The Good Life
With the buoyancy in newbuild business witnessed so far this year, the cruise ship orderbook stands at an all-time high of some 48 vessels. Erring on the conservative side, analyst Peter Wild of the U.K.-based consultancy G P Wild (International) calculates that the record workload constitutes 3.2 million-gt of ocean-going newbuildings worth around $14.7 billion.
Further expenditure amounting to $6 billion-plus is promised in the near-term on the basis of a raft of options and advanced negotiations and tenders. The aggregate fleet investment offers the prospect of a net capacity increase not far short of the 77,500 lower berths encapsulated in the vessels under construction and on order, while offtake through scrapping is likely to be on a limited scale in the immediate term. In a presentation to the recent Cruise+Ferry Conference in London, Wild put the current level of investment into perspective with the observation that "The general pattern over the last decade has been for the number of outstanding contracts to be around 30." The anticipated productivity of the ships under build and still to be laid down is 4.5-million passengers per annum, assuming an average cruise duration of six days and an operating profile based on 350-days per year. The domination of the business by a very small number of players is highlighted by the fact that 85-percent of current newbuild tonnage has been contracted from the four leading yards in the field, and that 64-percent is to the account of the top three cruise groups. "It is generally accepted that demand in the cruise market is supply-driven, and the concentration of power in the hands of a few major operating groups can only enhance this factor," suggested Wild.
Carnival, the Royal Caribbean group and P&O together wield the greatest influence. The scale economies encapsulated in those companies' various newbuild initiatives is such that the aggregate share of industry investment is less than that of market share by gross tonnage and berth capacity.
The increasing effectiveness of the Alstom group company Chantiers de l'Atlantique, in the face of illustrious European competition, new successes by Far Eastern builders in what has long been regarded as a European province of construction, and the emergence of a U.S. cruise vessel building dimension, make for a dynamic supply-side scenario. Wild's statistics, though, give a measure of the European profile in the market, whereby Fincantieri, Chantiers de l'Atlantique, Kvaerner Masa-Yards and Meyer Werft have been entrusted with 37 of the 48 vessels in hand.
While contracts in force, plus options and definite projects give a fairly clear view of the newbuild path to 2003/2004, the indications are that the sector will continue to generate growth in highvalue shipbuilding projects through the next decade. On the basis of current trends, Wild estimated that the industry might be expected to place orders for a total equivalent of around 12,000- 12,500 lower berths per annum over the five years from 2004 to 2009.
By extrapolating the average cost per berth from current fleet development expenditure, the anticipated future flow of orders would constitute a minimum annual investment of $2.4-2.7 billion, amounting to $12-13.5 billion in the 2004-2009 period. "These figures are conservative and may well be exceeded," noted Peter Wild.
Carnival, Royal Caribbean and P&O subsidiary Princess Cruises together account for 70-percent of the North American cruise market, and are likely to maintain their dominance, according to Per Regnarsson, vice president of Moody's Investors Service. A favorable outlook for demand coupled with growth potential in North America, Europe and also Asia provided the backdrop to current fleet developments, he confirmed.
New entrants to the business and the ongoing enlargement of capacity impacts on price competition, industry yield and operators' margins. However, the pattern of industry growth and market penetration offsets the various pressures so that the top players continue to finance expansion, considered Regnarsson, who raised the question "Will smaller operators and newcomers survive in the longer term, and for how long?" Regnarsson is Moody's leading analyst in Europe for the shipping industry, rating cruise ship and passenger ferry undertakings in addition to owners and operators in other fields. Influences on future ratings in the cruising domain would include a slowdown in the U.S. economy, a closer match between capacity and demand growth, price competition, and levels of debt-financed fleet expansion.
Addressing the Cruise+Ferry Conference gathering at London Olympia, Fincantieri's senior vice president, Giorgio Cossutti said that 1998 was perceived in many circles as "a year of records" in the cruise ship sector.
A total of 12 vessels worth nearly $3 billion were commissioned into service, and fleet rejuvenation and expansion among leading operators had brought orders for 18 newbuilds with an overall capacity in excess of 33,000 berths. The contract flow took place against a backcloth of market development, whereby cruiseship passenger numbers grew by 8.6-percent, with peaks of 20-percent in the Mediterranean region.
Fincantieri's well-documented contribution to the industry's advance last year had included the deliveries of the seminal vessels Grand Princess, Carnival Destiny and Disney Magic. "Over the last 10 years, cruise operators have updated and reinvented this sector through efficient facilities, entertainment alternatives and new itineraries, in order to successfully compete with landbased holidays," noted Cossutti, who linked society's increasing value of quality leisure time to the seemingly inexorable growth in the cruise business. As a capacity-driven market, demand is inextricably allied to the investment momentum, and with perceptions of quality and affordability.
It is also related to the industry's ability to demonstrate innovation in ship design and onboard facilities, to continuously enlarge the range of destinations and routes, and enhance shoreside logistics. Although passenger numbers show year-on-year compound growth, competition is intense and passenger expectations are growing all the time.
In this environment, affirmed Cossutti, shipyards have to ensure that the product is in every respect tailored to the shipowners' core commercial requirement: to ensure that the vessel and the vacation fully meet client expectations as to comfort, enjoyment, and quality, while ensuring the requisite maximum safety.
He felt that European shipbuilders' would concentrate their efforts in three main categories, namely 'mega' ships in excess of 100,000-gt, incorporating relatively high speeds to enable a wider operating area to be covered, Panamax vessels of around 80,000/90,000-gt, and ships below 50,000-gt aimed at the luxury end of the market.
Cossutti pointedly observed that, "As a shipbuilder, it causes me some concern, as it does my European colleagues, that all the efforts we have made so far to improve competitiveness and create successful products, could be damaged by the devaluation of the currencies of our Far East competitors..."