Southern California ports watch cruise ships go elsewhere

By Johanna Jainchill
A perfect storm has rocked Southern California's cruise sector, prompting a pullback of capacity that has more than erased several years of growth.

Facing a host of challenges that make it difficult to compete as a cruise embarkation point with the Caribbean and Europe, the area's two main ports, Los Angeles and San Diego, are losing their ships.

Click on chart for a larger view.San Diego's cruise calls this year will be half what they were in 2010, which was already down 45% from 2009. Los Angeles will experience a five-year low in cruise passengers this year, to 605,000 from a peak of 1.2 million calls in 2008 (for a larger view, click on the chart).

Most damaging has been the elimination of the two year-round ships at those ports, the 2,052-passenger Carnival Elation from San Diego, and the 3,114-passenger Mariner of the Seas from Los Angeles.

The significant reduction is happening despite the many advantages the region offers.

It is blessed with year-round sunshine, good airlift and a population of 17 million in the Greater Los Angeles and San Diego areas combined. It is home to several of the nation's wealthiest ZIP codes and a cruise line's ideal demographic mix of retirees and young families. There are plenty of pre- and post-cruise options, from visits to Hollywood, Disneyland and the San Diego Zoo to shopping on Beverly Hills' Rodeo Drive and frolicking on Pacific coast beaches.

Yet the reasons for Southern California's loss of cruise traffic are not a mystery.

The nation's most populous state has arguably been the one worst hit by the recent recession and among the slowest to recover.

Last week, when Jerry Brown was sworn in as California's governor, the New York Times reported that he was inheriting a "financially beleaguered state."

A report released in September by the University of California, Los Angeles' Anderson School of Management predicted that California's economic recovery would be "even slower than the rest of the country's," pointing to the state's 12% unemployment rate, which contrasts starkly with a national average of 9.8%. The report said that rate wasn't likely to fall below 10% until late 2012.

The Port of Los AngelesThe economic malaise stands one of Southern California's traditional advantages, its huge drive market, on its head.

"Here on the West Coast, we source a lot of people from California," said Chris Chase, the marketing manager for the Port of Los Angeles. "We have 17 million people [in the San Diego and Los Angeles areas combined]. Of that group, you only need a small percentage to go cruising."

Chase added that in addition to the area's double-digit unemployment rate, "our biggest non-Southern California market is Northern California, and they have the same problems we do."

As they've removed ships from the region, the cruise lines have stated that pricing has dropped too low to sustain an acceptable level of profitability, even when ships sail full.

"I hear from the lines that this is one of their least profitable markets," said Port of San Diego marketing director Rita Vandergaw. "People in California are suffering, and so they aren't willing to pay higher prices."

When it comes to total revenue, Chase said, Los Angeles couldn't come close to matching the revenue that Royal Caribbean International predicted the Mariner of the Seas would generate in Europe, where it was relocated last year.

When Royal Caribbean CEO Adam Goldstein made the decision to remove the Mariner its Mexican Riviera itinerary, he said the ship was not performing "at an acceptable level."

"Throughout the industry, ships normally go out full," he said. "The critical question is, at what price? ... We are obligated to our shareholders to deploy her where she can earn superior returns."

Nor is the issue just ticket prices.

The cruise lines' "ability to sell excursions in Europe is huge, too," Chase said, explaining that, with the exception of Alaska, the "take rates" for shore excursions on cruises in North America is about 30%.

"The difference is in Europe you are looking at 85% take rates," Chase said. "That cash flow is substantial."

Adding to the region's woes are its geography and the rising cost of fuel.

The San Diego terminal, under constructionWest Coast cruise destinations have always been few and far between.

"It's about 800 to 1,000 miles from here to Cabo [San Lucas, Mexico]," Chase pointed out. "And that is the first destination, and a long drive on a ship."

As a result, he said, cruise vessels must sail faster and burn more fuel.

"It isn't the same in the Caribbean," he said. "The Bahamas are 60 miles off the coast of Florida."

Terry Thornton, Carnival's senior vice president for marketing and planning, said last year that in 2008, when oil prices were at their highest, fuel costs ate 25% of the revenue on the Carnival Elation's cruises out of San Diego.

"That's not sustainable," he said at the time. "With fuel costs so high, we needed to generate a reasonable cruise price."

Thornton said last week that while there is no acceptable standard percentage of fuel cost relative to revenue, fuel costs for the Carnival Corp. fleet averaged about 14% of ticket revenues.

Vandergaw expressed concern about the recent rise of oil prices, which some analysts have predicted will average $100 per barrel in 2011.

"That's very discouraging from my perspective," Vandergaw said last week. "Any time there are additional costs it is a real easy decision for them to take the ships and move them somewhere else."

Los Angeles cruise terminal waiting areaAdding further to Southern California's woes has been the reduction of cruise capacity in Alaska, because California has always been an opportune place to relocate itineraries in the winter months.

Last summer alone, Alaska experienced a 17% decline in cruise traffic.

And if all that were not enough, Mexico, home of the cruise lines' most popular destinations, has made headlines in the last two years for H1N1 swine flu and for drug violence that has yielded more than 30,000 murders since 2006.

In December, the Texas Department of Public Safety urged residents of that state to avoid traveling to Mexico during the holidays, citing "drug cartel-related violence" in the northern Mexican border cities and in popular tourist destinations like Acapulco.

"The safety and security of holiday travelers cannot be guaranteed if they venture into Mexico," the warning said.

In reality, Mexico is a huge country, and with the exception of Acapulco, where 17 were murdered in a drug-related shooting last March, popular cruise destinations have experienced none of the violence that erupted in border towns, nor has any cruise passenger been a victim of that violence.

But in the minds of many American consumers, drug violence has permeated the country, and no destination is safe.

For that reason, the Mexican Tourism Ministry has challenged such warnings and is struggling to get the word out that the violence is concentrated in non-tourist areas and affects mostly members of drug cartels.

An Associated Press report found that crime across Mexico varied greatly, and while the homicide rate in the border state of Chihuahua last year was "a horrifying 74 per 100,000," in popular cruise regions like the Yucatan and Baja California Sur, the rate fell to 5 per 100,000, which the report concluded was "low to average even by U.S. standards."

Even so, Americans, never famous for their geography skills, remain reluctant to travel there, which people in the Southern California cruise industry say has hurt their ports.

"Our hope is that the Mexican government will seriously consider [this] and will do something that will make a difference," Vandergaw said.

Rays of hope
Despite all these setbacks, some in the industry see reasons for optimism.

The Disney WonderDisney Cruise Line, which often goes against the grain with deployment decisions, is basing the Disney Wonder in Los Angeles this year after summering in Alaska.

The ship arrives Jan. 21, and its first regular sailing is scheduled for Jan. 23.

"In the short run, Disney being here will add more to our baseline, because as everyone is leaving, they are coming in," Chase said. "Disney will add a marquee value that we are excited about."

As Disney makes a major fleet enlargement with two ships debuting over the next two years, it is able to add new homeports. The line committed to two years in Los Angeles, with an optional three-year extension.

Rena Langley, Disney's vice president for public affairs, said, "Going to the West Coast makes sense for us for a number of reasons. We had great success visiting the West Coast in 2005 and 2008. The West Coast has a significant fan base for Disney Cruise Line. Many of our [West Coast] guests fly to Florida to cruise with us, so a Disney Cruise Line port in their own backyard makes it much easier to vacation."

The bottom line, Langley said, is that "our guests continue to give us feedback that they want Disney Cruise Line to come back to the West Coast."

It helped that the Disneyland Resort is so nearby in Anaheim.

"It was a natural choice for us because of our past success with the Port of Los Angeles and its proximity to area attractions, including the Disneyland Resort," Langley said.

She added that the Port of Los Angeles is one of the busiest cruise ports on the West Coast and has "tremendous experience and expertise. The ease of convenience for transportation and nearby airports was also a plus."

When Crystal Cruises saw diminished demand for its Mexican Riviera cruises, it got creative and changed its itineraries rather than its homeport. Crystal is now offering "Pacific Coastal" sailings -- one from San Francisco, one from Los Angeles -- that make calls in such ports as San Diego, Santa Barbara, Seattle and Vancouver. The line's spokeswoman, Mimi Weisband, said Crystal was "getting some nice interest in them."

"For our repeat guests, it's something different, and they still offer a relatively inexpensive way to experience [Crystal]," Weisband said.

The RotterdamIn addition, both Los Angeles and San Diego have seen growing cruise opportunities to Hawaii.

Princess will operate 16 roundtrip Hawaii cruises from Los Angeles this year on the Golden Princess.

Holland America Line will operate four roundtrip cruises this year from San Diego to Hawaii, three on the Oosterdam and one on the Rotterdam.

Cunard Line has three cruises sailing roundtrip to Hawaii from Los Angeles, and Crystal Cruises will operate one roundtrip sailing from Los Angeles in April on the Symphony.

And there are signs that the economy and public perceptions might be improving.

In recent weeks, West Coast travel agents say they have seen something of an uptick in the local economy as well as a better understanding of the localized nature of the violence in Mexico.

Debby Hughes of CruiseOne in Big Bear City, Calif., said she sells quite a few Mexican Riviera cruises.

"In the rare cases when someone expresses concern about the destination, I share some positive aspects about the levels of safety in the Mexican Riviera," Hughes said, "based both on webinars I've attended with the Mexico Department of Tourism as well as my own recent experiences."

Hughes said that the local economy was not affecting her business, which she said has been growing.

"More than ever before, I think people are looking for an escape from the pressures of daily life, and they're looking for a great value to help them get there. Cruising offers that value."

Susan Reder, president of Frosch Classic Cruise and Travel in Woodland Hills, Calif., also said the local economy was doing better.

"This year [2010] has been terrific," she said, attributing much of that strength to her clientele being at the upper end of the market. "Last year, like most travel agencies, we received so many cancellations. Thank goodness, this year has been a bit more quiet with cancellations."

And, finally, it appears that prices have begun to climb up some.

"Because there are so many fewer cruises available, the cruise prices are going up out of the California market," Vandegraw said.

The cruise lines and travel agents have both noticed this trend, as well.

"Mexican Riviera pricing is nicely higher from the low levels of a year ago," Carnival Corp. COO Howard Frank said on the company's recent earnings call.

Thornton qualified those comments, saying that Carnival has seen "some limited positive pricing trends" for the three ships that operate there seasonally. However, he said "it appears it will take more time for us to achieve pricing close to our 2008 levels.... For 2011, we are hoping to see some steady improvement in the West Coast pricing."

Port of Los AngelesHughes noted that with shorter Mexican Riviera itineraries, pricing is on the rise, while the seven-day cruises are still competitive.

"It will be interesting to see what happens with the rates and demand once the Disney Wonder arrives," she said.

In addition, both ports have made significant investments in their cruise accommodations recently; San Diego has been building an entirely new terminal.

Vandergaw said that the terminal alone wouldn't persuade cruise lines to bring ships back, but she said it would probably help.

"The cruise lines asked us to improve the facilities, and we responded," she said.

Chase and Vandergaw also pointed out that the problems their ports are experiencing are cyclical.

"This, too, shall pass," Chase said. "There will be more opportunities, and our business case will become better.

"No matter how you cut it, the Southern California market is one of the best source markets in the world for the cruise industry."
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