Yard talk
As a naval architect and owner and director of the Grave shipyard in Grave, Netherlands, Robert van Kessel has seen how the river ship building business has evolved over the last 20 years.
"If I had three shipyards the same size, I could fill them as well with river cruise ships," said van Kessel, who observed that, despite a post-2001 slump, river ship building has been thriving ever since 2005.
Grave builds river cruise ships and occasionally takes orders for passenger ferries. The company takes on all construction, from fabricating the hull in sections, which it then assembles, to piping, wiring, engine placement and air conditioning.
Due to space and labor constraints, Grave can build only two river cruise ships a year, and those slots are currently booked by AMA Waterways through 2011.
Just last week, van Kessel said, he had to turn away two order inquiries, one from a German company and one from a U.S. company.
Given the demand, van Kessel said it's not surprising that companies are looking to alternative shipyards in places like Serbia and Turkey.
"New competitors will arise because the standard market cannot keep up," he said. But for the most part, only the hulls are being built in these alternative locations, then towed to the Netherlands for finishing.
While the demand is strong right now for Grave's river ship building service, van Kessel has no plans to expand. Not only does he not have the space, but from a business perspective he doesn't feel the market can sustain its current growth rate forever, and he doesn't want to expand only to have to scale back operations later. Van Kessel was confident about orders through 2012, but he said 2013 remained a question mark.
As for their suitability for various bodies of water, river ships are designed to sail inland waterways and great lakes. And while they are designed to withstand rougher water than they will likely ever encounter, they are not, van Kessel said, permitted to sail out to sea.
Over the past 10 years, the price of a river cruise ship in Europe has more or less doubled. The main reason is costs involved with keeping up with European Union regulations (e.g., fire safety and environmental regulations governing fuel and waste disposal); the rising cost of raw materials such as steel; and the overall improvement in the look and feel of the ships. -- M.B.
Only a handful of shipyards in Europe have the ability to construct river ships, which means that the booming river cruise industry is facing a major bottleneck in operators' attempts to keep up with the growing demand for this increasingly popular form of touring.
"It's been a race in the river cruise market," said Rakesh Dewan, director of product planning and costing at Tauck World Discovery. "The shipyards are definitely maxed out. The situation is becoming worse and worse."
As tour and river cruise operators compete to add enough capacity to satisfy the market's seemingly insatiable demand, their plans rely entirely on the shipyards.
Citing as an example a popular shipyard in the Netherlands, Patrick Clark, managing director of Avalon Waterways, said, "You couldn't get a ship from Den Breejen before probably 2012 right now."
Den Breejen, based in Hardinxveld-Giessendam, has its hands full building four ships for Avalon and three for Scenic Tours, an Australian operator.
"There's no question about it: If you don't have orders in, you are going to have one of two picks," said Clark. "You're going to have to take someone else's spot, and buy it, or arrange for someone else who's got [a spot] to get a ship built for you. The yards are committed certainly for the next two or three years."
A few companies, such as Viking River Cruises and Grand Circle Travel, built up their river cruise fleets early in the game, in the 1990s and early 2000s. Viking has 21 vessels, and Grand Circle has 15. Viking, for instance, has now slowed its shipbuilding schedule to about one ship a year. (See related story, "Smooth sailing, turbulent tales aboard Viking Surkov.")
That leaves younger companies sprinting to catch up.
The race is on
In the last year alone, AMA Waterways announced a $100 million plan to triple its fleet size, adding two ships this year and two next year for a total of six. AMA is on track to build two additional ships per year through 2011.
Globus' Avalon Waterways says it is on course to have a 10-ship fleet by 2010, up from five last year.
Scenic Tours is investing $100 million to launch a river cruise fleet of four vessels by 2009.
By 2010, Tauck will have four Tauck-branded river cruise ships on Europe's waterways.
And in March, Uniworld will launch its 10th river ship.
River cruise operators report anywhere from 50% to 90% growth in bookings year over year for the past two years, and they estimate at least 50% growth in 2009. The good news for the eight or so major players in the European river cruise market is that any company that aspires to join the game would be hard-pressed to find anyone to build ships for them.
In December, former Silversea Cruises CEO Albert Peter took the sector by surprise when he announced the launch of Jewel River Cruises, a luxury line, with six ships slated to set sail this year. To date, however, Jewel has not launched a single river cruise ship. Numerous attempts to contact Jewel for updated information about the launch have been unsuccessful, so there is no way of knowing exactly what has caused operations apparently to stall, but it seems clear that starting a river cruise company today requires much more than a vision and a bankroll. Logistics can and do get in the way.
Most river cruise companies have had orders placed for new ships for years, with a lead time ranging anywhere from two to three years.
That isn't to say it would be impossible to start a river cruise company right now or to build more ships. Given the increasing demand, in fact, more shipyards are opening their doors to river cruise ship orders.
The traditional river shipyards are based in the Netherlands, where five or so yards specialize in river cruise vessels. The problem, said Rudi Schreiner, president of AMA Waterways, is that these are all small, family-run operations with between 50 and 100 employees, and they cannot take on more than a couple of river cruise ship orders per year.
"Right now there is a big construction boom, and the yards in [the Netherlands] are full," said Schreiner, who has worked with almost every major river cruise company since the industry first blossomed in the early 1990s. Moreover, he said, because the Netherlands yards tend to be located in smaller towns on inland waterways, they really can't expand.
So river cruise operators are now looking to yards in Northern Germany and even to fabrication facilities that are starting to spring up in places like Romania, Bulgaria and Serbia, according to Tauck's Dewan.
For example, the Swiss Jewel, the newest ship in Tauck's fleet, was built in the Vahali shipyard in Belgrade, Serbia, this year. It was then moved by tugboat to the Vahali facility in Gendt, Netherlands, where its engines and other major components are being installed. The remaining construction and final outfitting will take place in Hardinxveld-Giessendam, with a scheduled launch in April.
Money matters
The two primary models for financing ships -- which today cost on average about $25 million to build from the ground up -- are owning and leasing. Viking, Uniworld and Grand Circle Travel, for example, own much of their fleets outright.
Companies like Avalon and Tauck, on the other hand, lease their ships for three to five years, with options to extend the leases. There are advantages and disadvantages to both.
Owning the ships, said Joost Ouendag, vice president of operations at Viking, "gives you full control. It allows you to do whatever you feel is necessary to upgrade your ships, to keep them up with changing standards. All of these things are a lot easier if you don't have to go through someone else and say, 'Look, this is what we really, really need.' You don't have a lot of explaining to do. That's the primary advantage."
But because Viking owns its fleet and has been around longer than many of its competitors, it also faces the challenge of dealing with aging ships, which generally comes down to investing in refurbishments or selling off the ships when they are too old to update.
"That is actually something that we do almost on an ongoing basis," said Ouendag. "Building new ships doesn't automatically mean that we increase our fleet every year."
Leasing, on the other hand, allows younger companies to maintain young fleets without having to worry too much about refurbishments.
Avalon's Clark, for example, said, "If the market really went south ... we simply don't re-renew the lease. And that's one of the appeals of our business model."
Generally, when leasing, operators partner with various investors, and occasionally the ships will be chartered by another firm during the off-season, though that is also the time during which the ships must undergo winter maintenance.
Luxury and service
In ocean cruising there is more to new ships than just added capacity. Each new vessel presents an opportunity to push the boundaries, to experiment with new and exciting attractions and to ultimately unveil a product unlike any before it.
In river cruising, however, Europe's locks and bridges place such restrictions on the length, width and height of the vessels that there is very little room for innovation and experimentation with the product hardware.
The focus with newbuilds is to be able to add capacity on a more comfortable and luxurious product. It really can't be about dazzling the passengers with never-before-seen appointments, which makes investing in and designing new river cruise product a very different process from building ocean cruisers.
"Health centers? Spas? Jacuzzis? It's something that sounds a lot better than it actually works," said Viking's Ouendag. "Our primary goal is to bring these cities to people. When we're in port, we would not want people to spend their time in the fitness center. We would want them to go out and get fit while walking the cobblestone streets of Europe or climbing the hills in Russia. So, we have never had a strong emphasis, and we've never had the urge to come up with these types of things on the ships themselves."
River cruise operators often refer to the ships as "floating hotels," traveling during the night to deliver passengers to a new destination daily, where they will spend the majority of their time off the ship. Thus, innovations in river cruise design and development have evolved more along the lines of hotel innovations.
"The destination is still Europe," Schreiner said. "The destination is not the ship."
Mimicking deluxe hotel standards, operators are focusing on enhancements to the accommodations, making the cabins bigger, adding French balconies, proper mattresses and modern showers.
Also, there has been greater emphasis placed on gourmet dining, improving the quality of food and wine as well as overall service.
Having realized the limitations of the onboard experience, which really boils down to accommodations, dining and the lounge area, many operators are emphasizing the off-ship experience: more exclusive lunch sites, such as castles or gourmet restaurants, and more enticing land programs with better audio equipment, guides and local destinations, taking full advantage of the ships' proximity to city centers.
Still, river cruising has advanced in other ways, as operators constantly work with architects and engineers to improve the design and mechanics of their vessels.
Viking, for example, is building its newest, the Viking Legend, with only three engines, as opposed to a more standard five. The engines are diesel-electric and are linked to a computer that determines how much energy is needed for propelling the ship as well as for all other functions. Viking estimates the technology will help cut fuel costs by about 15% to 20%.
Gambling on growth
River cruise operators are all banking on the market continuing to grow at the same rate it has been growing for the past few boom years, continuing to place early orders for ships and investing millions of dollars, on the assumption that river cruising is not a fleeting trend.
"There certainly is an element of risk," Clark acknowledged. "But the opportunity comes to become a significant river cruise operator, and you've got to build quickly to get the critical mass. To cover all the major rivers we want, with the kinds of frequency we want, to have the breadth of product to satisfy the travel agent and ultimately the consumer ... it would justify the risk."