The undeclared race for supremacy in the European cruise market reached a fever pitch this month when Carnival Corp. revealed a plan to form a joint venture with Iberojet Cruceros, a two-ship cruise outfit based in Mallorca.

Carnival entered into a letter of intent with Orizonia Corp., Spain's largest travel company and Iberojet's parent, to transfer Iberojet's two vessels to a newly formed joint venture and to grow that fleet over the next few years through the acquisition of existing Carnival Corp. tonnage.

Carnival has not said what ships it would transfer to the new company.  

For anyone keeping score, Carnival made its move on the heels of the purchase by the world's second-largest cruise company, Royal Caribbean Cruises, of Spanish cruise and tour operator Pullmantur last November.

And in December, Carnival entered into a letter of intent with TUI AG, Europe's largest tour operator, to form a joint venture to develop a new cruise brand for the German-speaking market.

This is in addition to action in Asia, where Carnival's Costa Cruises became the first international cruise line to embark Chinese nationals from ports in China last July. Shortly thereafter, RCCL announced it would do the same when it begins operating the Rhapsody of the Seas out of Singapore, Hong Kong and Shanghai in December.

The overarching reason the world's two largest cruise companies are staking their agendas on burgeoning foreign source markets, particularly Europe, is growth potential.

The European cruise market is underpenetrated. As Carnival noted in a recent Securities and Exchange Commission filing, Europe is the largest single leisure travel vacation market, but cruising has had a much lower penetration in Europe than it has in North America.

About 10 million North Americans cruised last year, or 3% of the total population. In contrast, only 3.3 million Europeans, or just under 1% of the population, booked a cruise, according to G.P. Wild, a U.K.-based business research firm. 

Bank of America analyst Michael Savner pointed out that only 1% of German consumers and 1.4% of Spanish consumers cruised in 2005, compared with 3.5% of Americans.

But according to the European Cruise Council's latest statistics, between 2003 and 2005 the number of European cruisers increased by 13%; in Italy the number grew by 28%, in Spain 26% and in Germany 10%. The U.S. market is also growing, but more slowly, at 9%, according to Savner.

"The cruise lines recognize you can't base it forever on the North America market and the Caribbean," said U.K.-based cruise industry analyst Tony Peisley. "There is a limit to how many ships you can put in the Caribbean, and there is also a limit to pricing there. ... If you can't put [capacity] there, you have to put it somewhere else. Europe is the next best market, and Asia will follow that."

The Spanish and German cruise markets, the targets of the most recent investment, represent two sides of European cruising. 

Germany has a tradition of cruising, said Peisley, while Spain has almost none. In Germany, he said, there is a well-established tradition of river cruising, budget and upmarket cruises. Carnival's venture with TUI will tap into the middle cruise market.

"TUI is very strong there and well established," Peisley said. "They were at the bottom end of it and the top end of it, and they could see that all the money was in the middle. Rather than set it up themselves, they wanted someone with the expertise of Carnival to hit that market for them."

Spain, on the other hand, has almost no tradition of cruising. While the U.K., Germany and Italy have had indigenous cruise companies for the last century, Spain has not, despite its 3,000 miles of coastline. 

"It's a market that doesn't understand the product, so it's a hard sell," said Peisley. However, that also means that the cruise companies can go in and "really create the market they want," he added.

Germany has double the population of Spain, with more than 82 million people as of July 2006. As the fifth-largest economy in the world, its $2.6 trillion gross domestic product is more than twice Spain's. But it is also one of the slowest-growing economies in the European Union, according to U.S. government figures.

Spain, on the other hand, has flourished since joining the EU, and its economy is rapidly expanding, suggesting a potential that many nations cannot offer.

"It's a growing economy, and as a result there will be natural growth in tourism and revenue but also in devoting that tourism share to the cruise industry," said Jose Campos, secretary general of the Association of Mediterranean Cruise Ports, based in Barcelona. "Already, that trend is happening."

Campos said that until recently the Spanish perception of cruising had been that it was a product "reserved for the wealthy." That was reinforced by U.S. cruise lines, which brought foreign passengers into ports like Barcelona on massive ships. The perception is changing, he said, in part because of the formation of local cruise lines like Pullmantur and Iberojet, which opened the market to Spaniards.

"The language of the ships is important," Campos said. "Spanish people don't speak much English. If they chose Royal Caribbean and they don't speak English they may not feel very comfortable. They have their traditions and their way of eating Mediterranean diets."

This may be a key reason that Carnival and RCCL decided to forge deals with existing Spanish cruise lines rather than simply move their own ships into those markets.

The 3,000-mile Spanish coastline also represents an opportunity for cruise lines to emulate the homeport boom that both Carnival and RCCL's cruise brands benefited from in the U.S.

"A lot of ports that ships are going into increase the possibility of getting Spanish passengers embarked in those ports," Peisley said. "That is how Italy does so well. They have Venice, Genoa, all these places. After Italy, [Spain] is the best country from that point of view. A lot of cruise ports means a lot of potential for people to drive. You don't have to fly them in." 

Campos said many of the ports around Spain were seeing investment in facilities that will support this trend. He noted that some ports on the Costa Brava north of Barcelona had experienced 100% growth in cruise calls over the last few years. A new cruise passenger terminal recently opened in the southern Spanish town of Castellon.  

Such investments are likely to increase as countries see the contribution cruise tourism makes to their economies. A report recently completed by G.P. Wild for the European Cruise Council indicated that the cruise industry generated 1 billion euros in direct spending in Germany and 683 million euros in Spain.

Cruise investment in Germany and Spain also reflects the ability of people to fly easily within Europe.

"With the increases in low-cost air fares, EU travelers can now get to a number of embarkation points at reasonable prices," according to an institutional private equity investor with significant travel-related investments.

The investor also noted that Carnival and RCCL "are flush with cash and looking for incremental growth to complement their existing product lines. Cash is a dead weight on the balance sheet, and it needs to be deployed or the stock price will stagnate."

To contact reporter Johanna Jainchill, send e-mail to [email protected].

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