcing market can provide new demand for tonnage that can be redeployed from more mature markets, which could also potentially drive pricing in those existing markets,” Farley wrote in a note to investors.

More specifically, she said, the withdrawal of the Quantum from the domestic market reduces Royal’s capacity in North America by 1.5%; the ship represents 3% of its 2014 Caribbean capacity.

Except for the Oasis-class ships, at 4,180 passengers the Quantum would be the largest ship in the Royal fleet.

The impact of the shift of the Serena is a little more indirect on the North American market, since it is currently deployed on Mediterranean and Red Sea itineraries.

But if the loss of one ship in those regions results in Costa shifting a ship from the Caribbean (in the winter) to cover the void, it could reduce capacity in the Caribbean another 1%, Farley said.

Although the changes are small in absolute terms, a reduction at the margins could have a relatively larger impact on pricing as supply and demand come back towards equilibrium.

Sourcing of cruise passengers in China on a sizeable scale only started in 2006 when Costa positioned its first ship there, the 1,000-passenger Costa Allegra.

Since then, it has ratcheted up capacity with a series of bigger ships, including the current Costa Atlantica (2,680 guests) and Costa Victoria (2,394 guests) operating from Shanghai.

The debut of a second brand, Princess, with its 2,670-passenger Sapphire Princess, will increase Carnival Corp. capacity in China this year by 74%. Adding the Serena next year will mean 140% growth over two years.

Carnival has set up a dedicated unit in Asia (Carnival Asia, based in Singapore) and is laying the groundwork for selling more cruises to residents of that region, particularly in China.

“We have never been more committed to China as a market of great strategic importance for our company,” Carnival CEO Arnold Donald said.

Carnival has set up 10 offices in Asia, including five in China: Shanghai, Beijing, Tianjin, Guangzhou and Chengdu. It said seven of its 10 brands sail in Asia, and 23 ships will visit 90 ports with an estimated 1,439 port calls planned this year, including 220 in China.

Patrick Scholes, a leisure industries analyst with SunTrust Robinson Humphries, said the cruise lines are relatively slow to fully concentrate on China compared with other leisure industries. “It almost seems like the U.S. cruise lines are a day late,” he said.

Scholes pointed to the gaming giants like Las Vegas Sands and Wynn, who were not in the China market 10 years ago but “now they get the vast majority of their business out of Macau and China.”

Global hotel operators also converged on China about 10 years ago. “Now their strongest pipelines for opening new hotels are in China,” Scholes said.

Recently, Scholes said, cruise companies have started to shift their development attention to China. “Welcome to the party,” he said.

Scholes agreed that the increased desire to put competitive tonnage in China could help solve the industry’s structural impasse of recent years in which prices have been anemic even as capacity growth has been kept moderate.

“It sounds like [Caribbean] capacity for the first half of next year will be down simply because a lot of the ships are moving to Europe and Asia,” Scholes said. “So that will be a positive.”

Lines ponder retirement plans for old ships

Posted on 13 May, 2014 by Spacejunkie2

By Tom Stieghorst

How and when to dispose of older ships is one question quietly being studied by the management teams of North American cruise lines.
There is a wide gap in revenue potential between the newest, most modern ships now being delivered and the industry’s oldest vessels, which in some cases date to the early 1990s.
Those ships are typically deployed on short cruise itineraries out of South Florida or southern California, where the guest expectations of the hardware aren’t that high but neither is the cost of the cruise.
A decade ago when ships were past their prime, they were sent overseas to sail for brands in the U.K. and southern Europe, but that strategy faltered after the 2008 economic downturn. Until very recently, demand for cruises in some European countries was moribund and new capacity wasn’t needed.

The recent decision to deploy Quantum of the Seas to Shanghai, China full time signals that Asia isn’t likely to be a region where older tonnage goes to find new life either.

Lines have tried to retrofit some of their newest features onto older ships during drydock. This has been partially successful, and marketing slogans such as Royal Caribbean International’s “Every Ship Is Our Best Ship” have helped to position those ships as improved, if not new.
But the pace of innovation, particularly at lines such as Royal Caribbean, has been gaining speed. And as fleets get bigger, it takes longer and longer to bring a new feature to every ship.
Charters are another solution for older ships. Norwegian Pearl has sailed the Caribbean for much of the winter on charter, Norwegian Cruise Line officials have said. So Norwegian didn’t have to push agents to sell Pearl against the more attractive Norwegian Breakaway or Getaway, which carry double-digit fare premiums to Norwegian’s older ships.

But Norwegian has more new builds in the pipeline. Where are its older ships going to go? And if they don’t exit the fleet, will the gap between fares on newer and older ships continue to widen?
Older tonnage can be a good solution for some cruise lines. Windstar Cruises has acquired three ships from Seabourn, a more luxurious line, and is adapting them to Windstar’s casually elegant style. The ships are close to 30 years old, their useful lifespan for accounting purposes. But they are still in pretty good shape.
Windstar guests sailing last week on the Star Pride, the first of the three ships to be converted, didn’t spend much time talking about the age of the ships.
My guess, though, is that the Windstar-Seabourn deal is more a one-off transaction than a model for other lines. It should be very interesting to see what other creative solutions cruise lines come up with for their older tonnage in the years to come.

China and the cruise industry’s ongoing globalization

Posted on 10 May, 2014 by Spacejunkie2

By Tom Stieghorst

The news that Royal Caribbean International is putting its new ship in China made a big splash. But sometimes it takes a surprising development to show an underlying trend that has been slowly taking shape for years.

The North American share of the world cruise passenger base has been declining, even though in absolute terms it is growing and it still remains far larger than any other source market.

Cruise lines are hungry for new growth, and China is the current gravy train that everyone is hoping to ride. But it isn’t only China. While the Quantum of the Seas is headed for Shanghai, Royal’s Voyager and Rhapsody of the Seas are spending a good part of the year taking Australians on vacations from Sydney.

And Royal is hardly alone. Carnival Cruise Lines is sending its Legend of the Seas to Australia later this year too. *TomStieghorst

Some higher-end cruise lines, such as Azamara Club Cruises, draw more than 50% of their passengers from outside North America.

The international sourcing of passengers is drawing industry attention and resources away from its historical roots in the U.S. and Canada. Cruise officials take pains to assert that North America remains a vital interest for the cruise industry and takes a back seat to no region.

It is obviously true, and yet there is a shift going on that can’t be ignored. It has implications for passengers, for travel agents, suppliers and employees of the cruise lines.

Driving the decision to diversify internationally is the public ownership of the big North American lines. The loyalties of the management of those companies isn’t to country, region or tradition as much as it is to the shareholders that they work for. As Royal Caribbean Cruises Ltd. President Adam Goldstein told me, it is the shareholder’s interest in long-term profit growth that was the primary factor in deploying the Quantum full time to China.

Ironically, as Royal and other U.S.-based cruise lines are looking abroad, privately owned MSC Cruises is knocking on the door, trying to gain more purchase in North America.

MSC is the line adding to its sales force, making its pitch to travel agents here to funnel clients to its small but growing North American capacity. So even as the U.S. loses a new ship (after a short season in New York) it may soon gain a new ship from a Swiss company with an Italian product.

Call it two faces of the same coin, both manifesting the further globalization of the cruise industry.