Cruise price competition affects profits, pay


NEW YORK -- Competition, the saying goes, makes everyone better. But intense price competition, a weakening national economy and aggressive shipbuilding programs are combining to make 2001 a challenging year for the cruise industry.

The industry's recent struggles are illustrated in second-quarter financial results from the three largest operators, Royal Caribbean Cruises Ltd., Carnival Corp. and P&O Princess Cruises.

Two of the Big Three reported reduced earnings for the quarter and executives at all three said intense price competition -- responsible for lower yields and dwindling travel agent profits -- will affect cruising throughout 2001.

The biggest second-quarter loser was Royal Caribbean, whose net income declined 25% to $81.7 million.

Incidents on four ships caused the cancellation of eight weeks of sailings, reducing earnings by $12 million, but Royal Caribbean's profits declined 13.5% even without those unusual events.

"We are clearly feeling the challenge of a significant softening in the economy, coinciding with a capacity increase in excess of 30%," said chairman Richard Fain.

Royal Caribbean's yield (net revenue per available cruise day) fell 8.8% in the quarter, and the company expects a 2% to 3% yield decline in the second half of the year. Falling yields also impact agents, because lower prices mean lower commissions.

The pricing problems aren't limited to one region. The Caribbean has long been cruising's most competitive arena, but this year, "creating demand, for seasonal markets [like] Alaska, Bermuda and Europe has been especially challenging," Fain said.

Carnival Corp. reported an 8.3% decline in second-quarter profits, to $187 million. On the plus side, operating income was up 14.3% and "we have and have had less inventory available now than at this time last year," said chairman Micky Arison, in a June conference call with analysts.

However, Howard Frank, Carnival's vice chairman, called cruise industry pricing is "extremely aggressive," noting that "the whole industry is concerned over pricing."

The second-quarter news was better at P&O Princess Cruises, the industry's third-largest supplier and the only one of the Big Three to report increased earnings, as second-quarter net income rose 7.6% to $89.1 million.

Yet P&O Princess did not go unaffected by soft prices. The company's second-quarter yield fell 3%, which chief executive officer Peter Ratcliffe attributed to competitive pricing in the Caribbean and Alaska.

Moreover, Ratcliffe said cruising hasn't seen the bottom of the low-pricing cycle. "The industry is likely to continue to see competitive pricing as it absorbs the new-build programs of the major operators."

Trade feels the effects of rate cuts, capacity gains

Agents, have little trouble recognizing the results of the industry's competitive pricing. "The whole problem with the industry today is that the product is underpriced," said Mike Wild, vice president of cruise marketing at Orlando-based Travelbyus Cruise Center. "Everyone is working harder than ever to make the same money."

Agents also understand that with several new cruise ships set for introduction through the end of 2002 (including new vessels from Carnival, Royal Caribbean and Princess), cruise rates may not improve anytime soon.

"I don't expect pricing to go up," said John Keen, president of Cruise Outlet of the Carolinas, a division of "It takes twice the work to make the profits we made in 1998 and 1999. But I'm used to riding out the ups and downs."


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