Although recent years have seen net profits of cruise companies decline, over the long run they have been quite vibrant and are showing signs of recovery. RCCL reported net profit margins of just under 10% in 2014, while Carnival Corporation recorded net profits of 7.9%. Part of this longer-term growth owes to the dynamic growth of
the sector noted above. Cruise Industry News (2015) projects that Carnival Corpor- ation will grow from carrying 10 million passengers in 2015 to more than 13 million in 2022. RCCL will experience similar growth, going from 5 million to 7 million pas- sengers in that time. The third and fourth largest cruise firms Norwegian and MSC Cruises are projected to grow even faster on a percentage basis. Within that aggregate growth, while traditional markets continue to grow, the potentially vast and relatively new market of China is just beginning to open up. China represents the fastest growing cruise market in the world and for RCCL will soon be its second largest market (Gold- stein, 2015). The company announced that Quantum of the Seas, one of its largest ships, was to be stationed in Shanghai starting in the summer of 2015. Ovation of the Seas (newest Quantum class ship) debuted in China when it entered service in April 2016.
Carnival expects China to eventually become the world’s largest cruise market and it entered the market with Costa in 2006 (Carnival Corporation & PLC, 2015). It has four ships servicing the country in 2015. In 2015 the company announced they had signed a memorandum of understanding (MUA) with China State Shipbuilding Cor- poration and Italian shipbuilder Fincantieri to build future ships.
In addition to growth through opening and expanding new markets, cruise com- panies are uniquely positioned to increase profits through market power. Market power exists when firms are able to establish prices that are higher – or costs that are lower – than those that would exist under perfect market conditions. According to theories of industrial organization, most market power derives from the particular structure of industries. Monopolies or oligopolies allow for firms to raise prices above marginal costs and collect rents. Under oligopolistic competition, firms may collude in order to keep prices high. According to Papatheodorou (2006b), however, there is no clear evidence that this has been the case in the cruise ship industry. This may be that collusion is difficult and cruise lines face competition from non-cruise firms as well.
Due to the nature of the product – cruise tourism like all tourism is mainly an experi- ence good – firms also face risk in under-utilized capacity. Bed nights, much like bed nights in a hotel, or seats on an airplane, are highly perishable. Unsold they are lost forever. This is even more the case for cruise lines, which typically sell cruises for an average of 7 days. An empty berth is empty for a week. As a result high discounting of tickets as departures approach is common, which in turn affects broader prices as savvy customers learn to hold off on making purchases.
Yet this is not to suggest that cruise companies do not possess market power. Instead, rather than utilizing it through the sticker price of a cruise, they pursue it elsewhere.
At least four areas can be identified. First is with respect to cruise customers them- selves. Once aboard, passengers are captive consumers. They are constantly marketed to, with offerings ranging from drinks, high-end dining, shopping for merchandise, Internet access, engaging in activities from gambling, spa treatments, art auctions and onboard adventures. Moreover, as Weaver (2005, p. 165) points out, cruise ships are mobile ‘spaces of containment’ that centre upon revenue capture. Where market power comes in is in the ability to charge premium prices – rents – on all of these. The model here is the airport, where passengers – temporarily captured by their difficulty in leaving to find substitute products – are charged high prices for everything from bottled water and snacks to magazines, clothing and electronics. As revenues from these ventures have increased, airports have increasingly become ‘retailized’, shopping malls within transport centres. Cruise ships are similar, adding more and more shop- ping, entertainment and premium products for sale. The common thread here is that
everything is sold at a premium price. This also spills over to onshore excursions.
Excursions arranged onboard are commonly much more expensive than similar inde- pendent land-based excursions.
In essence, the ticket price for a cruise, while technically not a loss leader, has become less important. Vogel (2012) argues that the cruise market is really two mar- kets: one, a fairly competitive one for buying a ticket and the other a monopoly once passengers board the ship. Once aboard, they become what Klein (2005) calls ‘captive spenders’. Cruise firms have found that one of the most lucrative sources of revenue comes from these ancillary revenues where customers are, in the words of Papatheo- dorou (2006b), ‘spatially constrained’. This also helps explain the ever-increasing size of cruise ships: they not only allow for more passengers, but also more activities that generate onboard revenues. Cruise ships have long included such revenue-generating amenities as casinos, shops and spas. Now many ships include golf driving range simu- lators, wave simulators, climbing walls, skydiving simulators, premium speciality res- taurants and shopping malls. Weaver (2006) reports that RCCL’s Allure of the Seas, for example, contains seven distinct ‘neighborhoods’, many of which emphasize spaces for additional revenue capture. These include an indoor pedestrian boulevard named the Royal Promenade. Along the boulevard are shops, cafés and bars, and the area also serves as a site for entertainment. Former NCL CEO Colin Veitch refers to these huge ships as ‘ultras’, suggesting they are the ships of the future for just this reason (Bachman, 2015). Veitch suggests the model for modern ships is the new wave of Las Vegas resort hotels and casinos such as the Belagio. No longer simply centres of gam- bling, the resort hotels offer a range of entertainment activities, from shows, shopping, activities, rides. The intention is for guests to never leave the premises, in the name of revenue capture, much of it in the form of rents.
When passengers do leave the ship, firm efforts to capture revenue continue. Cruise companies own private islands and other enclosed areas on shore. The islands are either just that or are peninsulas that amount to private beach clubs and ‘fantasyscapes’ that involve both notions of tropical paradise and additional sites for revenue capture (Wood, 2000; Weeden, 2015). They often include activities such as surfing, swimming, snorkel- ling and zip-lining. In addition to these private spaces cruise companies build or own many artificial markets near ports. Sorensen (2006) notes that the Maya Plaza on Cozumel Island, Mexico, is owned by a cruise company. Its only real clientele seem to be cruise ship passengers. She argues the Maya Plaza seems to be deliberately designed to keep the cruise tourist from venturing into San Miguel, the main town on the island.
Second, possessing the ability to extract rents from passengers, cruise companies effectively sell these rents to others in the form of concessions. Again the model is the airport, where the airport operating authority, knowing it has a captive group of con- sumers, auctions off the right to extract rents to restaurants (McDonald’s, Starbucks) or food service companies (Aramark, Sodexo) and retailers. Cruise firms do the same.
Cruise companies traditionally contract with concessionaires to run many of these onboard activities. Steiner Leisure, for example, operates spas on more than 200 cruise ships. Recently, well-known land spa operator Canyon Ranch has also entered the cruise spa market. Casinos are sometimes run internally but are also often contracted out. Century Casinos, for example, advertises itself as the largest independent casino concessionaire on luxury ships, operating casinos on TUI Cruises, Windstar, Oceana, Regent Seven Seas and Nova Star Cruises. Miami-based Starboard Cruise Services, which was purchased by French conglomerate LVMH Moet Hennessy Louis Vuitton
in 2000, operated more than 700 stores on 93 cruise ships from eight different lines in 2014 (Miami Herald, 2014). Its sister firm Onboard Media, provides in-cabin media services for cruise lines while also advertising ‘preferred vendors’ both on and off ship.
Park West Gallery operates art auctions on more than 100 ships globally on such lines as Carnival, Celebrity, RCCL and NCL.
Today these ancillary revenues amount to the main profit centres for cruise lines.
Rodrigue and Notteboom (2013) report that the average customer spends roughly US$1700 for their cruise but a majority of those expenses are captured within the cruise ship itself. By 2015 onboard revenues accounted for roughly 25% of overall rev- enues. Carnival Corporation’s Annual Report for 2014 reported onboard revenues of US$15.8 billion, some US$3.78 billion or 23.9% came from onboard and ‘other’ un- specified revenues. Of that total, more than US$1 billion came from concessions – the auctioning off of the exclusive right to collect rents from passengers. RCCL reported onboard and other revenues constituted 27% of gross revenues in 2014 (RCCL, 2015, 56) and 28.1% the year before. Frequently the ‘other’ in question refers to revenues from onshore activities. Cruise lines want their passengers to stay on ships where they can generate additional revenue. If they do leave the ship for shore, however, the firms also have strategies for generating additional money. These include sales for land-based tours in destinations as well as other fees collected. The shore excursions are sometimes run in house but more commonly are additional concessions contracted to outside vendors such as International Voyager Media, Onboard Media and the PPI group (Klein, 2005). Cruise firms routinely collect a cut of 10–40% of the ticket price of the shore excursion (Kroll, 2004). Cruise companies also collect additional revenues through recommending onshore shops, stores and restaurants. In many cases they pro- mote ‘special prices’ available to cruise passengers only from select port merchants in return for a fee. One merchant in Cozumel interviewed by Sorensen (2006) reported paying a cruise line US$30,000 in a single year in order to be promoted on ship. Again this constitutes a pure rent derived from market power.
Third, cruise companies are able to extract revenues through the threat of exit.
Frequently these revenue gains take the form of reduced costs (such as taxes) or passing off operating costs to other entities. Here the key feature is that sites of production – cruise ships – are themselves highly mobile. This gives cruise companies the power of easy exit and shifting of capacity to meet market conditions. This happens regularly in response to seasonal demand, weather, political instability and changing markets.
In addition, cruise firms can use the threat of exit when negotiating regulatory issues and other terms of service with host governments. Contrast this with other tourism or non-tourism enterprises. The literature on bargaining between multinational corpor- ations and host country governments suggests the balance of bargaining power typic- ally shifts from firm to host government over time (Vernon, 1971; Tarzi, 1995; Vachani, 1995). This is primarily due to the sunken costs made by firms. Once made they are difficult and expensive to remove. Cruise ships, however, are easily moveable. Historic- ally cruise firms have used this mobility to respond to initiatives such as raising destin- ation port fees. Caribbean governments and Alaskan towns, in particular, have faced threats by cruise companies to bypass them as destinations if they impose head taxes (Wood, 2004; Klein, 2005). As a result, passenger port charges remain very low in most destinations, especially next to comparable airport passenger fees.
Cruise firms also pass off many costs of cruising, particularly the construction of port facilities, through similar strategies. Firms regularly go to existing destinations
demanding upgrades, added berths and other accommodation (e.g. to accommodate newer megaships), arguing that without modernization they will exit. This is a par- ticularly powerful argument for destinations that are easily substitutable. There is no substitute for Venice, but for cruise passengers, many Caribbean destinations, for example, are interchangeable. In 2014 the Miami Herald (2014) reported a port building boom throughout the Caribbean, as destinations and possible destinations build as a way to compete for cruise ship business. Most were funded by governments or contracted out by governments to private builders and operators. Notably, few costs were shared by cruise firms. This is also true of embarkation points (hub ports).
In late 2014 Port Canaveral (Florida) completed the first of four new planned cruise terminals. Initial cost was US$100 million. Mobile, Alabama previously spent more than US$25 million on a cruise terminal that drew Carnival ships beginning in 2004, but the company pulled out of Mobile in 2011 in favour of other southern US ports.
Meanwhile Tampa is looking at tens of millions in expenditures to upgrade facilities (including replacing the mammoth Sunshine Skyway Bridge) in order to accommo- date megaships or possibly face elimination as an embarkation point (Tampa Bay Times, 2014). Most of these costs are borne by local authorities or are through public–
private partnerships. The cruise companies rarely participate.
The final way that the cruise industry can exert market power is through directly politicizing that power through peak associations and lobbying. The Cruise Lines International Association was formed in 1975 and has gradually become a primary peak association for the industry. Originally focused on marketing, CLIA merged with lobbying group International Council of Cruise Lines in 2006. Today its membership includes more than 60 cruise lines and the organization claims to represent more than 90% of global cruise capacity (CLIA, 2015). There are certainly additional, primarily regionally based peak organizations as well, but CLIA merged again with seven smaller organizations in late 2012. It is perhaps no accident the merger came together months after the grounding and capsizing of the Costa Concordia off the coast of Italy, killing 32 people. Proponents argue the industry as a whole now speaks with one voice, and CLIA now has global representation at such bodies as the International Labour Organization in Geneva and the International Maritime Organization in London (PR Newswire, 2012). CLIA has been very active in a range of policy issues, including health and safety standards aboard ships, pollution regulations, taxation and labour standards.
CLIA originated as a US-based body and it has long lobbied national, state and local governments. According to the Center for Responsive Politics, spending by the overall cruise industry in the USA peaked at just below US$5 million in 2008 before dropping off during the great recession. In 2014 it reached nearly US$3 billion, with nearly half spent by CLIA (Center for Responsive Politics, 2015). The lobbying organ- ization announced in December 2014 that it was centralizing its US operations by closing its Florida offices in 2014 and relocating all staff to its Washington, DC of- fices. This signals greater attention to national regulatory issues and legislation, par- ticularly on the heels of several individual ship mishaps that led to bad press and consumer criticism. CLIA also refreshed its public relations campaign ‘Cruise For- ward’, which had originally launched in 2012 to sway public opinion away from
‘myths vs. reality’ regarding a number of issues that had given the industry a black eye (pollution, health and safety) in order to ‘clearly communicate the industry’s leader- ship and positive actions’ (CLIA, 2015) in these areas.
Ultimately these moves, of course, are consistent with practices in most indus- tries. To the extent that they face legislation and regulation that will affect their operations and ultimately revenues, firms will organize and seek a seat at the table.
What is particular to the cruise industry is that most lobbying seeks to maintain ex- isting rents as well as to protect industry advantages vis-à-vis non-cruise competi- tors, specifically land-based tourism firms, and that with the merger this now takes place on a global scale.