Growth of the Cruise Line Industry: the Case of Carnival Cruises

Read this text and answer the following questions.
Carnival Cruises Case I must go down to the seas again, for the call of the running tide Is a wild call and a clear call that may not be denied —John Masefield, Sea Fever The call of the sea spurs the cruise business.57 Sea voyages have had an aura of mystique for centuries, but only in recent decades has the experience of the open sea and exotic ports of call been available to a mass market. Historically, the recreational sea voyage was an essentially elitist endeavor. Certainly, members of the lower classes occasionally found themselves on the open sea, but usually as displaced job seekers or crew members aboard ships. In recent years, however, the cruise industry has undergone a sea of change, and the demographic groups it now targets include the working middle class as well as the idle rich.
What’s a Cruise, and What Happened to the Cruise Industry? A “cruise” is a sea voyage taken for pleasure (as opposed to, say, passage on a whaling ship, an assignment in the navy, or a ferry ride to get you from point A to point B). Typically, passengers enjoy cabin accommodations for the duration of a fixed itinerary that brings them back to their original point of embarkation. There was a time when ships (called liners) transported people across waters for business or pleasure, but the advent of transoceanic air service after World War II offered a speedier and less expensive alternative, and airlines captured liners’ passengers. The competitive balance tipped decisively in the 1960s when advances in jet technology made air travel a viable option for a growing mass market of budget-minded travelers. One by one, shipping companies retired the great luxury liners that had plied the seas for decades. The Contemporary Cruise Industry Today, the cruise industry is dominated by two companies: Carnival and Royal Caribbean, which command a combined 72 percent of the market. By far, the largest is Carnival, which offers cruises to every continent on the globe, including Antarctica, and operates ten lines that it calls brands. Map 1.2 shows the headquarters of these brands. Carnival was born when a former partner in Norwegian Cruise Lines saw an opportunity to expand mass-market sea travel by promoting the idea of the “Fun Ship” vacation—an excursion designed to be a little less formal and luxurious than the traditional ocean liner. The timing was right. Sea travel still projected a certain aura, and more people could afford an ocean-borne vacation. Further, a lot of these vacationers gravitated to holidays—group tours, theme-park visits, and sojourns in Las Vegas—that were compatible with the Fun Ship concept. Carnival began by buying a retired liner at a good price, refurbishing it in bright colors, rigging it with bright lights, and installing discos and casinos. On its maiden voyage from Miami in 1972, the Mardi Gras ran aground with 300 journalists on board; fortunately, neither the ship nor the business concept was severely damaged. Embarking from Miami to such destinations as Jamaica, Puerto Rico, and the U.S. Virgin Islands, the Mardi Gras soon became successful. Over time, Carnival added not only ships but also whole cruise lines to its fleet. Today, each brand operates primarily in a designated region and is differentiated from other Carnival brands in terms of geographically pertinent themes (in Italy, for instance, Costa boasts a Mediterranean flavor) and in terms of cost (cruises on Cunard and Seabourne cost much more per night than on Carnival). Doing Business in International Waters Given the nature of its business, the whole cruise-line industry is international in scope. Take the nationality of competitors. Companies can obtain so-called flags of convenience from about 30 different countries. By registering as, say, a Liberian legal entity, a company can take advantage of lower taxes and less stringent employment rules. Legally, Carnival is a Panamanian company, even though it’s listed on the New York Stock Exchange, has operating headquarters in Miami and London, and caters mainly to passengers who set sail from the United States. Although cruise-line revenue is subject to neither Panamanian nor U.S. income taxes, Carnival does have to pay substantial “port fees.” In fact, ports compete for cruise stopovers because of fees and tourist expenditures. Only a few cruise-line offerings—such as excursions along the Mississippi River or among the Galapagos Islands—can be characterized as purely domestic. Even trips from the U.S. West Coast to Alaska are “international” because they stop in Canada. By far the most popular destination for cruise passengers is the Caribbean/Bahamas, largely because the area boasts balmy weather year-round. During the summer months, Carnival shifts some of its ships from the Caribbean/ Bahamas to Alaskan and Mediterranean routes. Obviously, cruise ships go only where there are seaports, but Carnival cooperates with (and owns some) tour operators who provide almost 2,000 different onshore excursions (for additional fees), which have been a source of recent revenue increases. Carnival estimates that half its passengers to the Caribbean take shore excursions to such sightseeing attractions as the Mayan ruins in Belize. Passengers on Carnival’s Princess Lines, which serves Alaska, can helicopter to a glacier to dogsled. Nevertheless, critics contend that passengers see and spend too little in the countries they visit, going only to cruise-line-sanctioned locations and stores. What It Takes to Operate a Cruise Line Ship Shopping Not surprisingly, ships constitute the biggest investment for cruise lines. Carnival introduces two to three new ships per year. Shipyards in several countries are capable of building ships that meet cruise-industry needs, and Carnival secures shipbuilding bids from all over the world. Because shipbuilding employs so many people and uses so much locally produced steel, governments often subsidize the industry—a practice that works to the benefit of the cruise-line industry by offering less expensive prices for ships. For instance, the Italian government awarded the shipyard Fincantieri about $50 million in subsidies to build five ships sold to Carnival for $2.5 billion. Where to Find Crew Members Shipping companies—including cargo and cruise lines—scour the world for crew members who not only can perform specialized tasks but are properly certified (by international agreement, a registered crew member can enter virtually any port in the world). Cruise lines, of course, have special staffing needs—notably, the crew who can interact with passengers. About a third of all the world’s ship crews are from the Philippines, not only because of reasonable labor costs but because Filipinos are generally fluent in English. On a typical Carnival ship, crew members hail from over 100 countries, and Carnival maintains a range of employee-training programs that include English as a foreign language. Casinos and Other Amenities Although Carnival has thrived with the concept of informal cruises for a mass market, each of its cruises offers one or two formal nights per week; theme-based dinners centering on national cuisines; a variety of musical entertainment, games, and contests; and spas and athletic facilities. Because cruises operate outside the jurisdiction of any national authority, they’re not subject to any national laws restricting gambling. Casinos, therefore, are onboard fixtures. Passengers can also shop for merchandise from all over the world. Indeed, art dealers occasionally hold shipboard auctions and seminars, and one dealer sells about 300,000 pieces of art per year on cruise ships. The Overseas Environment Because Carnival operates around the world, it has the advantage of treating the whole world as a source of both customers and supplies. (The photo shows a cruise ship approaching Antarctica.) In addition, because its chief assets are ocean-borne, Carnival can ship capital and other assets to places where they can best serve the company’s needs. However, it’s also vulnerable to a wide range of environmental disturbances. Let’s take a look at a few of these. Safety Issues After terrorists seized a cruise ship in the Mediterranean in 1985, the major cruise lines instituted strict security checks for boarding passengers; thus, they had in place a security protocol before 9/11 and before the airline industry had one. In the wake of 9/11, when cancellations started to exceed bookings, Carnival increased the number of U.S. ports from which its ships embarked so that passengers with a heightened fear of flying could reach points of departure by land. Carnival also redeploys cruises to avoid areas in which passengers might face danger from political upheaval or crime, such as suspending cruises to St. Croix in the U.S. Virgin Islands because of its high crime rate. Nor does Carnival stop in Cuba, a popular tourist destination, because the U.S. government limits U.S. citizens’ travel there. Fortunately, shipboard emergencies are infrequent, but when they do occur they are problematic. During 2012–2013, the Costa Concordia hit a rock and sank off Italy, causing 32 people to die. A generator fire aboard the Costa Allegra led to the loss of air conditioning and toilet service for 1000 passengers for four days in the Indian Ocean. Another generator fire on the Carnival Triumph stranded 4000 passengers for four days while the ship was towed to Mobile, Alabama. Due to the Carnival Dream’s maintenance problems, passengers had to be flown home from St. Maarten. Another maintenance problem affecting ship speed required that the Carnival Legend miss one port of call. Although these incidents were costly to Carnival in terms of asset loss and legal payments, passenger safety has been good. Simply, the cruise industry has only 0.1 fatalities for every million passengers it carries, a rate three times better than airlines. Sporadically, cruise ships are stricken with a virus that causes diarrhea and vomiting. These outbreaks are hard to control because of the close contact among people on board a ship. More than once, Carnival has had to take an infected ship out of service to eradicate all traces of the virus; the process involves sanitizing virtually every object on board. When the H1N1 flu (swine flu) hit Mexico in 2009, Carnival modified itineraries temporarily to avoid Mexican ports. Economic Issues Spending for a cruise is generally considered discretionary. During recessions, people are more apt to take shorter cruises and to embark from nearby ports rather than flying to far-away points of departure. Interestingly, however, in comparison with other segments of the tourist industry, cruise lines have fared well during economic downturns. Why? Partly because their all-inclusive per diem prices are often bargains compared to the cost of travel to major cities and popular resorts. In addition, fixed cruise-line prices spare passengers the added risk of encountering unforeseen unfavorable exchange rates. Since 2009, Carnival has offered discounts because of the global recession, which has attracted more passengers but lower profits per passenger. The Weather Whenever there is extreme weather, Carnival may have to cancel trips, switch embarkation points, or change destinations, such as for Tropical Storm Isaac and Hurricane Sandy in 2012. Typically, passengers on canceled trips receive full refunds, and those on shortened cruises partial refunds. The Future Overall, the outlook for Carnival and the cruise-line industry is mixed. On the one hand, with prospects for growing incomes in many countries, such as China, more people will have discretionary income to spend on tourism. There are still relatively untapped cruise destinations that Carnival has either not exploited or has only recently begun to serve, such as the addition of ports in Vietnam, Indonesia, and Papua New Guinea in 2012. And since 80 percent of the U.S. population has not taken a cruise, there is growth potential. On the other hand, people who have taken a cruise continue to be repeat customers, and the percentage of first-time customers is declining. On the downside, then, industry observers worry that experienced cruisers will tire of visiting one port that’s pretty much like another and that non-cruisers will still prefer such destinations as resorts to ports of call. There is also concern about the uncertainty of gasoline prices, taxes, and mortgage interest rates along with the soft European economy, which might leave more households with too little discretionary income for taking cruises. In fact, Carnival’s revenue and profit in 2012 were down from 2011.
QUESTIONS
1-3. What global forces have contributed to the growth of the cruise-line industry? How have they contributed?
1-4. What specific steps has Carnival Cruise Lines taken to benefit from global social changes?
1-5. What economic factors influence the success of the international cruise industry? Explain how each affects such success.
1-6. Although most cruise-line passengers are from the United States, the average number of annual vacation days taken by U.S. residents is lower than that of workers in most other high-income countries (13 days, compared to five weeks in France and Germany). How might cruise lines increase sales to people outside the United States?
1-7. What threats exist to the future performance of the cruise-line industry and specifically of Carnival Cruise Lines? If you were in charge of Carnival, how would you (a) try to prevent these threats from becoming reality and (b) deal with them if they were realized?
1-8. Discuss the ethics of cruise lines regarding the avoidance of income taxes while buying ships built with governmental subsidies.