3.1 Wetting the Whistle
3.1.1 Fantasy Islands
Although ships have been transporting passengers since the beginning of time, the first cruises were conducted by the Peninsula and Oriental Steam Navigation Co., which ran vessels from Britain to Spain and Portugal and to Malaysia and China beginning in 1844.1And, the “first American-originated cruise was probably the 1867 voyage of the paddle-wheel steamer Quaker City from New York.”2 This
1Dickinson and Vladimir (1997, p. 1).
2Dickinson and Vladimir (2008, p. 4).
©Springer International Publishing Switzerland 2016
H.L. Vogel,Travel Industry Economics, DOI 10.1007/978-3-319-27475-1_3
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adventure—in which people would promenade the deck in the evening, sing hymns, and listen to organ music—was advertised as an excursion to exotic places of interest.3 The earliest year-round leisure cruises began around 1950, when a Miami operator, Frank Fraser, began to run ships to Caribbean ports. One of the first dedicated ships was theNuevo Dominicano, which was only 300 ft long and carried only 177 passengers. The great innovation of the 1950s included the then luxurious addition of air-conditioning.4
However, the modern industry only dates back to the early 1970s, when rising consumer disposable income and the development of new technology opened up the possibility of cruising on a giant ship purely for pleasure and not necessarily for the purpose of going anywhere in particular. Prior to that time, the giant ships—the Titanic and Queen Elizabeth, for instance—were, until the appearance of jet aircraft, the only way for most people to traverse the oceans. Prior to the 1960s, cruises were characterized by their long duration and distances covered as opposed to the relatively brief “movable resort” cruises of today.
Miami-based entrepreneur Ted Arison, along with the financial help of Norwe- gian ship owner Knut Kloster, was among the first to capitalize on the opportunities for growth. Arison formed Carnival Cruise Lines in 1972 with the purchase of a rusting Canadian vessel that he renamed theMardi Gras. Using this as a base, he quickly embellished and aggressively promoted the concept of fun and frolic aboard the ship to people of all ages and backgrounds and changed the nature of cruising into a market for mass tourism.5Meanwhile, Royal Caribbean, a compet- itor founded in 1968, reinforced the concept by being the first to design ships specifically for warm water, year-round cruising.6
Competitors to Carnival, including companies such as Viking, Princess, and Royal Caribbean, soon developed cruise packages of their own, boosting worldwide industry growth to a compound annual rate of 7.4 % from 1980 through 2010. Over this span, the number of passengers carried by the industry rose to more than 16 million as compared to not even one-tenth as many in 1980 (Fig.3.1). And by 2016, the global number of ocean-going passengers had grown to 24 million.
Cruising accounts for only an estimated 5 % of the North American vacation market, defined as persons who travel for leisure purposes on trips of three nights or
3Ibid.
4As reviewed in Garin (2005).
5It also didn’t hurt that popular television series of the seventies included The Love Boat (1977–1986) andFantasy Island(1978–1984).
6The first Royal Caribbean ship,Song of Norway, went into service in 1970. A detailed industry history appears in Cartwright and Baird (1999) and also in Garin (2005). In 1965 Princess Cruises, operated by Stanley B. McDonald, was the first to focus on leisure travel markets. Gibson (2006) covers history and operations in detail. By the end of the 1990s, Carnival accounted for approx- imately 40 % of all industry revenues and Royal Caribbean, 30 %. As of 2012, Carnival accounted for approximately 60 % of all industry revenues, Royal Caribbean, 25 %, and Norwegian Cruise Lines (partly owned by private equity firm Apollo Group) around 10 %. See Ward (2008) and ABC’s20/20episode of January 20, 2012 about the cruise ship industry.
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longer involving at least one night’s stay in a hotel. The Cruise Lines International Association (CLIA) data further indicate that only around 24 % of the North American and 13 % of the UK population (and much less of the populations of Australia and continental Europe) has ever taken a cruise. The Caribbean still ranks as a primary destination, with the Mediterranean being the second most popular as measured by share of total bed-days (in 2010, Caribbean, 34.8 %, Mediterranean 17.8 %). Table3.1presents an origin-destination matrix for the largest markets.
Cruises are now also packaged to attract tourists interested in specific categories such as adventure, nature, specialty themes, coastal, river, or world expeditions.
Travel agents, who book more than 70 % of cruise vacations and who collectively earn about $1 billion a year in commissions, meanwhile continue to be central to the arrangement of such packages. But the essence is thatcruising is more about the itinerary than the destination.7
From a marketing perspective, vessel size (see below) is only one of several features that are purposely designed and branded for their appeal to different types of passengers. As in the hotel industry, there is generally some overlap and competition between segments but, for the most part, each segment is distinctive.
For example,contemporary cruise lines (including Carnival and Royal Carib- bean) target families and first-time participants in a broad range of ages and incomes typically for excursions of 7 days or less on the largest ships.Premium lines (including Cunard and Princess) target passengers that are somewhat more experienced, affluent, and older. This segment features comfort and style for excursions of up to 14 days and emphasizes destination activities and attractions.
And in theluxurysegment (including Seabourn and Windstar) a cruise would likely be on smaller modern ships able to provide top-scale services, dining, and other amenities, but at the highest per diem prices.
Although North America is the source of about 60 % global boardings, fleets are also being expanded to take advantage of demand potential in relatively low-saturation markets that include the Asian/Pacific (e.g., major operator, Star
0 150 300 450 600
0 6 12 18 24
80 90 00 10
passengers (mil) berths (000)
berths
NA pass Global pass Fig. 3.1 Cruise-line
industry passengers and berths, 1980–2015.Source:
CLIA and company reports
7This notion may be credited to Rodrigue (2013, Chap. 7).
Cruises) and South American regions. In these regions, cruises are typically of shorter duration than are their counterparts elsewhere. Also, China-originated cruising will rank among the top three global markets.8
In recent years, passenger unit growth has been sustained if not accelerated by the industry’s shift toward use of larger ships that have allowed efficiencies to be gained and prices to be lowered. The strategy is similar to that implemented by airlines in their transition to using wide-bodied jumbo jets for long-distance flights. Indeed, the size of the ships has continued to burgeon, with the largest of them several football fields long and able to feed and shelter the population of a sizable village. For example, theCarnival Destiny, built in 1996, sails with 101,353 tons (the first to ever exceed 100,000-tons), a length of 893 ft, and a passenger capacity of 2,642 based on double occupancy.Oasis of the Seas, launched by Royal Caribbean in 2009 at a cost of $1.5 billion is one of the world’s largest at 225,000 tons. And theQueen Mary 2, technically an ocean liner, with a length of 1,132 ft, makes aircraft carriers seem small. Vessels of this size typically cost more than $1 billion.9
A list of some of the largest cruise ships built in recent years appears in Table 3.2.—with the largest as of 2014, Royal Carribean’s Allure of the Sea containing 2,706 rooms, 16 decks, 22 restaurants, 20 bars, a shopping mall, a casino, and a water park and able to accommodate around 6,300 passengers with a Table 3.1 Origin-destination matrix, total bed-days, 2005
Origin
\Destination
The Caribbean/
Bahamas Alaska
Mediterranean Atlantic Island
Northern Europe
South America/
Antarctic
Asia/
Pacific
United Kingdom 300 22 467 190 12 7
Germany 125 n.a. 314 192 20 n.a.
Italy 48 n.a. 423 42 n.a. n.a.
Spain 51 n.a. 311 17 n.a. n.a.
France 55 n.a. 152 26 n.a. n.a.
Rest of Europe 78 n.a. 268 34 n.a. n.a.
United States of America and Canada
6,713 858 1,822 1,033 294 132
Japan 18 20 10 n.a. n.a. 75
Source: World Tourism Organization, Cruise Tourism: Current Situation and Trends, 2010, reproduced with permission and available at: www.siimt.com/work/sites/siimt/resources/
LocalContent/1172/6/Cruceros_2011_pw.pdf Data for Japan is for 2004
8See Beam (2015).
9Voyagerhad a contract price of approximately $500 million not including capitalized interest, change orders or owner’s extras. And theQueen Mary 2, described in Perez (2003), cost $780 million. It is the first liner to enter service since the sisterQE2in 1969. TheQM2length is 1132 ft;
height from water level; 23 stories; and girth, 135 ft. Its maiden voyage to New York was in April 2004. As late as 1954, ocean liners carried one million passengers across the Atlantic as compared to only 600,000 on airlines. But by 1965, airlines carried four million and ocean liners only 650,000.
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crew of 2,400. Nearly all such behemoths are registered outside of the United States, where foreign governments often subsidize the cost of shipyard construction.
In fact, foreign-flag ships, having greater flexibility in hiring, are likely to have significantly lower average unit labor costs than those flying the American flag.
This is an important profitability enhancement factor because the ratio of crew to passengers may be as high as 50 %.10Many cruise companies further benefit from a loophole in the Federal tax code that exempts from taxation a foreign-registered Table 3.2 Large cruise ships, selected sample, circa 1996–2016
Name Year built Passenger capacity Approximate gross registered tons Carnival Corporation
Regal Princess 2014 3,560 142,714
Costa Diadema 2014 4,947 132,500
Carnival Dream 2009 3,646 130,000
Queen Mary 2 2003 2,620 150,000
Carnival Victory 2000 2,758 101,000
Carnival Triumph 1999 2,758 102,000
Carnival Destiny 1996 2,642 101,353
Royal Caribbean
Ovation of the Seas 2016 4,180 167,800
Anthem of the Seas 2015 4,180 167.800
Ovation of the Seas 2016 4,180 167,800
Allure of the Seas 2010 5,400 225,000
Oasis of the Seas 2009 5,400 225,000
Navigator of the Seas 2002 3,114 138,000
Voyager of the Seas 1999 3,114 142,000
Norwegian
Escape 2015 4200 163,000
Getaway 2014 4028 146,600
Breakaway 2013 4000 144,017
Epic 2010 4100 155.873
Source: Company reports
10The choice of a country depends on many factors including the place where the vessel is financed, the operating costs, and the routes the vessel sails. The United States and Britain, for example, have strict regulations concerning the use of unionized labor. So-called flag-of-convenience, “open registries” countries include Panama and Liberia, which are the most popular, and also Bermuda, the Bahamas, and the Netherlands Antilles. The higher operating costs with US registration are in part caused by the US requirement that all ships registered in the United States use only licensed American officers and that three quarters of the unlicensed crew be US citizens. See Dickinson and Vladimir (1997, p. 66) and Garin (2005, Chap. 8) for more details. Note also that the Passenger Shipping Act of 1896 precluded foreign-flagged vessels from operating between US ports when there is no US flag competitor.
The Jones Act of 1920 has had a significant influence on these issues and, as noted by Wayne (2003, 2004), Norwegian Cruise Lines was able to obtain an advantage by agreeing to pay American taxes and conform to American environmental and wage standards in serving the
firm’s income from ships and aircraft if the country in which the firm is organized (e.g., Panama, Liberia, and the Bahamas) offers equivalent exemptions to American companies.11These rules were initially established to promote international ship- ping and trading by air.