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
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
"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
Trade feels the effects of rate cuts, capacity
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
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 Mytravelco.com. "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."