Wednesday, March 28, promises to be a typical
winter weekday on the island of Grand Cayman.
Seven mega-cruise ships
will pull into Cayman's capital, George Town. The ships will arrive
early, about 7 a.m., and leave before the sun sets, around 4 p.m.
The passengers will go to Stingray City, they will do world-class
diving and they will lounge at Seven Mile beach.
The smallest of the
ships, Royal Caribbean International's Radiance of the Seas, will
deposit about 2,100 passengers; the largest, Royal Caribbean's
Freedom of the Seas, will disembark more than 3,600. In all, the
seven ships, including three from Carnival Cruise Lines and one
from Costa Cruises, will bring about 20,000 people to George Town,
nearly doubling the city's population.
It is a scenario that
plays itself out in dozens of Caribbean ports throughout the year,
every year.
But behind the images
of busy ports, crowded piers and the sheer numbers of ships and
passengers, there lurks a growing concern that the Caribbean, long
the bread and butter of mass-market cruising, is showing signs of
weakness.
As good as 2006 was for
the cruise business, with ship introductions, a cash-cow market in
the Mediterranean and the largest cruise lines continuing to reel
in impressive profits, it was also a year marked by the same
blemish on nearly every earnings call, every analysts' report and
in every cruise line forecast. The Caribbean market has been in a
pricing slide since the end of 2005, with only spotty signs of
improvement.
The cruise lines say
their ships are sailing full, but they also admit to pricing
pressure.
In October 2006, at the
Cruise Holidays convention in Miami, there was widespread buzz
about an agent who had sold a five-day, $199 Caribbean cruise out
of Jacksonville, Fla., and had reaped a $6 commission. Similar
stories of major cruise lines calling past customers and offering
weeklong cruises for under $500 followed. An Internet search of 
Caribbean fares yielded
similar results; in 2006 it was sometimes cheaper to take a cruise
to the Caribbean than to stay home.
"Clearly, there is
revenue softness in the Caribbean," Colin Veitch, NCL Corp.'s CEO,
said at the recent Seatrade Cruise Shipping Convention in Miami.
"When we speak to analysts and investors, we probably spend half
the time answering this basic question: Is this economic factors or
is this a fundamental structural issue?"
The question may be
basic, but it is becoming increasingly obvious that the answer is
complicated. Ask various players in the industry why the Caribbean
has softened and you'll be offered any number of reasons, ranging
from the economy to the impact of higher oil prices on U.S.
consumers to a jump in hurricanes to confusing passport
rules.
The cruise lines tend
to agree that the issue is not structural. They see the weakness as
a cyclical phenomenon caused by economic changes that specifically
affect those American consumers most likely to take a mass-market
Caribbean cruise.
The cruise lines, as
well as the ports, resist another widely held theory that the
public has a case of Caribbean fatigue syndrome. According to this
theory, veteran cruisers are no longer interested in the typical
itineraries that cruise lines offer, and there simply aren't enough
first-time cruisers to fill the void.
To a large extent, the
softening Caribbean market appears to be an anomaly in an otherwise
healthy industry. Cruising remains robust, mostly because of the
cruise lines' ability to move their ships where the yields are
highest. One cruise executive said that yields in the summer are
highest in the Mediterranean, followed by Alaska, then New York and
finally the Caribbean.
In the last year,
Carnival has moved the Elation from Port Canaveral, Fla., to San
Diego, where it will be based year-round to offer cruises to the
Mexican Riviera. Its newest ship, the Carnival Freedom, will spend
its summers in the Mediterranean. Royal Caribbean will base the
Independence of the Seas in England when it debuts in 2008, giving
the cruise line a record seven ships in Europe.
But both lines are
still strong in the Caribbean. According to A.G. Edwards analyst
Tim Conder, 42% of Carnival Cruise Lines' 2007 capacity and 54% of
Royal Caribbean and Celebrity's capacity will be
Caribbean-based.
As analysts and cruise
executives point out, while hot destinations like Europe and Alaska
are attractive locations for summertime cruising, the Caribbean is
one of the few places where many ships can be deployed in the
winter.
"I can't find perfect
jobs for all of them in the winter," Rick Sasso, MSC Cruises CEO of
U.S. operations, said of his eight-ship fleet. "So one very nice
job is being in the Caribbean with the proper ship. You can't keep
12 ships in the Med in the winter. And you can't send five ships to
South America or five to South Africa.
"And," he added, "North
America is the cruise capital of the world."
In addition, the worst
may be over. After Carnival Corp.'s first-quarter earnings call
this month, in which it said it expected record Caribbean bookings
this year, albeit at lower prices, Conder noted that "Caribbean
pricing for both short and long itineraries appears to be
bottoming, based on our pricing surveys."
Pricing is down
compared with last year, A.G. Edwards' pricing survey indicated,
but it appears not to be continuing its slide.
The report offered some
much-needed confidence to an industry that puts 39% of its total
capacity in the region, according to figures from the Cruise Lines
International Association, of which most big-ship lines are
members. CLIA member lines have 38 ships on order at a cumulative
cost of more than $20 billion.
While the various
explanations for Caribbean market conditions are all compelling, in
the end they may each clarify a part of what is going on.
The
economy
Veitch used his
platform on the annual Sea-trade State of the Industry panel to
offer a presentation about why forces in the U.S. economy explained
the Caribbean market softness.
When analysts ask if
the market conditions represent economic or fundamental structural
issues, he said, what they really mean is: "Has the market maxed
out, or the consumers are bored with your product, or the
infrastructure hasn't kept up with your growth, or people don't
like the big ships or it's the impact of hurricanes."
"I'd like to make the
case ... that it's none of these," Veitch said. "It is something
going on in the economy. We've been here many times before. It's
temporary softness, and we'll come out of it again."
Veitch's PowerPoint
presentation correlated soft Caribbean sales with a weakening of
the middle and lower levels of the U.S. economy. The recent
stagnation of the housing market in the U.S., he said, meant that
after years of "free money" in the form of extremely low interest
rates and the ability to tap into high home equities, lower- and
middle-income consumers' recreational savings were being diminished
by rising interest rates on their home loans, on top of consumer
spending on gasoline going from 2% of household income in 2001 to
4% in 2006.
"Many ships at end of
the '90s ... came into service during a
very strong consumer market," he said. "That market is now
faltering a little, and there is softness at the low-price-point
end of the market."
According to Conder,
the median family income for North American cruisers is $84,000.
Among cruisers on contemporary lines, that income hovers between
$40,000 and $80,000. About one-quarter of those families, 25.8%,
make between $40,000 and $60,000.
"They are getting
squeezed by gas going up $50, their mortgage going up $300. That's
$500 a month, and they have to cut back somewhere," Conder said.
"At some point it cuts into spending."
The resort consumer is
different, he added. This is typically a higher-end consumer with
income that averages about $80,000 per year. This is also true of
luxury cruisers.
"We are struggling to
sell mass-market to the Caribbean," said one travel agent who is a
top producer. "If all someone can afford is a $500 cruise, $3 gas
prices hurt them. They will not go on vacation. If someone can
afford a $3,000 cruise, $3 gas prices are annoying."
Conder said that this
most hurts the least expensive cruises, the three- to five-day
segment. But the ships are still full.
"If cruise lines drop
prices enough, people will cruise," Conder said, "especially if
they can drive [to the ship.]"
Where are the first-timers?
The economic pinch may
also pose another problem for the industry: a possible slowdown of
first-time cruisers joining the ranks. First-timers, who are
typically younger and less affluent than experienced cruisers, are
more likely to take the shorter, three- to five-day cruises -- the
very products that have been hardest hit by weakness in the
Caribbean.
And to hear Carnival
Cruise Lines CEO Bob Dickinson tell it, the industry needs a
serious infusion of first-time cruisers.
Late last year he told
Travel Weekly that since 2002, the number of first-time cruisers
had dropped 10%, from just under 65% of overall Carnival cruisers
to the mid-to-low 50% range.
Royal Caribbean
increased its three- to five-day Caribbean cruises this year
despite the softness. Lisa Bauer, Royal Caribbean's senior vice
president of sales, admitted that the segment was somewhat weak,
but she said it was an investment in the future of cruising if it
attracted first-time cruisers.
"Once we get them on,
we know they will come back," she said. "Those cruises have the
highest satisfaction rates of all our cruises."
Evan Eggers, president
and co-founder of SureCruise.com, agreed with the assessment, going
so far as to say that the current Caribbean weakness could be a
boon to the industry in the long run. He said prices had been cut
on 1,234 Caribbean departures since November 2006, about $80 per
person on average.
"You want cruising to
be accessible to broadest possible spectrum of Americans," he said.
"These prices will bring more people into cruising. ... We need to
focus on bringing new people into cruising."
Caribbean fatigue
An influx of first-time
cruisers would also help ameliorate the problem of possible
Caribbean fatigue.
"My clients don't want
to go the Caribbean anymore," said one agent in California. "Even
on a high-end ship, they've been there, done that, several
times."
She added that the
small ships do a better job of going to less-crowded destinations,
but that the bigger the ship, the more crowded the port, and the
more likely the port would look just like the one the ship pulled
into the day before.
"There are a lot of
alternative cruise destinations, and the Caribbean is a tired
product," said David Russell, principal of DMRussell Consulting, a
tourism services consulting firm. "There are a lot of interesting
possibilities for cruise experiences elsewhere that there didn't
used to be. The Caribbean product is just one of many now, and it's
been around so long it's a bit old and tired."
Russell consults on
many tourism development projects in the Caribbean. Overcrowding at
certain ports is one of the problems, he said. Belize, for example,
served as few as 15,000 cruise passengers per year as recently as
1999, he noted; now it draws close to one million.
"I went to an eco-site
[in Belize] with 17 boatloads of cruise passengers," he said. "And
it didn't much feel like an eco-site. It felt more like
Disney."
This is not the first
time the Caribbean has faced challenges to its
dominance.
As recently as 2003,
Kenneth Atherley of the Barbados Port Authority presented a paper
to the Organization of American States' Inter-American Committee on
Ports about the industry's challenges in the Caribbean.
In what now seems to
have been prescient, Atherley proposed that the Caribbean was
already facing market share challenges.
"Other regions are
providing what the Caribbean has traditionally promoted: sand and
sea, and offer a better quality of service," he wrote.
Atherley also touched
on overcrowding and infrastructure issues affecting Caribbean
ports.
"The cruise sector has
opened up an opportunity for heavy use and instantaneous cash flow
from short-term but intense use," Atherley wrote. "Unfortunately,
in some cases, this added pressure onto land-based facilities,
resulting in congestion, scheduling and control problems, which
have affected visitor satisfaction."
The tug-of-war between
ports and cruise lines has always existed.
"Some ports where the
cruise experience is better than 10 years ago -- those are the ones
that work favorably into our itinerary plan," Dickinson said. "In
some ports where the infrastructure and the cruise experience is
atrocious compared to 10 years ago -- those ports would logically
be on the bubble when more attractive ports open up. Those are the
ones that are at risk."
Some travel agents see
the recent weakness as opportunity for the lines to diversify their
Caribbean products.
"Projects like
Carnival's port development in Roatan [Honduras] are reactions to
needing to diversify the traditional Caribbean ports of call and to
attract past cruisers back again to try new things," said
Eggers.
He added that Caribbean
pricing weakness was partly a result of "so many new staterooms
being put on line that it is simply supply and demand. Supply has
caught up with demand and gone a little ahead of it."
"It will even out
again," he said. "This industry grows year after year after
year."
Eggers said he believed
that there was nothing wrong with people traveling to farther
corners of the world, that in fact it said something positive about
the American cruising public.
"Now that you have
cruise lines Americans would be comfortable in, more Americans are
seeing the world," he said.
Other
factors
The warm winter during
the holiday season in the Northeast this year; the residual effects
of 2005, one of the worst hurricane seasons on record; and the
confusing passport regulations were suggested by agents and cruise
execs as having contributed to the Caribbean softness in some
way.
"My clients say, 'This
winter isn't so bad, so instead of going away now, I'll save my
money and vacation [days] and go somewhere more interesting in the
summer, like Alaska or Europe,' " said one travel agent in the
Northeast. "It's getting cold late in the season, but they already
made up their minds."
Then there was the
passport issue. "For almost two years we were promoting to the
consumers, 'You are going to need a passport to go the Caribbean,
whether by air or by cruise,' " said Richard Kahn, president of
Kahn Travel Communications, a public relations firm. "It changed,
they got an extension ... but millions of people don't have
passports, especially families. They said, 'I have to change my
plans for winter 2007, because I can't go the Caribbean. I will not
go outside the country because I'm not going to buy a passport for
my kids.' "
Kahn said the issue was
affecting land vacations and cruises in the Caribbean.
Stein Kruse, president
of Holland America Line, also addressed the Caribbean issue at
Seatrade. He noted that the "devastating hurricanes that caused
temporary problems" and the other issues were all manageable. "The
Caribbean will weather the cyclical challenge it has faced," he
predicted.
"The Caribbean is where
it all began, where it continues and where it will continue for a
very long time," Kruse said. "There will be more ships and more
cruise passengers coming to the Caribbean in years ahead. Being as
close to the U.S. mainland as the Caribbean is and being a full
year-round destination and seasonable deployment area, it's unique
and extremely important."
Perhaps what the
Caribbean really needs to come out of its slump, he said, is a new
product infusion. Cuba, for example.
"Not if, but when Cuba
becomes a destination option for North American operators, another
exciting chapter in the modern cruise industry history will surely
be written," he said.
To
contact reporter Johanna Jainchill, send e-mail to [email protected].