The shutdown of Cruise West on Sept. 18 was seen by many travel agents as a warning shot signaling the vulnerability of small-ship cruise lines.
Many of those lines have come forward in the last two weeks to assure the travel distribution system as well as consumers that they are financially sound and have capital and equity that Cruise West lacked.
"This is an isolated situation that happened because of its own set of reasons," said Sven Lindblad, founder of Lindblad Expeditions.
"Clients understandably get jittery," he acknowledged. "Some people may overreact to the consequences of this. This is still a lucrative niche for travel agents. ... I don't want to see people waking up and saying, 'This is risky,' or think twice about putting people on a small ship."
As Lindblad pointed out, very few cruise lines have gone out of business.
But it has happened, throwing passengers' booking dollars and agents' commissions into limbo, where they are often lost.
In the case of Cruise West's closing, most passengers who paid for cruises but didn't sail were protected, either by their credit card carriers, travel insurance or the U.S. Federal Maritime Commission bond.
Still, many had paid in cash for cruises that departed from foreign ports. The prime example is the Spirit of Oceanus' world cruise, which was terminated in September when Cruise West sold the ship, deserting passengers in St. John's, Newfoundland, and leaving those who still hadn't sailed with no compensation.
Travel agents, many with thousands of dollars in commission still owed to them since July, were left with no recourse.
Cruise West's CEO, Dick West, said in an interview with Travel Weekly that the company had zero assets left and therefore could not even declare bankruptcy.
"We've been depleted," West said. "We realize that they earned the commission, but there is nothing to pay them with."
As a result, many agents said they were becoming more circumspect about selling small-ship lines, and some were even asking those companies to provide them with financial statements.
"Cruise West was certainly a wake-up call, and agencies do need to be more diligent in understanding a vendor's financial viability," said Don Walker, co-president of WMPH Vacations in Delray Beach, Fla. "There will always be an element of risk. To protect our clients, we do require transactions on smaller vendors to be completed with credit cards, and the sale of travel insurance is becoming even more of a focus within our agency."
Small-ship cruise lines are often more vulnerable than larger companies because they have less equity and capital to draw upon during economic downturns.
In the case of Cruise West, several former employees stated that the line was not well managed and that it had attempted to expand from its core product too quickly during a time of economic uncertainty.
West brushed off such suggestions.
"The last few years with [former president] Dietmar Wertanzl have been the best managed in 10 years," he said. "Dietmar held people accountable, something that had been lacking. He is very organized. He also delegates and expects his managers to do their job. Unfortunately, there were several longtime employees who did not like being held accountable. It is always difficult to try to change a culture."
Whether or not the company was well-managed, Cruise West's demise was clearly in part a result of the recession.
Lindblad said that his company had realized early in the economic downturn that it would need outside help to get through it.
"We decided we had to figure out how to navigate out of 2009 and be poised for 2010's economic reality," he said. "There will always be challenges in this business in one form or another. We have gone through stressful episodes that we've learned from. You have to prepare yourself for those situations in the future."
Lindblad's strategy was to seek out capital and in the process give up majority ownership to parent investors. Lindblad himself went from being sole owner of the line to a 30% owner.
The investors, he said, "have added a significant amount of capital into the company. We did that before it got potentially ugly. We were preparing for what we anticipated would be much worse."
Several small-ship lines said they had managed to navigate the downturn because they are well-run and amply capitalized.
In fact, some are growing.
American Cruise Lines, based in Guilford, Conn., is engaged in a major expansion via new ship construction. ACL took delivery of a fifth small vessel, the 104-passenger Independence, this year. It is the largest ship in ACL's fleet of U.S.-flagged vessels and the last of three ships ACL commissioned in 2006.
But it is not ACL's last newbuild.
The company recently said it was building a 140-passenger Mississippi River paddlewheeler, set to debut in August 2012.
'A completely different business plan'
"We operate on a completely different business plan from the other companies," said Charles Robertson, ACL's CEO. "Our philosophy and financial structure is much different than all those companies. We have comparatively little debt, and that's a huge advantage. We are well-capitalized and have always operated at a net profit. This year will be our highest for both revenue and net profit."
What's more, he added, "We have a different ... passenger experience, as well."
Robertson did not single out any companies, but said ACL has watched its competition operate old equipment that is very expensive to maintain.
"They don't have the amenities that we have, and so we consistently have captured their best clients," Robertson said. "If you look at Cruise West ships and [those of] other brands, many of them have very small cabins, half the size of ours, and no verandas or elevators."
Despite the upfront cost of building new ships, Robertson said newbuilds are more economical long-term because they cost less to operate.
"They are fuel-efficient, and the passengers just love them," he said. "So once they go with us, they don't go back to somebody else."
Robertson said the line's repeat rate is "extraordinary," which has enabled the company to continually improve its marketing costs per passenger. Because the line carries little debt, its debt service per passenger day is much less than many other companies.
The only secondhand ship ACL operates is the Queen of the West, which it acquired when Majestic America shut down its operations, putting seven river cruise vessels up for sale. ACL reduced the ship's passenger capacity from 150 to 120 to give passengers more room, and charged higher per diems.
Australia-based Orion Expedition Cruises is also building acquiring a second ship, a 100-passenger expedition vessel, under a long-term charter to begin in April 2011.
Sarina Bratton, managing director of Orion, said her company was a significant player in the small-ship industry in part because it has solid underpinnings and efficient operations.
Bratton said her experience working with large-ship operators such as Cunard Line and Holland America Line had taught her the importance of having "lean and effective operations."
"There is often such a heavy administrative burden on small companies, so we made sure we had a small and lean team," Bratton said.
She also set up a strong capital base before embarking on expansion. A major Orion shareholder is KSL Capital Partners, a Denver-based private equity company specializing in travel and leisure enterprises.
"That's the difference from a family operator," Bratton said. "It's getting results."
This report has been corrected to reflect that Orion Expedition Cruises is acquiring a second ship instead of building a new one.