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Spring 2010
Can
older ships survive higher operating costs?
By
Tony Peisley
Over the past two decades the number of new
cruise ships delivered every year has averaged between nine and
ten and, currently, there are about 350 ocean-going cruise ships
operating around the world.
It does not take an advanced mathematician or any (Sherlock) Holmesian-style
deduction to grasp from these figures that most of those 350 are
not in the first flush of youth. In fact their average age is
not far short of the 20-year mark.
Yet so much of the industry hype surrounds
newbuilds that it would be easy to draw the conclusion that, without
recent or future newbuilds, a cruise line is going to struggle
to survive. This view certainly appears to hold sway in North
America where – gambling and party cruise brands aside –
there is effectively only one line which operates only second-hand
ships: Celebration Cruise Line, with its veteran Bahamas Celebration
now sailing out of Palm Beach, Florida.
But in Europe – particularly the UK and
Germany – there are any number of brands which continue
to operate one, two or more ships of mature years, primarily in
the Budget or Premium sectors. They have different business models
and market niches, and enjoy varying levels of profitability –
but they survive in a world dominated by the mega brands which
(at least until hit by the recession) were regularly refreshing
their fleets with costly newbuilds.
Roger Allard is Chairman of the UK-based All
Leisure Group, which owns three brands: Voyages of Discovery,
Swan Hellenic and Hebridean Island. All operate older ships, with
varying capacities, but none higher than 700 passengers. “Smaller
ships clearly do not have the economies of scale of most newbuilds
these days,” he says, “so per-cabin costs like fuel
and maintenance are higher. But against that, we do not have to
pay finance costs, or worry about getting that level of finance
in the first place.
“There is a definite niche for this kind of ship, and it
is the smallness rather than the age that appeals.
Our target age group is 55+, and that sector
is growing all the time in the UK.”
Not only is that sector growing in number, it is also travelling
more. In February the charity Age Concern’s commercial offshoot
– Age Concern Enterprises – reported a significant
surge in 2009 sales of its annual worldwide travel insurance to
65–74 and 75–77-year-olds clearly unfazed by the recessionary
climate.
“The over-65s group is becoming increasingly
adventurous,” says Allard, “which is why our Voyages
of Discovery brand has been adding Caribbean and Latin/South American
destinations such as Cuba, the Amazon and Orinoco, Falklands and
the Galapagos for 2010/11.
“For the more exotic destinations our passengers clearly
have to fly. The air cost has gone up, but the world has changed
and it is often more expensive pro rata now to buy seats for larger
groups. It is also often the case that service quality is higher
on chartered than scheduled flights, and I never thought we would
be saying that.
“Our problem is always controlling the
quality. We are doing more and more to improve the whole experience
for passengers, but we can do very little at airports or on scheduled
flights. It is only by chartering that we can influence the quality.”
The other advantage of using small ships is
their better access to more offbeat ports, he says. “Tendering
is an issue for our passengers – psychologically as much
as anything.
“Fuel cost, which has grown to 15–19%
of our turnover, does play a part in our itinerary-planning. We
look at speeds and port stays to reduce cost, emissions and our
overall carbon footprint. But, within our niche, it cannot be
allowed to dictate deployments.
“We could stop cruising from the UK
to the Baltic because of the high costs involved; but our passengers
want to cruise there, and would not book if we went to the Mediterranean
instead.”
It would also mean competing head-on with
the bigger brands and their mega-ships; but, he says, “The
big new ships are great for that business as they stimulate the
market and bring in younger people who – as they get older
– can ultimately become our passengers, too.
“Our ships only have a few balcony cabins,
but our clientele generally prefer to mix anyway so we always
make sure we have good libraries with lots of seating. People
talk about balconies like they sometimes talk about casinos –
they want them, but then tend not to use them when they actually
have them.”
Saga Cruises, which is an operator of classic
older ships for older clientele, has recently withdrawn Saga Rose
and bought Astoria as a replacement. It will operate as Saga Pearl
II.
“We are adding some balconies in the
ship’s Swansea refit,” says Saga Shipping Managing
Director James Duguid, “but although there is the incentive
of extra revenue from these, we also have to bear in mind that
there is an upside to having ships without balconies – less
wind resistance, and therefore lower fuel consumption.”
He adds, however, that offering one-sitting
dining on smaller ships is one of the biggest extra costs –
because the extra space required for the dining room and main
lounges reduce that available for cabins.
Every ship in All Leisure’s various brands has been acquired
and refitted rather than newly built. “We could probably
order a new ship and make it pay,” Allard says, “but
financing and exchange rates are a major issue at the moment in
any case. I would never rule it out in the future, though.”
In the meantime, having added Swan Hellenic
and Hebridean to its cruise brand portfolio, the group acquired
another ship to its fleet last November with the purchase (at
auction) of Alexandr Von Humboldt. Including a complete overhaul
and refurbishment, the structural element of which will take place
following a charter this summer to Phoenix Reisen, the vessel
is costing about US$20 million.
It will have its passenger-facing changes
made next winter as, by then, Allard will have decided for which
of its brands it will operate.
“We bought it because it is the right
size – 250 cabins (90% outside), not too old (20 years),
and it was a distressed sale. That meant not only a good price
but also that we could find out exactly what it could and could
not do before bidding.”
He points out that the group had raised £8.9
million with a flotation, on the basis that capital raised would
finance future ship acquisitions. “Although we had since
acquired Hebridean Princess through saving the brand, it was still
our aim to buy another ship.”
Finding the right ship at the right price
is one of the challenges of this sector. Costa Cruises Chairman
Pier Luigi Foschi has revealed that Costa had received no firm
offers for its oldest, smallest ships – which it would sell
for the right price.
“Financing is difficult for small or
start-up companies at the moment,” he says. “That
means the second-hand market is very quiet and, if prices get
too low, it is not in our interests to sell anyway.
“Either we will continue to operate
the ships or we will scrap them – because, if we do sell,
the ship will be out there competing in some small way against
us. Unless the price compensates for that, there is no point in
selling.”
Thomson Cruises (now incorporating Island
Cruises) has the largest fleet in this sector, but it has a different
business model from most brands because it is vertically integrated
in TUI.
Thomson Cruises and Island Cruises Managing
Director David Selby says: “We use our own airline, sell
mainly (but not exclusively) through our own retail travel agency
distribution system, and even use our own incoming agents/operators.
“This means we have more control of
the whole quality of our flycruises and, crucially, have access
to the necessary airlift in the first place.” It also helps
solve the perennial problem for all Europe-based cruise brands
– how to avoid losing more money in the winter than they
make in the summer.
Thomson recently returned to the Caribbean
for the winter season after a long gap and, in 2010/11, is adding
a second ship. But, Selby points out, this involves no extra capacity
because some of the season is taken up in dry-docking both ships.
“We are operating two-week instead of one-week cruises,”
he says, “so we only need half as many passengers (albeit
paying higher cruise prices).
“Winter is obviously a difficult season
– especially with the recent increases in Air Passenger
Duty from the UK – but we have the advantage that we are
filling seats on our company’s airline. That said, we are
profitable in our own right as well as making our contribution
to other divisions within TUI.”
In its latest incarnation, Thomson Cruises
has chartered or leased ships rather than buy them outright. It
does however have the option to buy Thomson Celebration (from
Carnival) and – at the end of a five year lease –
its newest ship Thomson Dream from Louis Cruise Lines.
“It is most likely that, if we bought,
we would then leaseback,” says Selby. “This would
mean our business model stays the same, as our benefit now –
compared with brands with newbuilds – is that all our ships
have very low book values, and we have them on relatively modest
leasing fees. This means we do not have to worry about high interest
payments or other financing costs.
“This in turn enables us to spend more
money on food and entertainment. For example, on most ships we
have open seating rather than two sittings (which are cheaper
to operate as they require fewer staff). “We can therefore
offer as good a product if not better than some of our better-known
and newer, larger ship rivals – however glitzy they might
seem on the surface.”
Thomson Cruises is the second largest brand
in the UK market, carrying about 250,000 passengers, but it still
has to remain flexible – both in its deployments and in
its marketing – to survive and prosper.
This is why it is cruising to Cuba next winter,
when it will also offer some itineraries which homeport in Havana.
“US lines cannot go there, and only Fred Olsen (FOCL) from
the UK market features Havana,” says Selby. “So it
gives us something new to offer our more adventurous passengers.
“Also, ending our UK–UK cruise
programme was not to do with fuel cost but just us making sure
we filled the Mediterranean flycruising capacity gap when Ocean
Village and the other Island ship (Island Star) were withdrawn.
“As it is we see Royal Caribbean International
moving into Palma, where finding airlift is always a problem for
those without their own airline.
“Flycruising is our core product because
we are a tour operator cruise line, but we were given the go-ahead
for the UK–UK programme as long as it was profitable –
and it was. This was despite the challenge of the positioning
voyages, but even these meant we were filling seats at times (e.g.
October) when they are difficult for our airline to sell.
“We made a lot more money on shore excursions,
especially in places like St Petersburg, but there was reduced
income from the bars as these cruises attracted a different demographic.
Operating out of Tyne (Newcastle), we found there was a mix of
first-time cruisers and P&O types who did not want to travel
down to Southampton.
“Dropping ex-UK was sad – and
drew more complaints than anything else we have ever done –
but we will be back, and fairly soon I hope.”
On the marketing side, Thomson uses the option
of all-inclusive packages as a key tool. “Across all TUI’s
operations there is a trend for people to want to know what they
are going to spend throughout their holiday,” says Selby.
“But, rather than offer an across-the-board
all-inclusive cruise product, we offer it as either a pay-extra
option or free as an early-booking incentive. We have found that,
if it is free or sold at a reasonable add-on price, people do
not abuse it.”
Thomson offered a full ship, adults-only product
on Thomson Calypso until that ship’s charter ran out last
year. But it was a much smaller vessel – just 486 berths
– than the others in its fleet; in fact its small size was
the reason the charter was not renewed.
“It was becoming too expensive to operate,”
says Selby, “but it had shown that there was a market for
adults-only, so we now have it for a couple of months on Thomson
Dream cruises – which would attract mainly adults anyway.
“We do not want it permanently on the
larger ships as it just limits the market too much.”
Unlike Foschi, he believes the second-hand
market is improving from a buyer/charterer’s point of view.
“There are more options if we want to acquire vessels,”
he said, adding “we may soon be looking for something larger
than our existing ships, because we need economies of scale to
counter increased fuel cost.”
Newbuilds – even in the Luxury sector
– are increasing in size, and there is a similar trend among
those operating older ships with FOCL, for one, gradually going
up in unit size by acquisition or even by stretching vessels.
With SOLAS 2010 removing up to 20 older (mainly small) ships from
the fray, the availability of small (up to 700/800-passenger)
ships will decline over the coming decade.
Cruise & Maritime Voyages (CMV) Director
Richard Bastow says: “We saw the withdrawal Thomson Spirit,
Saga Rose, Black Prince (FOCL), Ocean Majesty (Page & Moy)
from the UK–UK market and the reduction of Voyages of Discovery’s
UK–UK season, and worked out that this was 60,000 berths
out of the game.
“So, when the chance came up to take on Marco Polo, we had
already been marketing (as Cruise and Maritime Services International)
for Transocean Tours when that company ran into financial problems,
we went for it and set up CMV.
“We originally went for Ocean Countess
as back-up in case did not get Marco Polo, but we ended up with
both, year-round, which is difficult. But on the other hand our
company expenses run 365 days of the year, so it does help to
have year-round product, too.
“We did not want both operating out
of Tilbury. We felt that we could use regional departures for
one – but not for the whole season, or just as one-offs,
as it needs a series of cruises for a homeport to work.
“Some of the seven regional homeports have performed better
than others, but Hull and Newcastle are definitely being repeated
in 2011.
“We have the ships on different charter
arrangements from different owners, but managed to get Global
Maritime, which has done a good job on-board Marco Polo, appointed
on Ocean Countess, too. This gives us a continuity of product,
and a measure of quality control, too.
“We would really prefer to own ships,
as we would receive more from on-board revenues – currently
we only earn from the shore excursions. But you need access to
a lot of money to buy outright.
“One problem with chartering can be
the multi-party deal where you have an owner, a head charterer
and then a sub-charterer or maybe two. Each takes their own margin,
so reducing everybody’s share. We have cut out several layers
with our deals, so that we charter directly from owners.”
The two keys to making the CMV operation work
are location and distribution, says Bastow. “When we were
selling Arion, Princesa Danae, Athena and then Marco Polo as agents,
we were selling on location.”
Tilbury’s catchment area was crucial, with 65% of passengers
sourced from the UK’s Home Counties and East Anglia. The
rest came from the North West and Hampshire. About 50% drove;
20% came by coach and the rest were either drop-offs (taxis etc.)
or flew into the nearby London Stansted airport.
“We were attracting a majority of first-time
cruisers (60%), and it was the departure point and destination
which came first. The ship was secondary.
“Marco Polo has brought us more experienced
cruisers, and across both ships we now have just 30% first-timers.
We are now picking up some who have cruised on big ship operators
and, not liking the size and the crowds of passengers, have switched
to us.”
But the UK is a crowded cruise market, and
CMV remains a small volume operator – about 10,000 berths
over the year – so achieving visibility is a real challenge.
“Our distribution is the most important
factor in filling the ships,” says Bastow. “We are
not concentrated either on the high street travel agencies or
in the pages of newspaper cruise advertisements from retailers.
This is where the big boys trade.
“Instead we go through tour operators,
so our prices and margins have some protection. And we choose
those with a variety of routes to market – some via agents,
some direct.
In this particular market sector, age and
size may still matter. But being flexible and smart in your thinking,
chartering/owning, marketing, distribution and deployments matter
even more.
After all, new ships are the old ships of
tomorrow. And as they have a 30+ year life span, somebody will
always be needed to come up with a business model to operate them
profitably when they have stopped being the new kids on the block.
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