The following article, an interpretive chronology of the cruise
industry by Ernest Blum, will appear in Travel Weekly's 40th
Anniversary Focus issue, to be published March 30. In anticipation
of this very special Focus issue, highlights will appear on TW
Crossroads each day this week.
As Travel Weekly celebrates its 40th anniversary, the
publication can claim to have played an instrumental role in the
birth of the modern cruise industry -- but more about that
later.
When Travel Weekly made its debut in 1958, the cruise industry
as such did not exist. What travel agents, by and large, were
booking were not cruise vacations but steamship transportation. In
1958, however, the first Pan Am 707s were in the skies over the
Atlantic, heralding the demise of that market. In the coming years,
obsolescent steamships would find new life as "cruise ships,"
creating a fast-growth industry that has prospered by forging a
unique alliance with travel agents. From the mid-1960s, when the
industry began taking shape, the changes have been relentless.
In just three decades, for example, cruising has gone through
three transformations. From 1965 until 1981, the industry was
marked by the shift of transoceanic steamships into cruising
itineraries. From 1981 until 1987, the industry was marked by the
increasing dominance of new ships, whose size, efficiency and
glamour overshadowed the old tonnage. And from 1987, the industry
entered Wall Street, whose deep pockets financed the completion of
the industry's retooling and its remarkable consolidation.
In a mere decade, the players have gone from about 40 companies
to an oligopoly dominated by three major companies: Carnival Corp.
(including Holland America), Royal Caribbean Cruises Ltd. and
Princess Cruises. By the year 2002, the big three are slated to
account for 123,819 lower berths of the Cruise Lines International
Association's projected 160,000 berths, for an extraordinary
77.3%.
Measured by revenues, the big three are expected to top 80% of
the industry's total. Last year alone, the industry's five largest
companies were reduced to three, following the takeovers of
Celebrity Cruises and Costa by Royal Caribbean and Carnival,
respectively. On the other hand, a major new player with deep
pockets, Walt Disney World, plans to launch its first ship in
July.
Other changes are under way that promise to transform the
industry again. Of most concern for agents, the industry's
virtually total dependence on agents is loosening as the Internet
takes hold. In addition, the oligopolistic structure of the
industry suggests it may be able to enforce agency policies in a
way that was unthinkable a decade ago. Moreover, the
preferred-supplier arrangements that have come to dominate
distribution show signs of evolving into dealerships if not actual
cruise line-run outlets.
There is also a revolution under way in the makeup of the
product. Cruise lines, for example, are building megaships of up to
136,000-tons and 3,800 passengers, twice the size of even the
behemoths launched this decade. Could it be that we are seeing the
end of the very idea of "ships"? These have become more like hotels
and, with increasing size, are approaching the scope of land
resorts. Perhaps the next century has in store seagoing Las Vegases
and Walt Disney Worlds. Or does the future consist of U.S.-style
resorts that drop anchor along all the world's coastal
destinations?
***
How did this vital industry, which has carried 8% of the U.S.
population and is topping five million passengers annually, get
started in the first place? Already in pre-World War II days,
steamships had been sailing from the Port of Miami. By 1954,
Yarmouth Steamship Co., the successor to Miami's pioneering Eastern
Steamship Lines, had entered its Yarmouth Castle into regular
three- and four-day cruises to The Islands of The Bahamas.
In 1965, Princess Cruises was formed to pioneer cruising to
Mexico's West Coast Riviera. By 1974, the venerable Peninsular
& Oriental Steam Navigation Co. had seen the potential of
cruising and bought up Princess. But the industry was destined to
be based in Miami, where, in 1966, two executives came into the
industry who, one after the other, would be its leader. In that
year, the Norwegian shipping company Kloster Rederei, headed by
Knut Utstein Kloster, acquired steamship/ferry, the Sunward, to
take British vacationers and their cars to Spain. But the plan was
stymied when a currency dispute broke out between Great Britain and
Spain.
In the Port of Miami, Ted Arison, an Israeli-American shipping
executive, had chartered an Israeli ferry for service to Nassau,
but that ship's owner went bankrupt. With passengers lined up but
no ship to put them on, Arison read a report in a trade newspaper
about the plight of the Sunward. The publication was Travel Weekly.
Arison promptly got in touch with Kloster and proposed that the two
combine forces. Thus was born Norwegian Caribbean Lines, operated
by Kloster Rederei and marketed by Arison Shipping.
The venture proved a success, but by 1972, the two executives
had a bitter falling out. Arison left to form a cruise venture in
Miami with Boston-based American International Travel Service.
Their venture, called Carnival Cruise Lines, put into service the
ocean liner Empress of Canada, purchased for $6.5 million from
Canadian Pacific. Renamed the Mardi Gras, the vessel's maiden
voyage was a disaster: the ship ran aground just outside the Port
of Miami. By 1974, the operation was awash in red ink, and Arison
acquired full ownership for $1 in cash and the assumption of $5
million in debt.
Meanwhile, Miami hotelier Edwin Stephan, who had played a role
in the formation of Commodore, had hatched an idea for a
revolutionary type of ships. These would not be the traditional
steamships designed for the chilly North Atlantic, but more open
vessels ideal for the tropics. By 1968, Stephan succeeded in
persuading three Norwegian shipping companies -- Anders Wilhelmsen,
I.M. Skaugen and Gotaas-Larsen -- to bankroll a venture to launch
the ships. Thus was born Royal Caribbean Cruise Line. From 1970
through 1972, Royal Caribbean launched the industry's first ships
designed specifically for cruising: the Song of Norway, the Nordic
Prince and the Sun Viking. Their yachtlike silhouettes, open sun
decks, airy windows and cantilevered sky lounges were to become the
hallmarks of the line's ships to this day.
Cunard began diverting ships to cruising. Also diverting ships
into cruising were Holland America Line, Chandris and Costa, while
P&O bolstered the fleet of Princess Cruises. In exiting ocean
transportation for cruise vacations, the venerable steamship
companies had a pre-sold market. In the 1920s and 1930s -- the
golden age of steamships -- the unprecedented glamour surrounding
ever grander and faster transatlantic liners had stirred the
public's imagination. By getting on a cruise ship, affluent
Americans whose forebears came over in steerage could sample the
indulgence their ancestors could only dream about.
But there was a critical difference between the seagoing markets
of the 1930s and the 1970s. The industry was now based in the U.S.,
not Europe. There would be few three-class or even two-class ships.
America was one class. By a stroke of luck or genius, Carnival had
chosen a motto for its new product that defined the quintessential
nature of the wares: "The Fun Ships." The "Fun Ships" suggested a
new kind of mass-market product for a new kind of consumer:
middle-class Americans who wanted informality and abhorred
stuffiness. Other lines, such as Cunard, adhered to a more
traditional decorum. And lines such as Princess, Holland America
and even Royal Caribbean sought to preserve the luxury mystique
while providing de facto mid-market products.
This lingering mystique, at mass-market prices, quickly proved
to be the right formula, as virtually all types of tonnage filled
their cabins. By the end of the 1970s, the infant North American
cruise industry was enjoying unprecedented occupancies and a
seller's market.
Only two lines were predominantly represented by new tonnage
built for cruising: Royal Caribbean, whose forte was just such
ships; and NCL, which had replaced its Sunward with four "White
Ships" built for the tropics. Meanwhile Carnival, whose three ships
were old tonnage, had an unflattering image as a "bottom feeder."
But in 1978, the line shocked the industry by ordering a new ship,
the Tropicale.
NCL did not build a new ship but made an even bigger impact with
an old one, the France. Built in 1962 as the last great ship of the
French Line, the France went into moth balls in 1974, virtually at
the same time as the company itself. NCL's owner, Kloster, bought
the 76,000-ton ship in 1979 for $18 million and spent $130 million
rebuilding it for Caribbean cruising. After its reincarnation in
1980 as the Norway, the mammoth ship created a sensation and raised
cruising's visibility still further, as NCL became the industry's
top company.
***
But alerted to the possibilities of large new ships, Royal
Caribbean ordered the Song of America, delivered in 1982, which
together with the Tropicale became the prototypes of the industry's
new ships. Throughout the 1980s, the two companies would vie with
each other in placing new orders and competing for share of
market.
Meanwhile, Princess, which in 1984 had taken delivery of two
ships -- the Royal Princess and Sky Princess -- by 1988 had not
taken any other new build initiatives and lagged behind. But
Sitmar, which was also based in Los Angeles, had ordered three
major new liners. By buying out Sitmar, Princess was able to take
accelerated delivery of three ships: the Star Princess in 1989, the
Crown Princess in 1990 and the Regal Princess in 1991.
The race for new tonnage among the three companies helped stir
the public's imagination and sent the market on an uninterrupted
growth spurt. Between 1982 and 1993, for example, the number of
passengers each year grew from 1.47 million to 4.48 million.
Oddly, NCL, the industry's largest line, gave no signs of any
new building plans. Actually, the line's founder, Kloster, who was
a gambler as well as a visionary, was planning an end-run around
his competitors. Kloster was deeply involved in plans for building
a revolutionary 250,000-ton ship for 5,000 passengers, code-named
Phoenix. The ship's radical design -- three hotel towers built on a
platform of an aircraft-carrier hull -- would be a literal city at
sea, offering an extraordinary choice of passenger activities. But
the unprecedented scale of the project turned off bankers. As
Kloster struggled to find financial backers, NCL's two Miami
competitors kept ordering more ships and leaving NCL in their
wake.
A new type of competition emerged in 1987: The race for Wall
Street money. Here again, Carnival took the lead. Even after the
line had surpassed NCL as the industry's largest, Carnival's
reputation as a "bottom feeder" lived on.
***
But in the spring of 1987, the image of Carnival was to change
forever. A filing for an initial public offering the line made with
the U.S. Securities and Exchange Commission stunned competitors. It
turned out that for every dollar the company took in, it was
banking nearly a quarter. Wall Street investment bankers were
impressed, and Carnival founder and sole owner Ted Arison became a
billionaire overnight, selling 20% of the company for $400
million.
The access to Wall Street funding was not only to unleash a
second, unprecedented round of new build orders continuing until
this day but also accelerated the industry's consolidation. With
the tap open for Wall Street cash, for example, Carnival in 1988
sought to acquire the controlling interest in its long-time Miami
rival, Royal Caribbean.
Gotaas Larsen, one of that company's three original partners,
offered to sell its share to Carnival; and Royal Caribbean's second
partner, I.M. Skaugen, was ready to do likewise. But the
recalcitrant third partner, Anders Wilhelmsen, stepped in and
exercised its right to buy out the other partners -- for $600
million. Immediately, Wilhelmsen sold 50% of the company for $420
million to a group led by Hyatt Hotels' Pritzker family.
Taking over the helm of Royal Caribbean was Richard Fain, who,
in London, had been a long-time comanaging director of Gotaas
Larsen and was also on Royal Caribbean's board. By 1993, the
company was ready to issue its own IPO on Wall Street. With its
access to public financing, Royal Caribbean was in a position to
challenge Carnival in new multibillion-dollar orders of ships.
Carnival acquired venerable Holland America Line for $625
million in 1989. With the acquisition, Carnival funded Holland
America's own new building spree, thereby consolidating Holland
America's position as the industry's fourth largest line. Since
then, Carnival has extended its reach to acquire other major
interests in Seabourn Cruises (1992), Airtours (1996) and Costa
Crociere (1997).
***
Royal Caribbean, for its part, waited four years to follow with
its own major consolidation coup, acquiring Celebrity Cruises in
mid-1997 for $615 million. Behind both the new building and
consolidation moves of the industry's leading players has been
profitability, based on economies of scale. In a kind of virtuous
circle, each new ship is bigger and more efficient, expanding the
market and the profits to build even bigger ships.
Remarkably, only a handful of the industry's players have had
the foresight and wherewithal to gamble on this formula.
Carnival, in particular, has also benefited by a tight grip on
costs, making it the industry's lowest-cost producer and insuring
its high profit margins throughout a full decade. In 1987, for
example, the company earned $152.8 million on $564 million in
revenues, or 27.1 cents on the dollar. In 1997, after more than
fourfold growth, the company earned $666 million on $2.45 billion
of sales, or 27.2 cents on the dollar.
More than any other major player, Carnival has been able to
benefit from the experience and longevity of its top management.
Chairman Micky Arison took over as chief executive officer in 1979.
Carnival Cruise Lines President Bob Dickinson joined in 1973. Key
executive Meshulam Zonis, senior vice president of operations, was
there from the company's first day. Vice Chairman Howard Frank
joined in 1989, but he had been advising the company from Price
Waterhouse. At Holland America Line, Kirk Lanterman has been the
company's leader since 1982, having previously headed Westours.
Royal Caribbean, for its part, has a history of profitability.
But the company has a different itinerary mix and higher costs than
Carnival. In 1997, the company earned $175 million on almost $2
billion, representing a major expansion of profitability over 1993,
when it earned $60 million on $1 billion in revenues.
Princess, under Chairman Tim Harris, is also highly profitable.
Just how high is not always apparent because P&O, listed on the
London Stock Exchange for decades, reports its cruise business on a
consolidated basis for Princess and four P&O ships. With
P&O's cruise business earning operating profits of almost $120
million in the first half of last year, the multibillion-dollar
parent company is able to maintain its easy access to the large
resources needed to fund its new ship orders.
Today the industry, which is believed to have achieved a
watershed 5 million passengers in 1997, is still an industry in its
infancy, according to top marketing executives. CLIA, for example,
is reporting that 47 million people say they will "definitely" or
"probably" cruise in the next five years. The industry obviously is
confident it can attract many of them. At press time, it has
ordered nine megaships of over 100,000 tons each.
Just what these vessels will serve up is not yet clear. But
their very size offers the prospect for implementing a vision of
some of the industry's advanced designers: The ship as a floating
city, satisfying the full range of interests found on land.