Dingle: "There is a danger the industry is going to be disproportionately impacted by air emission legislation in Europe, which could become a particularly expensive place in which to operate."

Arison: "Cunard has trialled seven-day transatlantics, and these will become the norm. This will be a major change, but one that means a much greener as well as a lower-cost operation."

Hanrahan: "There is no doubt that the spread of ECAs is making it more difficult to plan deployments ahead."

Stuart: "Our decision to switch the base port for Baltic cruises next year from Dover to Copenhagen is primarily – although not exclusively – fuel-driven."

Kruse: "At HAL we have responded to the new in-port low sulphur fuel requirement in EU ports by simply costing the extra into the prices of the cruises."

Foschi: "You can reduce speeds, which clearly implies itinerary changes with maybe fewer ports, or solve it through technology – something which is not happening fast enough."

Michel: "We have operated more port-intensive itineraries in recent years than we have done in the past, and that has proved popular with our passengers."

Bastow: "We are always aware that in our niche we have to give passengers want they want. This is not regardless of cost, but that cannot be the only factor."

Selby: "Using older, smaller ships than the big brands inevitably means that fuel is a proportionately higher cost for us, so we will be looking at spending more days at sea in future."

Conroy: "We increasingly recommend agents and customers to arrive the day before departure to avoid any problems."

Download the entire Autumn 2009 issue of Dream World Cruise Destinations.

Spring 2010

Will regulation halt growth?

Regulation is changing the seascape of cruise operations. Higher fuel costs and increased taxes are no longer simply a bottom line issue for cruise companies, reports Tony Peisley: they will affect ports and destinations, too.

David Dingle, the outgoing Chairman of the European Cruise Council (ECC), warned (at last year’s ECC Rome conference) that only an excess of regulation potentially stood between the cruise industry and a continuation of its impressive growth.
This may have been seen as a simple case of special pleading prompted by the major cruise companies. But the implications of this warning go much deeper than the profit margins of Carnival Corporation & Plc or Royal Caribbean Cruises Ltd (RCCL).
There are issues here which could have a major – and mostly negative – impact on ports, destinations, and local and regional economies. At stake is the growth of an industry having a ?30 billion impact in 2008 – including ?15 billion direct – on the European economy, and generating more than 300,000 jobs.
Carnival UK CEO Dingle recently told me: “Not only could future regulation halt the industry’s growth, it could significantly diminish its economic impact in Europe. This is because there is a danger the industry is going to be disproportionately impacted by air emission legislation in Europe, which could become a particularly expensive place in which to operate.
“The Caribbean is already a cheaper place in which to operate so, if that gap is widened, it will increasingly offset the higher rates we generally
achieve on European cruises.
“At the moment about half the ships being built are for Europe-trading brands but, if Europe becomes too expensive, such newbuild orders will stop. That will have a huge impact on the cruise shipbuilders, which are almost all in Europe and are major beneficiaries of the cruise industry’s economic impact.”
The major issue is the spread and increasing extent of the regulations regarding the use of the much more expensive low-sulphur fuel (marine gas oil or MGO) in order to reduce the impact of sulphur oxide (SOx) emissions.
In the Emissions Control Areas (ECAs) of the Baltic and North Sea, the allowed sulphur content of fuel used by ships will drop from a maximum of 1.5% to 1% this July, and then to 0.1% in 2015.
The fuel maximum for ships in EU ports (docked or anchored off) has already fallen to 0.1% from the beginning of this year. The requirement at sea within the EU is a maximum of 1.5% for passenger vessels ‘on regular service’ – something which the cruise industry claims does not apply to its vessels, but the interpretation has been left up to each EU member nation.
The proposed North America ECA, which – if approved this month (March) – will extend 200 nautical miles from the US and Canadian coastlines excluding foreign territorial waters, the Arctic Circle, Puerto Rico and the US Virgin Islands in the Caribbean, the Western Alaska Aleutian chain and Pacific island territories, including the eight larger Hawaiian islands. It will start in 2012 with a sulphur in fuel maximum of 1%, dropping to 0.1% in 2015.
The International Maritime Organisation global requirement will – subject to review in 2018 – be for a 0.5% maximum from 2020.
“At 0.5%, we can still use residual fuel; but 0.1% means MGO, which is roughly double the price,” said Dingle. “The ECAs will, therefore, become significantly more expensive regions in which to cruise.” There has even been talk of the limit falling as low as 0.001% further down the line.
Earlier this year Carnival Corporation estimated the North America ECA would initially add US$50–70 million to its annual fuel costs, with the existing Baltic and North Sea ECAs already having a similar impact.
That total US$100–130 million impact is not described as being significant in the context of the group’s overall costs; but this is only the beginning, with those sulphur limits all scheduled to be further reduced in the future.
“I can see Canada/New England cruises being significantly affected by a North America ECA, but the Caribbean should hardly be affected – unless the region goes down its own ECA route. Even ships homeporting in US ports do most of their Caribbean cruising outside the proposed ECA area.” There is, though, a possibility of both Mexico and the Bahamas being incorporated into that North America ECA.
Dingle pointed out that cruising is far from being the only shipping industry sector concerned, in particular, by the developing European regulation situation. “Ferry companies are fighting against some of the proposed limits because they believe they will create an inter-modal shift in the traffic from ferries to road haulage, because the land transport cost will not be similarly inflated by such onerous emissions controls.
“This, of course, would lead to higher rather than lower SOx emissions, which is hardly in line with the EU’s Motorways of the Seas policy initiative.”
The reality, though, is that this emissions control trend is a juggernaut that is unlikely to be brought to a halt. So, while still lobbying for more helpful regulation going forward, the cruise industry has to prepare to change some of its ways. This includes the itinerary-planning equation, especially within Europe.
The escalating cost of fuel in recent years has already made cruise speed a key element, which needs to be taken into account far more than in the past – despite the fact that companies are now using every technological measure to improve the energy efficiency of their ships.
“With the 0.1% limit when in port, our costs there are also going up so staying longer at destinations is not really the answer,” Dingle said. “The two options we have if we want to ensure cost-effective itineraries are either cruising closer to home, or slowing the ships down and/or reducing the number of ports.”
Here he was talking primarily about transatlantic crossings and cruises out of the UK which, he said, had been gradually adding ports to 14/16-day itineraries. These would have to start shedding a few.
“It will be the same for all of us,” he said. “So there will be no fear of putting your brand at a competitive disadvantage.”
Carnival Corporation Chairman and CEO Micky Arison agreed that the requirement for this kind of itinerary changing would depend on the region and the operator.
“Cunard has trialled seven-day transatlantics, and these will become the norm,” he said. “This will be a major change, but one that means a much greener as well as a lower-cost operation.
“For other brands, there may be occasions in some parts of the world where they reduce the number of ports; but mostly not, I think. It will just take better planning. After all, we have the original Seabourn Cruises ships which cannot travel at more than 14 knots anyway but, although slower than most other ships, they have always been able to offer full and very interesting itineraries.”
There is no doubt, though, that the fuel issue is creating a sea-change in the way itinerary-planning is approached by all cruise companies. Celebrity Cruises President and CEO Dan Hanrahan spelt it out: “When I joined the company 11 years ago, I cannot remember being at a deployment or itinerary meeting and fuel ever being mentioned. Now it is an important part of the decision.
“It certainly does not – and will not – dictate deployments, but it will influence them and the individual itineraries. It is now a balance between reducing fuel cost and delivering cruises that people want to book, and there is no doubt that the spread of ECAs is making it more difficult to plan deployments ahead.
“This is why finding a technological solution to reducing or removing emissions is currently our industry’s holy grail.”
Norwegian Cruise Line (NCL) Executive Vice President Marketing, Sales and Passenger Services Andy Stuart said: “Fuel costs are going up anyway, even apart from the sulphur issue, and this is bound to play a big part in deployments and itineraries from now on.
“When we introduced our innovative winter Caribbean programme out of New York, we did not really think about fuel too much – now it is a major issue. Also, our decision to switch the base port for Baltic cruises next year from Dover to Copenhagen is primarily – although not exclusively – fuel-driven.
“It cuts down on the distance travelled and the speed required, but it also means we can offer nine-night rather than 12-night flycruises. It saves on fuel but we also believe we are more of a one-week cruise line. We are in the mass market where – particularly in North America – once you start offering vacations of more than a week the market potential drops sharply.
“The fact is – even in this new situation – we still have to weigh fuel against the passenger experience and our ability to market the cruise itinerary.
“Similarly, port overnights work against us on a seven-day cruise as they reduce the number of ports offered and therefore, potentially, the appeal of the cruise. They also reduce the on-board revenue.
“We used to have four ships (seasonally) in New England/Canada but we have gradually reduced so that, next year, we will have just one. Again, this is partly driven by fuel cost; but it also part of our brand strategy to have fewer different deployments within a year for an individual ship.
“New England/Canada is a short season, so the crew and the travel trade have just got used to a ship being there when it leaves.
“It is more difficult and costly to market different deployments within a year, and it is also easier to maintain a high quality on-board experience when on the same rotation. We are really talking about a return to our roots – we started out by just operating year-round from Miami.”
MSC Cruises CEO Pierfrancesco Vago takes a more pragmatic line on the fuel question. “We have to switch to low-sulphur if we stay longer than two hours in port, so there is no real option there. Itineraries are dictated by distances between ports and speeds, so I do not see us dropping ports to save fuel.”
The cruise industry has long benefited from its ability to turn a negative into a positive, and already some of its more creative operators are using the fuel issue to create an edge for themselves in the marketplace.
When he was parachuted in to relaunch Azamara Cruises, new President and CEO Larry Pimental did not settle for just changing its name (to Azamara Club Cruises). He decided to change its itineraries to include longer port stays (see interview with Larry Pimental on page 59). This is being marketed as “destination immersion” to appeal to those travellers who have previously complained that cruise calls are never long enough for passengers to get a proper feel for the place being visited.
But Pimental admitted that this was not solely a marketing-based decision. “It was definitely also driven by fuel cost concerns,” he said. “We are part of a major corporation (RCCL) which is looking at cost control throughout its operations.
“Having fallen back a year ago, fuel costs are rising again and, although it is difficult to be certain, it does seem likely to stay at this higher level or rise even more. Add the low-sulphur and ECA issues which require the use of MGO and that doubles the cost in one fell swoop.
“For us, the fuel savings significantly outweigh the increased costs of staying longer in port, and also any loss of on-board revenue which is, in fact, a smaller proportion for us than for the mass market-brands. For them, on-board has become more than 25% of their total revenues – with gambling becoming a particularly substantial contributor.
“This factor has to be weighed up carefully when deciding to spend more time in port, and I believe that those brands are more likely to just slow ships down between ports – and maybe miss some ports out – even if it means losing tour revenue.”
On-board revenue is even less of an issue for the largely all-inclusive Luxury brands and, for Regent Seven Seas Cruises (RSSC) the decision also to include shore excursions in the cruise price has taken those out of any fuel-saving itinerary equation, too.
RSSC President Mark Conroy said: “There are so many things happening in this area of emissions control and fuel-type restrictions that it is too early to say exactly how it will impact.
“There are still places we can use heavy fuel oil (HFO) but they are obviously reducing in number. In fact, as HFO is a by-product of MGO, it would be interesting to know exactly how it will be disposed of in future when we are not using it. There is only so much need for tarmac which – to my knowledge – is the only other major use for it.
“The industry does have a united stance on these issues. But cruising is only a tiny part of overall shipping; so, if we are going to be badly affected, then we can only imagine the cost for, say, the bulk container and tanker sectors.
“There is still hope that the impact can be minimised but, as it stands, it will obviously put a big extra cost on cruising operations. So it will clearly be a factor in itinerary planning.”
Costa Cruises Chairman Pier Luigi Foschi said: “Fuel is now a constant concern, both because of its inherent price rises and also the cost implications of low-sulphur requirements.
“There are two ways to address it: you can reduce speeds, which clearly implies itinerary changes with maybe fewer ports, or solve it through technology – something which is not happening fast enough.
“We need to press the engine makers and the shipyards. So far there has not been enough focus on the issue, with the result that progress has been too slow.
“Cruise being a small sector is a problem, and we need the rest of shipping to add their voice to ours. We need a unified approach to get the job done.”
Holland America Line (HAL) has been one of the most proactive brands in terms of exploring new technological solutions to the problems of escalating fuel costs. President and CEO Stein Kruse said: “ECAs, SOx and NOx issues are a big challenge, and they will have an impact on both deployments and itinerary-planning – but possibly not as significant as might be expected.
“We are all for-profit companies, so cost is always a factor; but we also have to offer suitable cruises which take passengers where they want to go and to ports they will like.
“At HAL we have responded to the new in-port low sulphur fuel requirement in EU ports by simply costing the extra into the prices of the cruises. For places like Antarctica and Spitzbergen, which have banned HFO altogether, we have switched to distillates”.
The relationship between fuel and emissions is a complex one with no simple solutions for reducing the production of greenhouse gases. CO2 and NOx are produced by combustion while sulphur is already in the fuel with the exact percentage depending on the crude used in the refining process which forms SOx in the exhaust. Both NOx and SOx can be reduced by exhaust gas cleaning but the energy required for this process creates increased CO2, the removal of which by exhaust gas cleaning has yet to be proven effective in practice.
“Technology is one answer to the challenges we face,” said Carnival Corporation’s Micky Arison, “but in terms of finding another radically different way of powering our ships in an even more environmentally friendly fashion, there is – as yet – no silver bullet out there.
“Various alternative energy sources have been put forward but they all have their problems – even liquid natural gas, due to the massive on-board storage space that would be required. The fact is we need to have the technology catch up, even though we are a small shipping sector and therefore a small market.”
Crystal Cruises president Gregg Michel agrees. “There is obviously a great incentive to use technology,” he said, “not just to reduce pollution but also to reduce energy use and therefore cost. But the cruise industry cannot do this alone – we need the yards and their suppliers to step up to the plate, too.”
It will not have gone unnoticed in the cruise sector that one airline, KLM, has already operated a passenger flight (at the end of last year) on an aircraft using a 50:50 mixture of traditional fuel and biofuel.
Luxury brand Crystal is particularly destination-focused, with much emphasis put on land programme add-ons, too. “We are not in the business of avoiding ECAs,” Michel said. “We want to be good citizens environmentally, but we also want to operate cruises our passengers want.
“We have operated more port-intensive itineraries in recent years than we have done in the past, and that has proved popular with our passengers. But we are not reckless about speed, and we also use overnights or double overnights to replace steaming to another port.”
Balancing cost against passenger expectations from a cruise is a recurring theme in the industry, and one not confined to those major brands operating the newer, generally more fuel-efficient ships.
The founding directors of Cruise and Maritime Services International Services have plenty of experience marketing older, smaller ships in the Budget sector of the UK market; but they have only recently become involved in operating the ships themselves, under the Cruise & Maritime Voyages banner.
Director Richard Bastow said: “Both the ships we operate – Marco Polo and Ocean Countess – are expensive on fuel, and this cost is increased by having to use low-sulphur in most of Northern Europe.
“But this is where our passengers want to go. Switching to the Mediterranean is not an option, because the major brands with their new resort ships have that business tied up.
“Fuel has always played a part in the itinerary planning for our ships. We have bunker clauses in our charter contracts, so we have to factor those in; but we have never had to look so closely at the average speed being required to operate itineraries.
“It may be that the classic Baltic run stops being part of our programme, because of the high operating cost being set against the big ships dropping their prices to fill their much bigger ships. That is why we were glad to see NCL switching from Dover to Copenhagen in 2011, as our market really wants to cruise, not flycruise.
“We are always aware that in our niche we have to give passengers want they want. This is not regardless of cost, but that cannot be the only factor. For example we are operating a couple of early year Northern Lights cruises, which are very expensive because there is the Norwegian NOx tax to factor in as well. But both departures sold out very quickly – so that market-driven decision was clearly the right one.”
Thomson Cruises (including the Island Cruises sub-brand) is a UK-based brand operating in a similar price sector, although with a significantly different business model due to its role within the huge German travel corporation TUI that makes flycruising its core activity.
“We cannot ignore the fuel issue – it will clearly impact us,” said Thomson Cruises and Island Cruises Managing Director David Selby. “It was not the reason we pulled out of ex-UK cruising, where the Baltic was a major destination for us, but it has certainly proved convenient because the ECA requirement to use MGO would have doubled our costs.
“Using older, smaller ships than the big brands inevitably means that fuel is a proportionately higher cost for us, so we will be looking at spending more days at sea in future. Currently our policy is to have one day at sea and then a port day, but now we may have to go to two days at sea in a week’s cruise.
“It is also making us review our policy on ship size, and I would not rule out us getting something significantly larger in the future as that would help spread that fuel cost across more passengers.
“There is an issue with yield in that decision, as the smaller the capacity, the easier it is to maintain a higher price when trying to fill the ship. If your last cabin is the 2,500th, it is clearly likely that the prices will drop lower than if the last you are selling is the 1,500th. But fuel is becoming the bigger cost/yield issue for us now.”
As David Dingle made clear in his Rome presentation, though, it is not just the emissions issue which has implications for both cruise lines and the destinations they visit, or the ports from which they operate.
NCL’s Andy Stuart said: “Any tax which puts up the cost of our cruise holidays is bad, and if we can influence against its imposition, we will.
“Alaska has been the classic example. Everybody had a difficult season there in 2009 and, although it was not just down to the head tax, that was a major part of the problem. It was a significant added cost and was bound to have an impact – especially with the level of capacity that had been put in there. The inevitable result – lines pulling ships out – should be a clear signal to everyone.”
The increasing of the UK’s already contentious Air Passenger Duty (APD) – particularly the disproportionate hike in fares to the Caribbean – is another example. “This hurts all of us badly,” said Selby, “in cruising as well as in tour operating.”
The UN World Tourism Organization Secretary-General Taleb Rifai described the APD as “discriminatory” and “not an environmental tax but a tax on development, which fails to understand the importance of tourism to developing countries – and also to the UK itself”. Caribbean Tourism Organisation interim Secretary General Hugh Riley agreed, calling it an “illogical tax which will damage tourism to the Caribbean”.
In this context, the resigned sigh of disbelief throughout the industry was almost audible when the Caribbean Hotel and Tourism Association (CHTA) proposed a US$10 air fare tax to flights to and from the region.
The suggestion from the association’s President Enrique de Marchena that the revenue raised would be used to help the Caribbean promote itself to help its tourism recover was hardly likely to appease any operator (including cruise companies) actually in the business of sending tourists to the region.
An equally cool reception can be expected from the cruise industry for the reactivation of a previously mooted CHTA policy to set up a region-wide cruise commission to regulate the sector so that cruise lines would have to apply to operate there (as for air services) and to pay regionally set tariffs.
Rising air fares and reduced networks and schedules caused by the general economic situation and the specific issue of higher fuel costs have already caused problems for flycruise operators, but these have created one positive for cruise destinations.
“Flights have gone up in price, but the cutbacks have not stopped passengers being able to get to our cruises,” said RSSC’s Conroy. “There is no doubt that their options have been reduced, though, and this is important – for if something goes wrong with their planned flight, it can now be the case that there are no other ways to get them to the ship the same day.
“As a result we increasingly recommend agents and customers to arrive the day before departure to avoid any problems.” This means more pre-cruise stays, which can add significantly to the economic impact of a homeporting cruise series to a port community.
It does, though, not begin to mask the serious challenges that lie ahead for all cruise industry stakeholders.
One industry insider summed it up by pointing out that the growth of the industry to date – and for the future – is predicated on the value for money proposition which the cruise holiday represents. If the price of a cruise has to go up significantly – and out of line with the rest of the leisure travel sector – there is a real risk of that growth coming to a shuddering halt.