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Opportunities in cruise business

Cost, revenue, satisfaction and appeal

Headwinds and opportunities in cruise business

By Rick Eyerdam

Caribbean ports and cruise terminal operators must begin immediately to improve the shoreside experiences of their cruise guests or risk a loss of cruise ship calls, Royal Caribbean Cruises Ltd executive Mike Ronan cautioned delegates at the 11th Annual Caribbean Shipping Executives Conference in Jacksonville in May.

The annual conference is presented by the Caribbean Shipping Association.

“Give us [cruise lines] reasons to stay during the summer or give us reasons to come back if we have left,” said Mr. Ronan, speaking as Vice Chairman of the Operations Committee for the 14 member lines of the Florida-Caribbean Cruise Association (FCCA). “There are headwinds in the region and we must work together on minimising the negative effects and hopefully improving on the positive opportunities we have out there.” 

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Above: Mike Ronan

He said cruise lines considered four critical issues, two years in advance, when adding or deleting a cruise destination from itineraries – namely, cost, revenue, satisfaction and appeal. 

Costly fuel

Mr. Ronan said fuel costs were continuing to rise. He said the rising costs operated against cruise destinations that were more than a few days from an international airline hub and home port such as South Florida. Air fares, he noted, were also driven by the cost of fuel, adding that they could eat into cruise industry profits by compelling the cruise lines to discount rates so as to offset higher air fares to keep ships operating at full capacity.

“The markets across the Caribbean are there and they are not going to go away,” said Mr. Ronan.

He said the Caribbean was still the most popular cruise destination and that was where the new larger ships were being deployed. Compared with some other vacation alternatives, however, cruise had to compete in a challenging market, he said. Prices were likely to continue to rise as Caribbean oil refineries closed and cruise ship operators were required to secure two kinds of fuel. Emission Control Areas (ECAs) were demanding a change to low sulphur fuel for ships operating within 200 miles of North American ports.

Cruise industry ticket revenue had remained flat, he said. An outside cabin aboard one of today’s elaborate ships was selling in 2012 dollars for the same as a tiny suite had sold for in the 1970s. 

The downside

Revenue parity was sustained only by the industry’s strategy of building and marketing larger, more dazzling vessels, said Mr. Ronan. “That obviously has been the trend of the industry,” he said. “We have really driven demand by providing more supply. The downside of that is, of course, not being able to increase the price of the cruise ticket.” 

Mr. Ronan said the industry was “…living the consequence of our growth. We have added all these beds to the global market and features, but we are not able to get passengers to pay the amount of money that they probably should be paying for the value of the experience.” 

Value of the experience

Satisfaction, the value of the experience, was the one variable over which cruise lines had most control while at sea but the least control in the home port and ports of call,” said Mr. Ronan.

“We need to be working together on these issues because the guest experience is extremely important,” he said. “And a major component of that are the shore excursions that are provided by the ships and sold in advance. Guided tours are now in the 30 to 40 per cent participation range in many destinations. In the Caribbean we used to be in the 50 to 60 per cent participation range. Now, with the larger percentage of the guests going on shore activities on their own, if they are not happy with the experience, it can kill your port,” he told CSA members and conference participants

According to Mr. Ronan, even when every-thing went perfectly on cruise-sponsored excursions at a port of call, “… people who get off the ship and go on their own and are dissatisfied ultimately can cost you cruise calls.” 

Mr. Ronan explained: “Today’s visitor is part of the satisfaction criteria used for the next cycle of planning. So what they [passengers] are telling us today is in fact what we are planning for 2014 and 2015.”

He said that each port was tracked with a constantly updated satisfaction rating.

“If that drops and we can’t control it together, then you can lose ships, because that is one of the drivers of where the ship will go – appeal and satisfaction.”

Mr. Ronan said improving the satisfaction rating could be addressed immediately by cruise ports and local governments who could demonstrate to cruise lines how they were working to improve the experience and service offered to all cruisers who disembark. 

NEED FOR RENEWAL

Appeal was a growing issue confronted by the Caribbean ports that had successfully marketed the irresistible appeal of winter sun and sand to North Americans, he said. That market was now considered a mature market dominated by seasoned cruisers who expected something dramatically different on board ship and something significantly different, better, more enjoyable at their port of call. 

“The broader issue that we are now facing in our area of the Caribbean is that the region has become what we call a mature tourism destination,” said Mr. Ronan. “There needs to be a renewal. There needs to be renovation. There needs to be something that gives the earlier customer reason to come back and gives the younger customer reason to go in the first place.”

Mr. Ronan said the newest and biggest ships home-ported in North America were committed first to the Caribbean because of its enduring popularity with that market. But the ships they replaced “…are not all coming into the traditional North American to Caribbean or Mediterranean markets,” he said. “The demand for cruising is now growing globally and the end result is that the ships are now moving to where the consumer demand is and where those consumers are prepared to pay the price to go on a cruise on that vessel.”

He said the Southern Caribbean – called ‘the long Caribbean’ by the industry – was suffering because the increased cost of fuel for the longer voyages departing from South Florida inevitably drove up the costs. Where once the Puerto Rico home port offered the opportunity for attractive voyages to the Southern Caribbean, that market had been constrained by increased airline fares, seat availability and resulting lower demand, he said. 

Mr. Ronan said the Mexican Riviera, once the destination of choice for cruises from Southern California, had suffered significant reductions in cruise calls because of the perception of lack of security in Mexico and the failure to improve the destination appeal, among other factors.

Fallen off a cliff

“The Mexican Riviera has fallen off a cliff,” said Mr. Ronan. “It has lost several year-round ships out of Los Angeles. Puerto Vallarta has declined from 650,000 annual cruise visitors to 250,000 and Mazlitan has gone from 550,000 to almost zero.”

Mr. Ronan said that some ships which toured Alaska in summer and Mexico in winter now did Alaska in summer and Australia, Hawaii or China in the winter.

“This is what is happening globally,” he said. “We are working with all our destinations and the issues are fundamentally all the same. They are all mature markets and if the markets don’t evolve, if the markets don’t create excitement, if the markets don’t change, they run the risk of being seen basically as ‘I’ve been there, I’ve done that, I have no real reason to go back’ And we have got to come up with the reason.”