What crucial trends are driving the industry?
As the cruise industry continues to mature in markets around the world we will continue to see ever larger, more innovative resort style vessels being built. The two key areas that will play a large part in this I believe will be the Far East (China) and the technology.
Why is China so important? There are two important facets within this question because China is not only a source market but it has the ability to play a key role in the cruise ship building arena as well and we’re seeing the country make steps to establish this important market segment already.
Globally the industry has some 40 vessels on order through to the end of 2020 worth a staggering $30 billion US dollars, of which almost exclusively the European yards will build, apart from two currently contracted to Mitsibushi Heavy Industry in Japan. We have already seen the yards in China, Korea and Japan win a large proportion of the Commercial shipping sectors order books to such an extent that very few are now constructed anywhere else. There are far greater challenges and complexities as to why we have yet to see the first ship being built in China, but the announcement that Carnival Corp & Plc, China Investment Corporation and China State Shipbuilding Corporation have signed a Memorandum of Understanding to explore this very area means that in the not too distant future we can expect to see a Chinese built vessel operating for a Chinese brand with Chinese guests and crew onboard.
As with shipbuilding, so mainland China holds vast potential when it comes to the country as a primary source market. It’s easy to understand, as with many other western industries, why the Cruise Industry has moved in with such a pace in order to quickly penetrate the holidaying public. That said the China market is very different and, domestically, each brand has had to learn how to serve this new demographic and, furthermore, teach them about cruising in general. Early on simple things that we take for granted, like credit cards to pay for onboard purchases, were an alien concept to a vast majority of Chinese people. Many would arrive at check-in with the card still in an envelope and our agents would have to firstly help the guest activate the card with their bank, the whole process really was that different to them. However, as with all industries, we have learnt from our mistakes and now quickly show the Chinese guests what cruising is about. At the same time in order to capture the markets appetite for all things new and western, Royal Caribbean International announced that their newest class of vessel, Quantum of the Seas would make China its home. But why was this so bold?
In comparison to the leading markets such as Europe and North America which over a 30 year period had finally arrived at accepting ships in the ultra large range, Oasis of the Seas (6000+ guests), China had achieved this growth in a matter of years and much of this is down to the desire by the Chinese themselves to try the newest and the best products the market has to offer, in whichever industry you choose to look at.
So what is the next trend for China, and how does this affect the rest of the Industry?
In the last few months the industry has seen another round of announcements made about China, with Norwegian Cruise Line Holdings (NCLH) and MSC both announcing ships dedicated to the Chinese market. This was followed quick on the heels by Carnival Corp announcing that two more of their brands, Carnival Cruise Lines and Aida Cruises would also enter the same marketplace. What will now be interesting will be the ability for this country to sustain the growth with so many vessels and companies competing for what is, at the moment, a small sector of the holidaying public. That said, China and the surrounding countries realise the potential this sector can bring and whilst in the rest of the world the industry continues to struggle with infrastructure that is in some cases over 100 years old, these countries continue to invest, construct and provide even bigger facilities to support the industry; it is this level of collaboration that makes the decision where to base the next ships that much easier.
Primarily to the industry, China has presented both a solution and a problem, and they are: where was growth going to come from but more importantly where else can you send ships?
Clearly, for the industry, it was an easy decision to enter the Chinese market and it had the benefit of deploying ships from other areas than the traditional Caribbean and Mediterranean. It has meant that at the same time as entering a new emerging market, our traditional markets have received less capacity allowing us to increase the yields on the ships based there. The capacity shortage has allowed us to begin increasing ticket prices in our traditional markets over the past seasons, something that without an alternative market for our ships would not be possible as the Caribbean remains the number one destination during the winter months, which was suffering from an oversupply during the peak months of November through to April. At the same time, China has also been the catalyst for the other burgeoning market, Australia. Where typically older ships were sent to this market, by basing ships in China during the Northern Hemispheres Summer months, the industry was left to decide where to send these same ships during the Winter months. As this question was posed so Australia, through its exportation of raw materials, coincidentally, also to China, saw a wealth explosion amongst its citizens and was therefore a natural choice for cruise ships to begin to base themselves. Australia now has the best market penetration rates in the world for the industry and has grown outside Sydney which used to be the sole departure point to more regional departures, as more and more vessels enter the capacity constrained ports that exist. As with everything relating to China, the move between these two countries is again not without its challenges. From crew and language, to food and entertainment, the vessel must almost reinvent itself between these two markets to cater to each countries own nuances and requirements for the guests onboard.
Globally, the industry will continue to grow. Each new ship, from each brand, continues to deliver even more efficiencies from a fuel saving perspective given that this remains our number one cost. The Quantum class of vessels for RCI are some of the most efficient vessels at seas from pervasive LED lighting throughout the ship to a cloud of air bubbles that reduces both the vibration and noise. Not to mention the updated propulsion units which reduce the drag of the vessel in the water by approximately 5%. On annual bills running into the hundreds of millions of dollars these types of savings are significant and each company continues to invest heavily in research and development that will look to increase any savings through efficient design and the use of new technology to reduce waste onboard our vessels. Furthermore, with the introduction of Emission Control Areas (ECA’s) technology has also been used to allow the wider shipping industry to continue to operate within these areas whilst continuing to burn fuel that would otherwise be non-compliant. Scrubbers, as they are known within the industry, remove Sulphur particulate to an extent that meets the new permitted levels within the areas that have ECA’s. As we see ever more areas of the world introduce this type of legislation, so the industry will continue to invest large amounts of money to ensure we remain compliant with these requirements.
What market segments will experience the most growth and why?
Whilst it is never easy to predict where growth is going to come from, there are certainly some assumptions led by the latest research into the spending habits of the middle classes that lends itself to some educated guesses as to where we as an industry are likely to see changes and evolutions taking place. Typically, the timeline of a new vessel is 4-6 years from design to delivery. Typically, each major company will add multiple options for additional vessels of the same class to be built, thus reducing the time and investment required for each ship. Only subtle changes are made to each subsequent vessel mainly within the hotel spaces to provide each vessel with its own distinctive personality. At the same time, depending on the span between each newly launched vessel, each business will incorporate any improvements and changes based on feedback from guests and crew onboard and therefore by the third and fourth vessels it’s typical to see any design issues worked out.
Within the myriad of segments that exist, my belief is that there are three key distinctive areas where we will see the largest growth and, in some cases, this is already supported by the various announcements and orders placed by the industry. As the largest segment there remains a huge appetite for growth within the mass market, resort style vessels we see today. This will mainly be fueled by the millennial generation as they begin to holiday and avail themselves of larger disposable incomes. This segment however begins to change the whole dynamic of the very industry itself. The millennial generation wants authentic experiences, want a world that is always connected and shun the traditional formality that cruising used to represent. No longer is it about dinner jackets and set seating’s for dinner, it is much more likely to be informal dining at a time they and their family want to dine. This generation wants to choose, not be chosen for, and in the setting of a Cruise Ship this becomes ever more challenging.
At the same time anyone who has cruised knows the internet was more dial-up speed, it was used as a selling point for those that wanted to be ‘away from it all’. In the hyper connected world today it’s no longer acceptable and again the biggest industry players lead the way in large scale development of broadband speeds at sea. Anyone who knows anything about the Internet will understand how complex this challenge has been – you can’t exactly trail a fiber connection off the back of the ship in order to provide the required speeds, and therefore my own business, Royal Caribbean International, has teamed up with a company called O3b to provide our own dedicated satellites targeted at specific ships in order to increase the bandwidth provided. Whilst this is the limit of my own understanding of the matter, from experience for the first time ever it was recently possible to video call home whilst I was at sea two hundred miles off the coast of New York. I’m reliably informed by our Chief Technology Officer this is no mean feat but is essential to allow todays guest the ability to do everything they can and want to do online, not least the ability to share their holiday experience. Where there is an expectation of free Wi-Fi by today’s travelers the Cruise Industry is battling with being able to offer the speeds required in remote destinations sometimes hundreds of miles from the nearest land mass or worse still mid-ocean with land sometimes days away, it really cannot be underestimated the challenges this represents and why my own business really is proud of the advancements and achievements in this particular area.
With millennial families beginning to travel, along with an ever increasing number of multi-generational family units, it should provide fuel to continue to grow the market. It’s important to remember there are multiple layers within the mass-market lines with premium brands like Celebrity Cruise Lines and Cunard as well as the more readily recognisable Carnival Cruise Lines and Royal Caribbean International. Within this marketplace there is essentially something for everyone with a price point to match and this is critical. Value for money and specific price points have become crucial for the millennial generation who have grown up used to comparison sites and low-cost travel where the bare minimum is provided and everything else is an added extra allowing the user to upgrade the experience as they see fit. The same can be said for the Cruise Industry with a range of included activities that are marketable to the consumer think Ice-skating rinks, flow-riders and i-fly as well as west end musicals such as Cats, We Will Rock You and Hairspray. Irrespective of stateroom booked these are included, the Cruise Line then has to work to sell the ancillary products much like the airlines, transfers, Shore Excursions alternative dining venues are all revenue opportunities not forgetting the multitude of shops, bars and, of course, a Casino where the industry is able to happily support a casual gambler enjoying their holiday experience.
At the other end of the market we’re also likely to see the ultra-luxury market continue to grow and, again, given the long lead in times we see with the industry the first orders have been placed in this particular segment of the market by a number of the leading brands. The support for this end of the market will come from an ever increasing number of high-net worth individuals who, as part of the baby-boomer generation, will begin retiring and accessing their own pensions to support unique luxurious experiences. Typically this segment will want an all-out luxurious experience from beginning to end and the decision by Crystal Cruises to not only purchase new ships but also their own aircraft ensuring the brand can protect the travelers experience from beginning to end.
As with each part of the industry there will also be overtures made to attract the new wealth of China and the Far East onboard these ships and each brand is positioning itself in order to start attracting these guests onboard. What will mark a departure from the mass-market experience is that these ships will likely remain an English speaking experience, against the mass-market players who typically provide an immersive product to a domestic market. Luxury goes hand in hand with international experiences and therefore those travelling within this sector are much more likely to want and appreciate the international feel, dining and experiences connected to the destinations they’re visiting. This sector clearly is not as price sensitive as we’ve seen in the mass-market sector and the discerning traveler at the luxury end will want once in a lifetime experiences where money is not an issue but is based on what the operators are able to source and provide. Small groups, private excursions and exclusive openings are the hallmark of this sector.
Finally, and in some way connected to the luxury market, is that of the River Cruise market which has seen unbridled growth led by Viking River Cruises and AmaWaterways. Interestingly, as part of Crystal Cruises growth in the luxury market, they too have decided to offer river cruises starting in 2016 and have ordered two vessels to commence their own branded operations, against chartering from a third party. It clearly goes to show that the two markets, ocean cruises and river cruises can operate side by side within one business, and Viking Cruises having launched their own Ocean Cruise Line would go some way to support this as well. There is obviously cross-selling opportunities within this approach and therefore its understandable as to why these companies have taken this approach. If a guest enjoys their time onboard an Ocean cruise they’re much more likely to be inclined to book a river cruise or vice versa.
Ageing populations in the mature cruising markets of the UK, Germany and the US means that the last two mentioned segments can rely on steady growth connected to guests who want a safe guaranteed and stress-free holiday. The ability, irrespective of price point, to be able to see multiple destinations whilst only packing and repacking once resonates with the consumer who wants a hassle free experience backed up by businesses and brands known to the consumer as a home-gown company with international standards for safety and security. On the soft side the businesses will ensure each nationality onboard is made to feel welcome through the use of technology to greet and offer advice and information in their chosen language to foods, drinks and brands available from ‘home’ to provide a sense of belonging and national identity.
What are the key challenges?
To ensure the continued growth of the Cruise Industry and to better create an environment whereby it can flourish as an alternative to land based holidays I believe there are three main challenges we need to overcome. They are:
- Regulation of the industry
- Investment in infrastructure
- A better platform to understand the Cruise Industry
As any private business knows regulations are tough to comply with and what makes this industry even tougher is the multitude of bodies that we have to comply with, not to mention how the laws we’re asked to comply with may differ at an international, national and local level. As we have become a globalised world the International Maritime Organisation (IMO) has assisted in becoming the umbrella organisation with which the shipping industry deals with, primarily because most shipping is working throughout the world sailing to multiple continents and therefore a respected body was needed to apply law. Today, we have that body, however, we also have a multitude of other institutions who must enact the IMO’s laws, this can take months, even years each time a law has to be ratified throughout the member countries and this is before we see institutions such as the EU who have another agenda and laws which affect the Cruise industry. In Europe, unlike the US where this industry has grown over the last 30 years, it’s less than 20. Also, the US, many laws take into consideration the uniqueness of the Cruise Industry, while in Europe, it’s not the case.
Furthermore, it’s then a piecemeal of various industry laws we have to comply with. As an industry we now have to act according to tour operator standards, shipping and maritime law, transportation and logistics regulations and this is just at a European level where our ships may spend 6 months of the year. We have a whole raft of other legislation if the ship is in the US, China or South America. What makes it doubly challenging is a real lack of understanding of what the Cruise Industry is. These are essentially high worth, low risk tourists coming to a destination over a very short space of time. It is not a ferry service or aircraft which brings passengers from A to B, we sail A to B to C and finish at point A with the same guests onboard the whole time. Why does this make such a difference?
When you enter the world of Immigration law, which clearly remains a hot topic within the EU and the UK, it becomes defining to the guests experience. Consider an American who flies into the UK at London Heathrow, transfers to Harwich to board a cruise ship having passed through UK immigration. Upon sailing the ship then heads to Le Havre where the guest spends a day in Paris before rejoining for an overnight sailing to Portland where they will then spend the day in Salisbury and Stonhenge. UK law dictates that the guest must be seen again by a whole new immigration team, despite having passed through UK immigration 48hrs ago. Why?
Because to UK immigration the vessel has come from Le Havre, but technically the guest has embarked in the UK. It’s these types of idiosyncrasies that challenge the very nature of the industry. The same types of bureaucracy exist throughout Europe and generally the world, and it’s the job of government to think sensibly about the industry and its worth to the country as a whole. In the example above, what was gained by two inspections of the same person and why if the next port was Vigo and then Lisbon did neither the French, Spanish or Portugese feel it necessary to see the guest and yet the UK did, twice?
As an employee within the industry and a UK taxpayer, it’s clearly frustrating to see resource utilised in a manner that does not meet the standards I and you as taxpayers may expect.
Immigration within the regulatory world does have the power to help and hinder the business. At this very moment in time there is a piece of legislation working through the EU regarding restricted nationalities such as Chinese and Russian, in order to make the application for a Schengen visa easier and less complicated than it currently is. The World Travel Organisation (WTO) estimates that each year 6.5 million people abandon the application for a Schengen Visa and decide to visit elsewhere. When you start to read into this you begin to understand why. Whilst today you can log on and book a flight, a hotel, car hire or tour for September 2016, you can’t apply for a Schengen Visa until three months prior to your intended travel date. Ask anybody who travels today whether you would be willing to book your trip, pay money for flights with no guarantee that you’ll be issued your visa. Wait until three months out, receive your visa and then make a booking?
In the new booking model for flights and travel it’s clear that the prices would have increased by time you come to make your booking at 60 days before departure. For someone in business what has become clear to me is lack of common sense application of law within the industry, both home and abroad. No one is perfect that’s for sure, but we sure do make it hard for any industry that wants to do well, to flourish and to deliver guests into Europe and beyond.
As the Cruise industry continues to grow, and more and more vessels are built, we’re seeing issues affecting peak demand in certain ports on certain days. Many would question why three ships would have to be in Barcelona on a Saturday and this could not be spread out. However, to those that ask the question, I would pose this: what day of the week do you like to go on holiday?
You guessed it everyone, from a working standpoint, people quite like to go on holiday on Saturday and only use 5 days leave against a Friday where you may have to use 6. Its simple on that side and means we typically as operators are fighting for the same space on the same day, just as an airport would on a Saturday morning. We therefore need to see large scale investment in new ports, to remodel those not adequate for cruise ships today so we’re able to add new destinations, experiences and tours and introduce our guests to places they may not have considered visiting, only to return later as a land based guest who were so impressed.
Many ports today around the world are full on days when the demand is greatest. Consider the case of Sydney a few years ago where many operators were making bookings 5-6 years in advance just to secure a berth. As the industry, we need to work with the Ports and governments to identify key areas where new berths are required and are built to standards that we’re able to use. Governments need to take action because as vessels continue to grow in size so the number of ports we’re able to call at is shrinking. Take the latest generation of ships being built by Royal Caribbean International, not one of the five on order, nor the last seven built are able to sail into the Baltic sea. We have already outgrown that area of the world and the same will be said of many other destinations as costs continue to rise for the industry and therefore the only way to counter them is to build bigger ships in which to spread the costs across a greater number of people.
Finally, there are some myths that hang over the Cruise industry painted by a minority of people. I’m sure many have heard about Venice and the apparent reason that its sinking is down to the cruise vessels and solely them. Two years ago the mayor of Venice enacted a new law which told the industry to reduce the size of vessels, we complied and whilst the law has been repealed we still comply with the law. We as Cruise Lines want to work with each destination to attract tourism and additional spend into the towns and cities we arrive at, we certainly have no desire to destroy the very places we wish to bring our guests, its certainly not a long term business model to do so. Whilst on the subject of Venice, there are many citizens there who complain about the number of cruise guests in Venice, that they should be stopped, if we look at the figures, approximately 22M people visit Venice every single year, approximately 2M do it by Cruise Ship, so less than ten percent. If cruise ships were stopped, the increase in visitors each year would quickly surpass that figure again, yet know one considers to complain about the number of flights that arrive into Marco Polo Airport in Venice. It’s very easy to point fingers at this industry but I wholeheartedly believe that comes from a lack of understanding of the business and is something that we as an industry must work harder to dispel if we are to continue to grow within and offer even more people the opportunity to experience some time with us. To put our industry into perspective, last year globally twenty two million people took a cruise, at the same time eighteen million visited Disney World in Florida, so we have a long way to go!