May You Live in Interesting Times
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(29-09-2008)

May You Live in Interesting Times

Nothing has quite shocked the world as much as the recent spate of bank failures and the $700 billion rescue package put together by the US Government to save its economy. To put that sum into persepctive it could pay for a fleet of 565 ships like the 220,000-ton 5,400-berth Oasis of the Seas!
Last week also came news that NCL was walking away from its first order for a 150,000-ton F3 cruise ship with 4,200 berths, and that the possibility of proceeding with a second had been put on hold. And the price of fuel has rocketed. So just what is going on in the cruise industry right now?


The F3 Problem

Although the F3 news was confirmed ten days ago when word broke that the builders, Aker France, were seeking alternate buyers for the first hull, it appears that the timing was accidental. Although no one is making public announcements, one view is that NCL's new owners, Apollo Management, were not particularly happy with the design and had asked for a lot of changes.

For a ship whose first steel had been cut a year ago, whose keel was laid in April and is already 25% complete, the cost of such changes appears to be the subject in dispute.

The is news was further confirmed when the line cancelled a search for a replacement for Andy Stuart, who had only recently been put in charge of the F3 project, which called for the delivery of two $940 million ships in 2010.

In separate news, one of the industry papers that reviews these things pointed out that as a brand, NCL fared worst of the big names, with Royal Caribbean on top and Carnival, Princess, Celebrity and Holland America all ahead of it.
Could it be that today's financial climate is also causing NCL to rethink its future development plans? Certainly, Freestyle Cruising, while one of the biggest changes to the cruising product in recent years, and one that has been imitated by others, has also been controversial.

NCL has suffered not only from passengers who refused to return, particularly a number who tried the NCL America project first, but also from travel agents who refuse to sell them. While perhaps coming from a minority, no line can afford this kind of publicity.

Now, the company's new president, Kevin Sheehan, appointed in November, is also its chief financial officer.
Colin Veitch, having ceded the presidency as well as his seat on the board, now concentrates on his job as CEO. Is it also revealing that NCL's executive vice-president, strategic and commercial development, Gregory Hunt, also appointed in November and an Apollo man, is in charge of on board revenue including casino operations?

With this background is it really puzzling is that the "Mission Statement" that appears on NCL's web site is a blank page?

The bottom line seems to be a contractual dispute, which Aker and NCL both claim they are trying to resolve. But the first ship has been offered about to other possible takers that do not include just Carnival, Royal Caribbean and MSC Cruises.
Think, for example, of TUI Cruises, who are looking to build two new ships for their brand for delivery in 2011 and 2012. TUI Cruises is 50% owned by Royal Caribbean and Germany's TUI, who also control Thomson Cruises and the more upmarket Hapag-Lloyd Cruises.
TUI Cruises' shareholders now also mirror those of UK-based Island Cruises.


Brands and Assets

Although NCL are not scoring well in the brand sweepstakes, they are not the only one to suffer. Speculation is rife that Island Cruises may be wound up and its second ship, the Island Star, formerly Celebrity's Horizon, go to Royal Caribbean brand Croisieres de France to join the Bleu de France.
These same sources have the Island Escape either going to year-round cruising in Brazil, where it has a success on its hands, or to 100% TUI-owned Thomson Cruises.

Other speculation has Island Star joining sister ship Zenith with Pullmantur Cruises. Now with many brands, but especially since the acquisition of Pullmantur, Royal Caribbean has begun to emulate Carnival, who are well known for transferring ship assets among brands to where they will make the best return.
Not so different from J P Morgan's old International Mercantile Marine (IMM) that controlled White Star, Red Star, Dominion and Leyland Lines, among others, but that was a hundred years ago.

More damaging speculation (and surely untrue) sees Azamara Cruises being wound up and both its ships going to Croisieres de France. French-built and much closer in size to the Bleu de France than Island Star, a sister ship has already worked the French market for TMR.
But it would not really make sense to triple CDF's berth capacity overnight, nor to return the Azamara ships to Pullmantur Cruises, of which CDG is a part.

All this speculation provides fun for observers, who have begun to regard the various ship assets held by the big two groupings as pawns, kings and bishops in a game called maximizing returns. While some suggest the F3s as candidates for TUI, for example, others suggest a rcontinuation of Celebrity's "Solstice" class.


Fuel Costs and Itineraries

While the price of oil has eased off since the highs seen in July, this factor is having a real impact on the cruise market too. Some ports are losing business because they are too far away from base port. The latest example is in Eastern Canada, where Quebec, Charlottetown (PEI) and Sydney (NS) are being dropped from four itineraries of Royal Caribbean's Explorer of the Seas in 2009.

However, all is not lost as Carnival soon afterwards announced that the Carnival Triumph would make three first-time cruises to Quebec in 2009. And other ports such as Baie Comeau, Sept Iles and Gaspe are all gaining first-time calls from the likes of Carnival, Holland America and Fred Olsen Cruise Lines.

If cruise lines listened to their customers, however, they could save a lot of fuel by spending more time in port and not sailing promptly at 5 pm so that the casinos and shops can open. Lines such as Crystal and Oceania have led the way to more overnight stays in port, something that (ironically) was first really trumpeted in a big way by easyCruise.


When is a Cheap Cruises really a Cheap Cruise?

One temptation by most cruise lines these days is too look affordable. Recently, for example, NCL advertised a 3-day cruise on its NORWEGIAN SKY for $99, or $33 a day for three square meals and board. But as someone who checked this found out, that's really $99 plus $44 fuel surcharge, $69 port charges and $29 in government fees, or $241 - almost two and a half times the sticker price.

And as if that weren't bad enough, remember the old phrase to "nickel and dime" people. Well, nickels and dimes are not worth what they used to be. Recently, one American cruise agent said that his clients were beginning to complain about being "dollared to death." Princess Cruises have even introduced a $150 fee for a bridge and engine room tour, something that used to be free. The truth is that on board revenue has now joined Mars and Venus as another god in the pantheon of cruise line executive worship - today under its new name of " strategic and commercial development."

In the UK, the Advertising Standards Agency is also now investigating whether they should be taking one large travel agent to court for misrepresenting the extent of cruised fare reductions. Conventional knowledge has it that no one ever pays full brochure price, and to a certain extent that is true, and that what is represented as a 40% or 50% fare reduction is in fact a falsehood. This will provide for some interesting press coverage.


Conclusions

The real truth is that cruise fares, like computer prices, have come down in real terms, but the thorn in the rose is a huge increase in onboard revenue "opportunities" - shops, alternative restaurants, art auctions, chain by the inch, shore excursions (which typically have a 100% mark-up) and spas (where a jar of hand cream can cost $430) - and now bridge tours for $150 - all of which cruisers didn't have to pay for in the past.

In a time when the United States is in crisis, Ireland has become the first European country to go into recession and the UK (11% cruise growth in 2007), Germany (8%) and Spain (32%) are predicted to follow, cruise lines have to be very sensitive to their markets and adapt their products to keep filling their ships.

The expression "may you live in interesting times" is said to be an ancient Chinese curse. But it's also an opportunity to meet challenges as interesting times can be the most rewarding too. Let's hope that cruise lines and their customers find this to be the case. One cruise line executive said this month they were still growing at a record pace but at record low fares too.

There are still billions of dollars worth of cruise ships on order - 39 ships worth $23 billion between now and 2012 according to "Seatrade Insider." That's a lot at risk should the economy really worsen.

(Source: By Mark Tré - Cybercruises.com)


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