Armageddon
The Cruise Industry in the Wake of COVID-19
August 20, 2020
by Joseph Slattery
COVID-19 is the cruise industry’s Armageddon. Fear, and its cohort, economic malaise, are the arch nemeses of travel and hospitality, but even those hardened by terrorism and recession were blindsided by the bio-ambush that heralded the new decade. While COVID has impaled everything from global airlines to rickshaw drivers, the threat to cruising has been near existential. Brands have been shut down for months, ships mothballed, zero revenue, hemorrhaging cash. And that’s just the part that’s visible and countable.
On the night of February 3rd, when the pandemic was at a tipping point, the cruise ship Diamond Princess sailed into the Port of Yokohama carrying more than 3,700 passengers and crew. Two days earlier the ship had received some troubling news. An 80-year-old male passenger who had left the cruise in Hong Kong a few days before had tested positive COVID-19. In Yokohama, Diamond Princess was put at anchor while medical teams began testing people. Ten of the first thirty-one tests came back positive. After deliberating, Japanese officials made a fateful, widely criticized decision. Rather than clear the vessel, evaluate and triage all ashore, they essentially locked everyone onboard. A cruise ship is designed to be neither a hospital or a prison, but for two excruciating weeks Diamond Princess became both. In all, 712 persons became infected and ten died.
The surreal scene gave the media a much-needed focal point, and for some, a new take on an old story. Through February and early March other links between cruising and COVID emerged. Some ships were literally stranded at sea, denied access to ports and medical care, even ships without confirmed cases. In early March the U.S. Department of State issued a warning fit for Bach’s D minor toccata: “U.S. citizens, particularly travelers with underlying health conditions, should not travel by cruise ship.” One by one, brands announced operational “pauses.” A few days later, on March 14, the United States Center for Disease Control issued a “No Sail” order, effectively shutting down cruising in U.S. waters. That order is still in effect.
By April, cruise lines were on their knees, bleeding cash and scrambling for liquidity. In those darkest of days, some questioned whether the industry would survive at all.
It is at times like these, when feeling for the bottom, that Frederick Nietzsche’s famous aphorism “that which does not kill us makes us stronger” becomes a source of hope. I am sure that from some far-off vantage point such will seem true for cruising. In the here and now, my confidence in the industry’s recovery springs not from optimism and wishful thinking, but rather from the bedrock upon which the business is built.
In 1990, less than four million people took an ocean cruise. In 2019 thirty million did, half of them Americans and Canadians. The industry that emerged like a Phoenix from the jet-age ruins of the passenger steamship business has built more than 200 new ships in the past thirty years, not one in the absence of cynicism. “Overcapacity! How will you fill these ships?” they cried when the market was four million, just as they did when it was two, and would again when it was eight, and sixteen, and today. Cruising is a complicated business with a simple formula: High-quality hospitality, delivered consistently, at extraordinary value; hassle-free access to multiple ports-of-call in a single vacation, with a wide variety of destination regions and cruising styles to choose from. And notwithstanding the adverse publicity, cruising is safer than most land-based vacations, or even staying at home.
Short-Term Recovery
Five months into the “pause,” the who, how, when and where of a successful and sustained restart are still unknown. Many brands have announced and aborted plans that in hindsight seemed wildly optimistic. A few smaller operators have tried and failed, harming the industry by adding fuel to the fear.
Nothing good is going to happen until cruising is safe. Of course, this applies to all modes of travel and hospitality, but cruising has unique challenges because of the duration that passengers and crew are together in a confined environment. The first and foremost condition is that the virus be under control among the source market population. This is why initial startups will limit participation by country or region of residence, as a few European brands are on the verge of attempting in Italy and Germany.
Then there are three primary lines of defense, all receiving significant attention and investment.
Immunization. Once a COVID-19 vaccine is available, a certificate of immunization may become the new equivalent of TSA pre-check. But even if the vaccine is produced as early as late 2020 or early 2021, it will take far longer to saturate the relatively healthy population of active travelers, and some may refuse it. And the vaccine is no more an end-all solution that COVID-19 is the end-all threat.
Health Security. For nearly 20 years almost all travel-related security has been based on the post-9/11 airport model designed to ferret out (or deter) the singular evil among millions of innocents. Health security is the opposite — everyone is innocent, and everyone is a threat. An instant-read COVID swab is the current holy grail.
Environmental Hygiene. Technology like advanced HEPA filters and UV lighting combined with process changes like distancing and modifications to food service are the final line of defense, aimed at preventing transmission of an imminent threat.
Suffice it to say, the industry and world at large was unprepared for COVID-19. Advances in all three categories will pay long-term dividends, a good reason to believe in a “will make you stronger” future.
Is there enough demand? Yes, enough that decisions based on demand alone are dangerous. This summer a Florida-based party cruise operator cited “a great deal of demand” as reason to announce a restart at the same time that the state’s COVID counts went off the charts and intensive care units overflowed. Could this be the same “demand” that crowded Florida’s beaches and bars in the weeks before the spike?
The cruise industry has endured two extended demand crises in the past twenty years, both rendered by external conditions. In the period from 9/11 through the Iraq invasion and again in the 2008-9 recession, the supply of berths actually increased. There were no “pauses” or ship lay-ups. Cruising’s economic model dictates much higher occupancy levels than are typical for airlines and hotels, so it was the third variable — pricing (i.e. yields) — that dropped to the point of saturation. Today’s cold start allows operators to at least crudely scale capacity to demand, which in theory will help stabilize prices. Some brands have downsized their fleets, but most of that capacity will be replaced by newbuilds within a few years.
By October roughly fifteen million cruise vacations will have been deferred or foregone. Counting on this pent-up demand, lines will start with shorter itineraries from easily accessible homeports and expand from there, targeting repeat guests who know the ropes and love cruising. Marketing to past passengers is low budget and will be laden with the same gimmicky, low-funnel promotions that proliferated pre-COVID. That will work for a while. Then comes the heavy lifting.
The Pre-Existing Condition
Since its infancy in the ‘70’s and ‘80’s, the optimism in the cruise industry, the tens of billions invested, have been justified by one simple metric: cruising’s tiny share of the overall vacation market. The industry term is “penetration rate:” the number of cruise vacations taken in a given year divided by a country or region’s population. For example, cruising’s penetration in the U.S. market is currently around four percent— roughly one in twenty-five people. Australia leads the world at five percent. In China, the rate is less than one-half of one percent, which is why many consider Asia to be the future of cruising. Given the industry’s high satisfaction scores and repeat rates, the potential even in the U.S. and Australia still seems limitless.
Seagoing vacations have always had skeptics. Every travel agent and every cruise line salesperson likes to tell stories of reluctant first-timers turned evangelists. Salespeople are trained to overcome the arch-typical objections: the fear of seasickness, the fear of boredom and confinement, price “sticker shock.” Those were the good old days.
In early May a friend sent me a link to an L.A. Times article titled “The Cruise Industry is Sinking. I’m O.K. with that” by David Lazarus. “If we’ve learned nothing else from the coronavirus catastrophe,” Lazarus wrote, “it’s that cruise ships are breeding grounds for nasty, potentially lethal little germs — and that vessels are perfectly positioned to transport these germs around the world.” After cherry-picking from a Norwegian Cruise Lines Securities and Exchange Commission filing that addressed the threat of bankruptcy, he adds “See you fellas.” Ten days later Princess Cruises laid-off or furloughed more than one thousand of Lazarus’s Southern California neighbors.
Not long after, SLATE published a piece called “How the Cruise Industry Became Synonymous with Disaster” by Seth Stevenson. An excerpt (my emphases in bold):
“The cruise ship business occupies a strange place in our collective imagination. It’s synonymous with gluttony: those obscenely large ships, and those all-you-can-eat buffets, and those armies of slovenly tourists who storm into little port towns all over the world. Cruising is also becoming known for its ugly mishaps: the poop cruises, the waves of terrifying illness. I’ve mentioned just some of the awful incidents that have occurred on Carnival ships in the last decade. They’re the ones that make big news and stick in people’s heads. But Carnival ships have also been sites of disturbing sexual assaults, and Carnival has been found guilty of a slew of environmental offenses.”
Lacking both new insight and thoughtful analysis, the point of both reports seems to be, simply, that cruising is evil. Both reek of resentment, even anger, that is rooted far deeper than COVID-19. Ironically, just as humans with pre-existing medical conditions have been more susceptible to COVID’s harm, so has cruising. The industry was vulnerable before the virus arrived.
Way back in the days when norovirus outbreaks made news, someone coined the label “floating petri dish” for cruise ships. Norovirus is a common stomach bug. According to the United States Center for Disease Control (CDC), one percent of outbreaks occur on cruises, trivial compared to schools, hospitals, and hotels. But the term was clever, memorable and sticky. In the wake of COVID-19, the metaphor was picked off the floor by NBC, the BBC, The New York Times, The Wall Street Journal, Business Insider, USA Today, the CBC (Canada), The Telegraph (U.K.), The Financial Times (U.K.), and The Guardian (U.K.), just to name a few. The Guardian added a visual exclamation point — an eight-year-old photo of Costa Concordia lying prone and half-submerged on the rocks of an Italian isle.
If the media’s attack on cruising can be traced to a single event, it would be the night of January 13, 2012. At around 9:45 PM, Captain Francesco Schettino was on the bridge of Costa Concordia, with his girlfriend, a Moldovan dancer. In his custody were 4,252 passengers and crew. As the vessel approached the Isola del Giglio, a small island in the Tyrrhenian Sea between Tuscany and Sardinia, the captain ordered a maneuver later described under oath as “showing off for the passengers.” The 290-metre long ship, launched in 2006 at a cost of four hundred and fifty million euro, grated across a reef. Thirty-two people died.
Costa Concordia was no bus accident. The public has long held a morbid fascination with ship disasters. Fifteen years earlier Titanic became the top grossing movie of all time. A year after Concordia, CNN decided that it doesn’t even take a disaster. Malfunctioning toilets would do. When Carnival Triumph suffered a propulsion failure in the Caribbean, the Atlanta-based network went in whole hog — everything but the Situation Room. Along with the issue at hand, CNN’s website linked-in stories like “Fraction of cruise ship crimes are made public” and “Luxury cruise fails surprise health inspection.” When Triumph made it back to port, no one had died, no one was seriously injured, and everybody got their money back and a future free cruise.
For a couple of years after 2013 a dearth of operational incidents left the media with scant material beyond norovirus outbreaks, occasional crimes, and suicidal over-boards — the sorts of things that best efforts cannot fully prevent considering that at any given moment the number of people on cruises is roughly equal to the population of Milwaukee.
Then, in 2016, Carnival Corporation found another way to fan the flames. Slapped with a $40 million fine for an illegal wastewater dump by a Princess ship, the company went on to violate its probation. That led to a much more public and high stakes flogging in 2019, rekindling resentment and anger.
The cruise industry often speaks of its resiliency. As a case in point, from the Costa Concordia disaster through 2019 the North American cruise market grew by 32% and the global market by 47%. Over the same time, Las Vegas visitor traffic increased by 9%.
Back to 2019
In 2009, when the full impact of the recession was understood, there was no talk about a “new normal.” In my company we tossed the business plans and hunkered down on one thing: clawing back to 2008. In the past few months, I’ve often been asked something eerily similar: “How long before the business returns to 2019?”
Whether or not this really is a “new normal” depends a lot on the industry itself. The cruise business has been faithful to more or less the same formula for the last fifty years. The ‘70’s and ‘80’s were entrepreneurial -- bold, imaginative ideas; lots of colorful characters. In the ‘90’s things turned corporate and the mold was set. Short-term pressures started to bump long-term thinking. The naughts were bookended by 9/11 and the recession. Otherwise, PowerPoint reigned. Forecasting results became almost as important as the actual results. Throughout, driven by the tremendously favorable economics, ships kept getting bigger. More than anything it is the mega-ships that are attracting resentment. The industry is filled top to bottom with capable and decent people, but there’s an undertone of hubris that is more evident to outsiders than insiders. Except for a few places like Alaska there are no real destination partnerships. Despite enormous and sincere efforts to protect the environment, a lot of people believe that the real focus is on not getting caught. As angry as Mr. Stevenson’s comments made me, I must admit that behind the vituperation there is a thread of truth. Is it more perception than reality? Maybe, but there’s also a thread of truth in something I learned long ago — perception is reality.