I was explaining some of the fundamentals of the cruise industry to someone recently who knows a lot about tourism but not much about cruising. The industry has about 120 new ships on order, I told him.
"Wait a minute," he said. "You mean there are a record number of ships on order just as the economy is going into a recession?"
There's no certainty yet that the U.S. economy is headed for recession. GDP increased 3.4% in the third quarter of 2018, and consensus estimates for the fourth quarter are for a growth of 2.7%. Unemployment ticked up last week to 4%, but the economy added a healthy 304,000 jobs in January.
Looking ahead, however, a growing number of experts are concerned about how much longer an expansion that started in 2009 can last. Some fear that the stock plunge of November and December was a leading indicator. The shutdown of the federal government in January trimmed economic growth by about $3 billion, and slowing growth in China could have dominoes tumbling worldwide.
How would a recession affect the cruise orderbook? Would all of those new ships get built?
Judging by the last go-around, a recession would have a bigger impact on the shipyards than on their cruise customers.
The 2008 recession virtually shut down the pipeline of orders going to European yards. Only one new order was placed in 2009 and four in 2010, compared with 21 in 2006 when the economy peaked.
No orders means no work for thousands of yard workers. It means very expensive capital equipment sits idle. The late Corrado Antonini, then head of Fincantieri, warned that ships could become more expensive and less efficiently made without a renewed volume of orders.
In fact, while no cruise line failed in the recession, the shipbuilding industry contracted from four yards to two, as Fincantieri absorbed the French yard in St. Nazaire and Meyer Werft picked up the Finnish yard in Turku. Both were owned by STX Offshore, the South Korean conglomerate that went bankrupt in 2016.
This time around, with only two yards left, things may be better. All the ships on order with Fincantieri and Meyer Werft would likely get completed, and since the orderbook now stretches to 2027, any recession would likely be over well before the pipeline gets depleted. Maybe some options would be dropped, but as long as the export financing for firm orders holds up, they will get built.
As for the cruise lines, there were some layoffs during the last slump, and yields suffered. As prices dipped, agents had to watch a bigger percentage of their earnings get absorbed by NCFs. But cruise passenger bookings never declined once during one of the worst downturns in U.S. history, which says something about the recession resiliency of the industry.