The Angle of Ascent

Author note: This is an updated version of an article originally published in May 2021.

The first sixteen months of this decade is, for me, a good example of the how the mind distorts the passage of time. Often, December 2019 seems like yesterday, but the next moment, it’s as if an eternity has passed. As the calendar turned to 2020, the cruise industry was on the cusp of a new milestone. The global cruise market would top thirty million passengers in 2019, having grown nearly seventy percent in the passing decade. (Fig. 1) The tally had increased without exception in each of the millennium’s first twenty years in spite of 9/11, SARS, the Great Recession, the Costa Concordia tragedy, and a myriad of other disruptions.

The decade’s waning days were for many a time of reflection and respite. The news feed seemed tuned to a low holiday simmer. Headlines reported the latest on Trump’s taxes, Bernie Sander’s health, and the Kansas City Chief’s march to the Super Bowl. Buried beneath, an emerging story from Wuhan, China began to percolate upward. Few recognized these first, veiled warnings of the precipice ahead (Fig. 2).

The pandemic was a worst-case scenario for the travel and hospitality industry, re-casting all previous disruptions in a whole new light. The cruise sector was hit first, hardest, and will be the last to recover. The initial reassuring tones from the PR playbook (“operational pause,” “out of an abundance of caution”) faded into a cold, hard hibernation, with operators focused first on the safe repatriation of guests and crew, then financial liquidity, and most recently, plans for safe and compliant service resumptions. Those plans are finally taking root. All major brands will be sailing within a few months. The second half of the year will be a frenzy of upscaling — ships, source markets, destinations, support services. Barring major surprises, operations should be near full-scale by early 2022.

The Climb Out

Financial analysts are fond of metaphors like “U” and “V” and “hockey stick” to describe the trajectories of disruption and recovery. In chart form, COVID-19’s impact on the cruise industry seems apropos of a geology textbook. Decades will pass – and a full generation of boardroom PowerPoints – before the chasm shallows and smooths. The question is no longer the depth of the wound, but the pace of recovery. Will it mirror the free-fall, or feel like a long, dusty slog up endless switchbacks (Fig. 3)?

Since its infancy a half-century ago, the modern cruise industry has stuck to a growth strategy memorialized by Kevin Costner in the 1989 movie Field of Dreams. Cruising’s tiny share of the overall vacation market and deployment flexibility are among the reasons why the “If you build it, he [they] will come” approach has generally worked. This correlation between capacity and passenger volume is a predictable outcome of the industry’s large-scale economic model. The combination of low variable costs and attractive, post-ticket ancillary revenues creates a clear bias for occupancy over price (Fig. 4). That’s why it’s a lot easier to forecast passenger volumes than revenues. In the cruise business, capacity drives volume. This not likely to change in the foreseeable future.

Plotting the Capacity Curve

The cruise industry has a long and slippery tail. There are marginal operators, new upstarts, overnight party cruises, ships chartered and chartered out, ships laid up, ships used as portable, floating hotels, ships mothballed and held on speculation. Cruise Lines International Association (CLIA) estimated 2019 global cruise capacity for member brands at 191 million berth/days. Allowing 5% for non-members and assuming an average service year of 360 days per ship implies 557,000 berths in service, a figure validated by my own bottom-up survey of individual brands and ships.

Two of my previous articles — Out of Hibernation and The Great Cruise Ship Bazaar — dive deeper into the capacity issue, particularly the buzz of activity during the pandemic. Forty-three second-hand cruise ship transactions (involving ships with 450 or more lower berths) have been reported in 2020 and 2021, including seventeen vessels sold for scrap. Most of the ships divested by the major brands will remain in service somewhere else. Meanwhile, nineteen newbuilds with 450+ lower berths will have been delivered, adding back more than double the berths scrapped or otherwise pulled from service. Suffice it to say, reports of the industry’s downsizing have been greatly exaggerated. The combined capacity of the world’s ten largest cruise lines is expected to increase by about 2.3% during the pandemic.

Large cruise ships are typically ordered at least three years in advance with an actual construction timeline averaging around two years. Thus, timing of deliveries can seem fortuitous or unfortunate depending on the operating environment du jour. The robust pre-pandemic orderbook has survived largely intact, although many planned 2020-2022 handovers were delayed by necessity or negotiation. As it stands today, seventy-three new ocean-going cruise ships — over 170,000 lower berths — are either under construction, on order, or on option for delivery in the five years 2022-2026. Eleven of these ships will carry more than 5,000 guests, double occupancy. At the end of 2019 there were six such ships in service; by 2026 there will be twenty-one.

To model capacity growth with the long tail in check, I’ve limited this analysis to sixteen major operators — ten based in North America, six in Europe. These are the largest brands with one qualification: all operate fleets made wholly or largely (i.e., the most recent classes) of vessels delivered directly to them as newbuilds. Together they control about 85% of the global cruise market.

Methodology for Framing Capacity Growth

BASELINE: January 1, 2022

Includes all 2020-2021 newbuild deliveries and existing fleet divestitures.

For the 16 brands: 182 ships, 516,000 lower berths

PLUS:

1) Newbuilds - under construction, orders, option — publicly announced and planned for delivery in 2022-2026.

For the 16 brands: 43 ships, 142,000 lower berths

2) Future (speculative) newbuild orders for delivery in 2026 or earlier

None are assumed, but the probability is high considering that -- for example -- Costa and Holland America have no orders beyond 2021 and Carnival has none beyond 2022

3) Second-hand ships acquired in 2022-2026.

None are assumed. Not likely for these brands.

MINUS:

1) Existing orders/options later dropped

None are assumed.

2) Divestitures: ships in existing fleet transferred out, sold, or scrapped by 2026

Potential divestitures are framed via methodology explained below.

PLUS OR MINUS:

1) Modifications to existing ships impacting capacity

None are assumed. These are rarely significant

For outsiders, forecasting divestitures is mostly guesswork. While newbuilds are announced with maximum fanfare years in advance, second-hand transactions are usually sudden, swift, and low-key. There is no good rule of thumb. Brand longevity favors ships that are exceptionally well designed, constructed and maintained, those that have unique physical qualities suitable for certain deployments, and those with a loyal following of past guests. Divestitures require a buyer (even if a scrapyard), and a financial reconciliation between the sale and book value. In 2020 and 2021 Carnival Corporation sold a flotilla of ships at small fractions of their pre-pandemic asking prices and wrote off billions in paper losses buried among colossal operating losses.

Of the twenty-two ships discharged in the pandemic by the 16 brands in question, the oldest was 31 years, the youngest 17, and the average 24. It was, and will continue to be, a buyers’ market. Two go-to outlets for used tonnage -- Britain’s Cruise & Maritime Voyages (CMV) and Spain’s Pulllmantur — filed for bankruptcy. Others -- like Fred Olsen in U.K. and Carnival Corporation’s P&O Australia – traded-up and seem set for a while. The Greek ferry operator Seajets has no standing cruise operation but nonetheless bought five ships at fire-sale prices. A maritime version of home flipping, perhaps?

What’s left to sell? In all, the sixteen brands still hold title to 33 ships that will reach 25 years of age by 2026. Consider this the pool of divestiture candidates. I offer no predictions as to which ships or how many ships will be discharged. The information merely helps frame the range of outcomes for each brand. The topside is defined by current capacity plus newbuilds, with a bottom side net of these aging ships. The most significant unrepresented factor is the potential for additional newbuilds, especially for 2025 and 2026 delivery.

Aggregating these metrics for all sixteen brands implies a capacity CAGR between 2.5% to 4.1% for the seven years 2020 to 2026, and between 2.8% and 5.0% for the five years 2022 to 2026. (Fig. 6) (As noted above, the market measured by passenger carry increased nearly 70% in the decade ending 2019 -- a CAGR of 5.3%.)

The corporate and brand dynamics are interesting. (Figs. 7-9) Carnival Corporation’s very public divestiture of 19 ships in 2020 and 2021 contrasted sharply with the strategy employed by the Royal Caribbean Group (2 ships), Norwegian Cruise Holdings (none) and MSC (none). The corporation’s flagship brand – Carnival Cruise Lines – shrunk 4% as a result, despite taking delivery of the 5,200 passenger Mardis Gras. With no firm orders for the Carnival brand beyond the 2022 deliver of Carnival Celebration, the corporation announced in June 2021 that CostaMagica would be reassigned to Carnival in summer 2022 and that AIDA’s third 5,400-berth Excel-class vessel scheduled for 2023 delivery would go to Carnival instead.

Carnival Corporation’s pandemic purge also truncated the Princess, Holland America and Costa fleets. Princess shed over 6,000 berths — more than any other brand in the world — but it is the only one of the corporation’s nine operators with more than one ship on order beyond 2021. Costa, AIDA and Holland America have no deliveries scheduled after 2021. Costa welcomed CostaFirenze in 2020 and is preparing for the 5,330 berth CostaToscana in December 2021, offsetting the departure of five older ships. When CostaMagica moves to Carnival Cruise Lines in 2022, the Italian brand will be 2% smaller than it was pre-pandemic but will operate one of the industry’s most modern fleets. Holland America took delivery of the new Rotterdam this summer, but the sister to Koningsdam and Nieuw Statendam makes up for less than half the capacity of four ships sold last year, a net reduction of 11%.

In stark contrast to Carnival Corporation’s strategy, both Royal Caribbean and MSC have five ships and over 25,000 berths in the pipeline for delivery in 2022-2026. (MSC’s new class of 1,000-passenger luxury ships are excluded). Eight of the ten will exceed 5,000 lower berths. Both Carnival and RCI have retained plenty of older tonnage, but RCI can divest strategically against the newbuilds, moderating growth while creating a more youthful (and profitable) fleet.

The Much Tougher Question

A point made earlier is worth reiterating. So long as cruise passenger volume tracks to capacity, forecasting a few years ahead is relatively easy. Notwithstanding the many interests in the cruise industry’s orbit that track mainly to passenger counts, for the cruise lines themselves, it’s all about revenue. In the simplest terms, revenue depends on three things: capacity, occupancy level, and price. Since its inception, the modern cruise industry has been able to overcome demand disruptions by reducing prices (or adding value incommensurate with price) to keep ships full (see figure 4).

I estimate that 40 to 50 million cruise vacations will be foregone during the pandemic. Over the next year pent-up demand for leisure travel, including cruises, will be unleashed with exhilarating force. Recognizing and reconciling this transitory phenomenon within a longer-term vision and strategy is a requirement best addressed sooner rather than later. This is especially important for an industry that -- fairly or unfairly -- found itself on center stage when the pandemic unfolded. As argued in my article Armageddon, cruising’s quantitative success in the last decade has been shadowed by a growing, media-fueled force of anger and resentment over many of its practices, dating back at least to the CostaConcordia tragedy in 2012. Will the industry’s management of the pandemic add to, or mitigate those negative perceptions?

It’s going to be hard to answer that question while throngs of loyal cruisers are backed at the gates. Some may dismiss the question altogether. But after a while the surge will pass. As this analysis shows, the industry has signed up for another 20% to 30% capacity growth in the next few years. While the Field of Dreams maxim will prevail, the industry’s pricing powers – and consequently overall revenue yields -- are far less certain. Whatever it weighs, the baggage of the past will be a factor in the inevitable heavy lifting to come -- finding and converting the next generation of cruisers.

The Global Cruise Market

2009-2019

The Global Cruise Market

2009-2021

The Global Cruise Market

2009-2026

Trading Price for Occupancy

Carnival Corporation 2008-2011

Cruise ships delivered, under construction, on order or on option through 2026.

Figure 5. Note the impact of deliveries delayed from 2020-2021 to 2022-2023. While some of the 2024-2026 capacity is still under option, I believe that any attrition will be offset by new orders from brands presently underrepresented.

Capacity framework aggregated for 16 major North America- and Europe-based brands.

North America-Based Brands: Carnival, Celebrity, Disney, Holland America, Norwegian, Oceania, Princess, Royal Caribbean, Viking Ocean, Virgin

Europe-Based Brands: AIDA, Costa, Cunard, MSC, P&O, TUI

Double-click chart to enlarge

Large North America-based Brands

Large Europe-based Brands

Smaller North America-based Brands