Cruise Carnival's ship order ends dry spell in the cruise industry By Johanna Jainchill / December 07, 2009 Share 1 -- Efficiency, value are Carnival prioritiesTravel Weekly cruise editor Johanna Jainchill interviewed Carnival Corp. CEO Micky Arison about the company’s surprise order for Carnival Cruise Lines and what the deal means for the cruise industry and for Carnival Corp.’s shipbuilding strategy.Q: You surprised analysts by ordering a ship for Carnival instead of Princess. A: We have been working on a prototype project for Princess, and we are very close to getting a deal done for Princess. But the actual design and negotiations have taken a little longer than we’ve liked. We are still shooting for end of year. Q: Why was ordering the third Dream in dollars so important? A: Historically, we have done a number of euro deals per year, and we are comfortable with that because we have a significant euro balance sheet with our European brands. But in all likelihood the deal we do with the Princess ships will be in euros, and we would have preferred not to balloon that euro exposure too far. Q: Is this order a signal to the market that you have confidence in the cruise sector?A: If I didn’t have confidence in the cruise sector, I’d be retired. It’s the only thing we do, and we have confidence in it both in North America and especially globally. We’ve gone through a very difficult time, but considering the kind of crisis we went through in the last 12 months, if you look at the fact that we earned a billion dollars in the third quarter in the middle of this crisis, it kind of shows the resiliency of our company in this kind of situation. We have very, very powerful brands that are well positioned to take on any kind of economic situation. Q: You’ve stuck by your statements that you would not build much bigger, and certainly not as big as the Oasis. Why does that make more sense?A: Our brands have built the largest ships in the world. When Destiny came out she was the largest ship in the world, the Grand Princess was the largest ship in the world and Queen Mary 2 was the largest ship in the world. We built large ships. But we like to build ships that have … the flexibility to call at 99% of the ports we call at globally. Even the Carnival Dream can call in Venice. Venice is a very important port. And there are dozens and dozens of Venices around the world that we want to be able to call on regardless of the ship. Q: The Dream is almost 50% smaller than the Oasis but accommodates about 35% fewer people. Are you concerned the space ratio is not as good? A: I think they are much better because they are more efficient. I’m looking at the more efficient they are, the more I’m able to give a reasonable price to the consumer. The reality is for what we announced a few days ago, we could build two Dreams for the cost of one Brand X. And we get 7,400 beds to their 5,400 beds. That’s more efficient, and being more efficient means better value and price to the customer.Amid the worst recession since the 1930s, Carnival Corp.’s $738 million ship order for Carnival Cruise Lines sent a signal of confidence in the health of the cruising industry from the world’s largest cruise operator. It was Carnival Corp.’s first North American ship order since late 2006 and the first for the cruise industry in 20 months. "We think the business model is as strong as it’s ever been," Carnival Corp. Chairman and CEO Micky Arison said three days after announcing the new ship order. Carnival Corp. is also seizing the opportunity to order new vessels at some of the lowest shipbuilding rates in years. Italian shipbuilder Fincantieri will build the 130,000-ton cruise ship, the third Dream-class vessel, with a scheduled delivery in spring 2012. The first Dream was delivered in September; the second, the Carnival Magic, is slated to debut in 2011. The all-in cost of the ship will be approximately $200,000 per lower berth, less than the $224,000 per-berth cost of the current Dream ship or the Magic’s $235,000 per-berth cost. Equity analyst Tim Conder of Wells Fargo called that price "attractive." The third Dream ship was also ordered in dollars, protecting Carnival Corp. against a currency slide that could make the vessel more expensive. It was a condition that Arison said set the stage for the order and one that he might not have been able to demand as recently as two years ago. Fincantieri and the other European cruise shipbuilders are reeling from the current turmoil in the industry. "They, and all the yards today, are anxious to make a deal happen," Arison said. "The reality is there is a global worldwide shipbuilding and shipping crisis going on."From 2005 to 2008, Arison said there was an "absolute boom in orders for container ships and bulkers.""And after the crisis last September, that just stopped," he said. "So prices for things like steel and engines and components have dropped dramatically."Arison added, "We were insistent on a dollar deal, and Fincantieri was willing to do it." The move surprised Wall Street analysts who had been predicting a Princess Cruises ship order by the end of the year. Princess is Carnival Corp.’s only North American brand without a vessel on order. Arison said a Princess ship order is still likely to be finalized by the end of December or in January. That ship is likely to be ordered in euros, he said, and the delay in placing the order is because the ship will be a prototype vessel for a new class. Surprisingly, Arison hinted that Fincantieri, the shipyard that has built almost every Carnival Corp. vessel since 2005, might not build the Princess ship. He said Carnival was negotiating with several shipyards. The third Dream order comes at a time when cruise ship orders have all but dried up. After the second Oasis-class ship is delivered to Royal Caribbean International, STX’s yard in Finland has no cruise ships on order. Its French yard has one MSC Cruises ship and Norwegian Cruise Line’s Epic to deliver before its order book is empty.Fincantieri has the most ships on order, 11 in all, but Arison pointed out that the yards have no cruise ship business on the books from 2013.In a statement, Fincantieri CEO Giuseppe Bono said, "This is a first, important signal from a market which is still going through a difficult phase. The sector is holding, even if it is hard to understand when it will recover completely." The last time a major cruise vessel was ordered was 20 months ago, when Celebrity Cruises ordered a fifth Solstice-class ship from Germany’s Meyer Werft shipyard. That ship is scheduled for delivery in fall 2012. The slowdown came close on the heels of an ordering spree like none the industry had seen. By 2013, ships delivered to Royal Caribbean Cruises Ltd. since 2006 — Celebrity’s Solstice-class and Royal Caribbean’s Freedom-class and Oasis-class ships — will account for half its fleet. But after the Allure and the last Solstice-class ship are delivered, those two brands have no new ship orders — nor should they place any, according to some analysts. "We believe [Carnival Corp.] remains the only cruise company with the financial flexibility to order new ships through 2011," said Conder. Next year, Carnival Corp. will introduce six ships, four of them for its European brands. Arison said that when Carnival Corp. merged with P&O Princess in 2003, it made the decision to significantly increase the size of its European brands (Costa, Aida and P&O), which the company felt were vastly underdeveloped. By 2012, when those brands have reached the growth level Carnival planned for them, the company will slow its delivery schedule to add two to three ships per year to its entire fleet. "Aida, for example, is a very, very powerful company in Germany," Arison said. "So we can now go to a more rational and conservative approach in the growth rates. … But each brand will be jockeying for more capacity because they each believe they can grow their brands. We will have to decide when each one will get their capacity increases and do it with a rational approach." Several travel agents who have suffered through a year of selling cruises priced historically low said the order was a good sign for the industry. But they also said they appreciated the more prudent growth plans. "Clearly, ship orders are a good thing for the industry and an indicator that the lines have a healthy balance sheet," said Howard Moses, president of the Cruise Authority in Atlanta. "The days of growth at all costs seem to have subsided, and we hope that ship orders now come in based on attainable growth targets for all parties involved. Ridiculously low pricing and unrealistic growth doesn’t serve anyone in the industry."The decision to give Carnival Cruise Lines another ship was simple, Arison said. The Carnival brand is "hugely successful," and the Carnival Dream has already proven very successful, he said. As for the Dream, he said, "Bookings are very good, and she is selling at a nice premium. Carnival, as a contemporary, mass-market brand carrying more than 3.5 million people a year, clearly is in the best position to grow."