Luxury operators facing choppy seas in 2001 By Brian Major / August 31, 2001 Share 1 -- he luxury cruise market has so far endured a turbulent 2001, buffeted by unprecedented capacity growth, a wobbly economy and shifting definitions of the market's fleet capacity and scale. The fallout has been felt by nearly every operator in the luxury category.Cruise pricing and profits are down across several categories this year, and the luxury segment seems to have been the hardest hit.Because high-end cruise vacationers are discriminating and demand a high level of service, operating a luxury cruise line is a costly venture. As one cruise line official pointed out, smaller luxury vessels, just like larger ships, pay high operational costs, including the salaries of top officers. But because smaller vessels can't spread their costs over a larger passenger base, they must attract premium rates to be profitable.However, with cruise rates at a two-year low, some luxury lines are downsizing or selling unprofitable ships to other operators. Others continue to build new ships, but not before hiring new chief executives.The challenging pricing environment is most evident at Cunard Line, the luxury cruise category's largest operator.Last month, Cunard reduced its operations by dismissing 92 land-based employees. The move represents a 3% reduction in Cunard's 3,000-member work force, 534 of whom work on shore.Pamela Conover, Cunard's president and chief operating officer, said the dismissals were prompted by capacity changes at Cunard's Seabourn division, which recently sold two 116-passenger ships to Norwegian investor Atle Brynestad.Seabourn also shed the 740-passenger Seabourn Sun this year.The ship is being transferred to the company's Holland America Line brand and will sail under the name Prinsendam.Carnival Corp., the parent company, merged Cunard and Seabourn when it bought the former company in 1998. The merger created the largest luxury cruise company.But since then, Carnival Corp. has focused on new ships for its mass-market and premium brands and hasn't built any luxury-market ships.The one luxury vessel Cunard has contracted for under Carnival Corp., the Queen Mary 2, will debut in 2003 as the largest cruise ship ever to sail.Some of Cunard's pain has been self-inflicted. Earlier this year, Howard Frank, Carnival Corp.'s vice chairman, admitted that Cunard "took some missteps on pricing strategy last year," which worsened the line's fortunes when the economy went sour.As one cruise official pointed out recently, Carnival Corp. is the only publicly traded company among cruising's luxury segment, so it's the only company required by law to release detailed financial results.For that reason, it's difficult to compare Cunard's recent financial performance with other operators in its segment. But it isn't hard to notice the change across cruising's luxury category.Silversea Cruises has been one of the fastest-growing companies in the segment, having added two ships, Silver Shadow and Silver Whisper, in the last 12 months and increasing the line's capacity by 130%.Each is nearly twice the size of the line's first vessels, Silver Cloud and Silver Wind, leaving the line with an additional 776 passengers to attract each week.Like other luxury lines, Silversea has had to reduce rates to fill its berths, which has been a challenge because of the line's rapid capacity increase.The Fort Lauderdale-based line has been among the industry's highest-priced products.This summer, Silversea's Italian owners, the Lefebvre family, completed a "restructuring of the family holdings," resulting in the appointment of Dott Manfredi Lefebvre to chairman, a post previously held by his brother, Prof. Francesco Lefebvre.As his first order of business, Lefebvre named Albert Peter chief executive officer. Peter has a strong background in finance. According to company officials, he has been the line's banker throughout its expansion program, which began in 1998.Prior to joining Silversea, he held senior management positions in the international banking and venture capital industry.Peter is now responsible for a growing fleet whose newest ships are helping to redefine the luxury segment.The first Silversea ship was introduced in 1994, with a passenger capacity (296) and gross tonnage (16,800) roughly comparable to what was then its main competition, two identical Seabourn ships (208 passengers, 10,000 gross tons).Since that time, however, luxury operators have followed an industrywide trend toward larger vessels offering more passenger capacity and the potential for more revenue.These new-generation vessels are changing the category's scale parameters.Previously, the largest luxury vessels were Crystal's twin 940-passenger, 50,000-ton ships and the 38,000-ton, 740-passenger Seabourn Sun (Cunard Line's 1,500-passenger Queen Elizabeth 2 is an anomaly because of its multiclass system).All three were considered by cruise experts as outside prevailing luxury parameters, which generally called for ships of 18,000 tons with 200 to 400 passenger berths.Modern luxury ships are far more likely to carry 400 to 1,000 passengers and feature tonnages of 50,000 and up.For example, Crystal Cruises' newest ship will be a 68,000-ton, 1,080-passenger vessel. It is being built at France's Chantiers de l'Atlantique shipyard, and delivery is scheduled for 2003.The unnamed vessel will feature a space ratio of 62.9 (compared with ratios in the low- to mid-50s for the Harmony and the Symphony), and 85% of the ship's staterooms will be equipped with balconies.Executive changes have also been afoot at Crystal Cruises. Like Silversea, Crystal's owners tapped an executive with a track record in finance.In July, Gregg Michel replaced Joseph Watters as Crystal's president. He had been Crystal's senior vice president of finance and administration.With Crystal since its launch in 1988, Michel was a member of the original management team that developed Crystal's onboard product.One luxury-market official was blunt in describing the state of this year's luxury cruise market. "It's not been an easy year," said Mark Conroy, president of Radisson Seven Seas Cruises. "It's not a good year for anyone."Still, Radisson is doing as well as any other line in the segment. Radisson is now the second-largest operator in the luxury segment, having introduced the industry's only all-suite, all-balcony ship, the Seven Seas Mariner, earlier this year. Another vessel, 50,000-ton, 700-passenger Seven Seas Voyager, is under construction at Italy's T. Mariotti shipyard, with delivery slated for 2003.Radisson's newest vessels exemplify the upgraded amenities and facilities found aboard contemporary luxury ships.As recently as the mid-1990s, balcony staterooms and shipboard Internet facilities were considered gracious luxuries. Today, they are essential elements of any successful luxury ship.The first passenger vessel to offer a balcony with every stateroom, Seven Seas Mariner, represents the apex of luxury-market innovation."I think [Mariner] worked out better than we thought," said Conroy. "The biggest problem is my minimum cabin is almost as good as my best suite."Otherwise, Mariner's superior accommodations -- (suites range from 359 square feet to 1,204 square feet and all include king-size beds and TVs with VCRs) -- and varied amenities (including a 12-terminal Internet center) are de riguer for discriminating, high-end cruise vacationers.The luxury market's struggles have not deterred some operators from testing the waters.Last month, Norwegian investor Atle Brynestad named former Cunard chief Larry Pimentel co-owner, chairman and chief executive officer of SeaDream Yacht Club, a new seagoing venture focusing on the former Seabourn Cruise Line ships Sea Goddess I and II, which Brynestad purchased in August.Interestingly, Brynestad has already tried to separate his new product from the highly competitive luxury cruise market."The product will be an extraordinary ultra-luxury, mega-yachting experience not currently available," he said.Still, most operators aren't ready to give up on the luxury segment."The customers are out there," said Jim McHugh, vice president of marketing at Silversea."We've seen [agents] be successful when we give them the tools. You'd be surprised how many people there are in this group."