Cruise Market Outlook
While the fervor over the recent spree of newbuildings and options contracted in the cruise ship segment for the first half of 1993 is encouraging, long term prospects for the building and outfitting of passenger cruise ships is strong according to industry insiders, and based on the industry's recent history and well-recorded penchant for growth.
While the latest news of multimillion dollar vessels contracted for multi-ship orders will always dominate the headlines, some more subtle recent, non-related maneuverings seem to indicate that those who build, repair, supply and operate cruise ships are in for a prosperous voyage.
Looking Back It is no secret that the cruise market has enjoyed a market boom over the past ten or more years which few industries can match. The cruise industry has experienced an average annual passenger growth rate of nearly 10 percent according to the Cruise Line International Association's (CLIA) January 1993 survey. By CLIA's best estimates, by the year 2000, the cruise market will accommodate up to eight million passengers per year and represent a $50 billion dollar opportunity. Similarly, this consumer interest has fueled demand for new tonnage, and according to Jim Godsman, president of CLIA (New York), between 1981 and 1992 the average capacity increase was 8.2 percent. While the demand for capacity for the next half decade is a more modest 5.2 percent, based on vessels contracted and planned, said Mr. Godsman, it still represents a boon to the builders and suppliers. "Any story on the cruise market has to start with the question, is the market there?," said Mr. Godsman, "and the answer is an emphatic Yes'." He has, though, noticed increased caution on the part of owner/ operators of late, a fact he attributes to the rising cost of vessels, the process of raising capital, yard competition and the economy in general.
Despite these concerns, Mr. Godsman is bullish on the coming years, because the cruise market's changing demographics—in 1986 the average age of new cruisers w 52 years, today it is 43 years accor ing to CLIA statistics—equates to demand for new designs and ame~~ ties, which in turn means new buil ings or refittings. "Recent deliveri are geared to a younger market, y can see it," he added.
"We have probably seen the mo dramatic period of growth in passe ger shipping," said Rod McLeo executive vice president of sal marketing and passenger servic with Royal Caribbean Cruise Lin (Miami), and chairman of the m aging committee of CLIA. "In t past 52 months we have more th tripled the size of our company, ing from 4,000 to 14,000 berths, of the major players were gobbli up ships over that period." Desp the tremendous growth, Mr. McLeod does exercise caution in predicting a similar boom any time soon. "The rate of new building introductions has slowed up, despite a spurt in newbuilding announcements over the first few months of this year. But when you look at the ships on order, it is not an insignificant amount." The landmark cruise ship orders to kick off the first half of the year have been well documented in these pages, but a short review is in order: Royal Caribbean Cruise Line (RCCL) signed contracts with France's Chantiers de l'Atlantique for the construction of up to three ships worth approximately $1 billion; Chantiers has delivered four ships to RCCL since 1987; Carnival Cruise Line (CCL) signed a contract with Italy's Fincantieri Cantieri Navali Italiani !br construction of the largest cruise ship ever, a 95,000-gt vessel with 1,300 cabins; —Japan's NYK Line signed with kvaerner Masa-Yards for the 50,000-gt Crystal Symphony, for lelivery in the spring of 1995; and inally Celebrity Cruise Lines Inc. CCLI) has order a pair of ships rom Germany's Meyerwerft, and tolds the option for a third. The irst, a 1,740-passenger, $317.5- nillion vessel, is due for delivery in late 1995. Looking to the end of the century, 1996 is the delivery date for the last contracted ship, and 1997 is the delivery date for the last planned vessel (the former for Carnival, the latter for RCCL). To explain the rash of orders, Mr. McLeod said "There were many positive signs, windows of opportunities opened at the yards, and pricing became very attractive." However, according to Georges Lesavre, director of commercial at Chantiers de l'Atlantique (Paris, France), the prospects for a strong cruise ship market are in place. Chantiers, which stopped building passenger ships between 1968 and 1983 in order to capitalize on the burgeoning tanker market, made heavy investments when it decided to build cruise ships again in order to capitalize on the anticipated market, according to Mr. Lesavre.
Based on the yard's success with RCCL over the past six years, it appears the investment has paid off, and then some. When we decided to start making cruise ships again, "we first invested in people, in forming a special passenger ship sales department. We then made investments in restructuring passenger ship designs, which we had lost since 1968," said Mr. Lesavre. Mr. Lesavre believes there is room for five or six major builders of cruise ships in the world, and he said that the prospects for the market will really explode once countries other than the U.S. get into the cruise ship buying market.
Repair & Refit While the media focus stays on the multi-vessel, multi-million dollar orders of record size ships, many yards and suppliers will be pleased to find substantial business on the repair and refit side of the cruise ship market. An important piece of legislation from the International Maritime Organization (IMO) could help the process along substantially. According to John Estes, president of the International Council of Cruise Lines (ICCL) (Washington, D.C.), the IMO recently renegotiated the "Safety of Life at Sea" treaty, a treaty which originated 19 years ago and is among the U.S., Norway, Great Britain, Italy, Greece, The Bahamas, Liberia, Panama and The Netherlands. The major impact of the most recent renegotiation is the elimination of a grandfather clause which stipulated that if a ship was in existence before a safety regulation was implemented, it did not have to comply with this regulation. "Because a ship is old does not mean it is unsafe," said Mr. Estes. "But there may be new technological safety advances that can bring all ships up to standard." Essentially, then, when the grandfather clause is entirely phased-out, all vessel owner/operators will be responsible for ensuring every ship is in compliance with the latest safety equipment regulations and standards, a potential boon to suppliers and yards alike.
According to Mr. McLeod, he has seen estimates suggesting that 15 to 25 percent of the cruise ship berth supply will have to be withdrawn when the regulations are fully phased in.
"This is going to cause owners of older vessels to make significant decisions," he said. "Cruise lines could be looking at between $30 and $40 million to maintain older ships, and that capital investment may not be warranted on a 40- to 50-year-old hull." Mr. Estes' organization represents all of the major cruise lines of the world with respect to legislative, regulatory and operational issues.
The ICCL is currently working with politicians on two critical legislative pieces, the Clay Bill and the Gibbons Bill, which could affect the future of the cruise market. The Clay Bill, which seeks to extend U.S. labor laws to foreign-flag ships, goes against the U.S.'s history of being a maritime leader and encouraging free seas, according to Mr. Estes. Another piece of legislation, the Gibbons Bill, is also contradictory to the free seas concept, he said. The bill, in essence, penalizes owners for purchasing ships in foreign subsidized yards. "We (ICCL) have no problem with the elimination of foreign subsidies, but shipowners should not be penalized; this is a government policy," said Mr. Estes.