Have the cruise lines overexpanded?

[flagger]

With the news dropping today that Starbucks is going to now close 600 stores, up from the original forecast of 100, I was struck by a line in the story.

As a story by Fortune’s David Stires pointed out, Schultz is trying to undo the exuberant expansion effort of his predecessor Donald who wanted to triple the number of stores to 40,000 with half in the U.S. and the rest abroad.

It begs the question of if you think the cruise lines have indeed over expanded their capacity in light of a weakening economy? I am positive they will do whatever it takes to fill their ships, but will we see orders and options for new ships start to be canceled?

[TEXASMUNK]

Taking RCI as an example...you might see something like selling off the smaller ships...Rhapsody, Splendor to smaller lines

 

 

CCL might sell off their older ships.

 

They could consolidate, but only time will tell. Especially with homeporting, they might weather the storm better than fly to destinations.

 

Places like Hawaii, Las Vegas, Europe might suffer more than cruise lines.

[triplej2484]

Taking RCI as an example...you might see something like selling off the smaller ships...Rhapsody, Splendor to smaller lines

 

 

CCL might sell off their older ships.

 

They could consolidate, but only time will tell. Especially with homeporting, they might weather the storm better than fly to destinations.

 

Places like Hawaii, Las Vegas, Europe might suffer more than cruise lines.

 

I don't think RCI is to worried with Pullmantur.....NCL sold off the Crown last year and now have sold the Majesty and Dream to Louis. And like you said, the other lines have plenty of outs for older ships.

 

Home porting is key. In Boston alone, we had the Norwegian Majesty and now the Dream to the Spirit next year. And the Jewel of the Seas appears to be here longer this year as well. Massport is also going to be refurbing Black Falcon to bring in even more berths.

 

Hawai'i is suffering big time between losing two ships and an airline, two if you count ATA that flew to the islands.

[shaggyofwv]

I think RCI may have to scale back its construction plans.. They are spending a huge amount of money on the Oasis class ships and with the economies of the world slumping, it may indeed cause them some major finiancial problems in the near future.

 

The U.S. economy doesn't look to recover anytime soon, and there is a 50/50 chance of our taxes going WAY up next year and beyond which means even less expendable income for cruising.. So what we will likely see is more ships moving their homeports to foreign countries, especially around Europe.

 

Another problem facing RCI is that since they are already considerably more expensive than their main competitor, they can't afford to raise their prices very much more or they risk losing customers..

 

Combine all this with the outrageous cost of fuel and, at least in the near term, the future for RCI doesn't look very bright. I know I wouldn't want to own any of their stock right now.

[Gonzo70]

I think they have over expanded in light of the problems with the economy and massive fuel cost increases. We are likley to start seeing cannibalization once the new mammoth ships come out. The cruise lines will be in quite a predicament; they will not be able to fill the ships without cutting fares, but the increased costs of food and fuel will make it hard to make much of a profit with cheap fares. Hopefully something happens to stabilize fuel prices or else the cruise lines are in serious danger and will start mirroring the airlines in terms of their economic woes.

[Maraprince]

IMO you will continue to see less and less offerings to Europe and the Med with the high exchange rate of the euro. The tide will turn towards more homeports since the airlines cannot even handle the flights they have and are constantly looking for more ways to charge passengers. Be it a cruise line or an airline, you can only push so much of the charges onto the passengers before they will walk away. Right now, some passengers are paying more for their airfare than their cruises.

 

Prices for sailings cannot go much higher or the lines will see passengers canceling. On-board revenue is already reflecting the cautionness of passengers. Okay, we paid for the cruise, now let's see what we can do to keep the on-board charges down.

 

Pure economics, push the prices much higher, you lose. If the ships aren't full, the cruise line will need to try fill them up by offering incentives to booking or else, dare I say it, reduce prices! Better to lose a little than to have an empty ship sailing.

 

 

MARAPRINCE

[land lover]

I believe with a ship as big as Oasis is all they have to do is go 10 miles off shore and park.......and there you have it a floating resort.

 

I am a port person and have always viewed a cruise as my transportation but after coming on these boards and reading how many people love sea days............I am in the minority.

[Rancher Dave]

I believe with a ship as big as Oasis is all they have to do is go 10 miles off shore and park.......and there you have it a floating resort.

 

I am a port person and have always viewed a cruise as my transportation but after coming on these boards and reading how many people love sea days............I am in the minority.

 

 

I care more about seeing ports, but I also like the transport to be nice and stable...and why not kick in loads of activities to do... I would if I had the time take a mega ship to Asia than fly since there would be more to do than sit in a single seat for 14+ hours.

 

I doubt the ships in building will be a big problem but as one other said new drawing board plans may be delayed...however where fuel efficiency and thus per pax ops cost per cruise berth are better by the newer ships, especially where significant cost savings come about and higher amenity levels draw higher per berth per night fares it becomes a win for the cruise line.

 

I know I will pay more per night on the same inent to go on a Voyager or Freedom or Oasis ship than a smaller few ammenities ship, maybe as much as 20% more for that trip...

 

Eventually things will improve with the economy. I could cruise more if they come find oil under the ranch...and the money multiplier helps others in the economy if oil is found under my ranch as well:D

[G'ma]

Hawai'i is suffering big time between losing two ships and an airline, two if you count ATA that flew to the islands.

 

Well, not really. My son lives on Maui - in Lahaina. He said that, for the most part, everyone is doing just fine. Some of those businesses that opened up to exploit the cruise passengers have closed...most were foreign owned anyway and sold a lot of "stuff" from China, Korea, Malaysia, etc..cheap souvenier thingies. But, traffic to/from the mainland, Asia, Japan, South Pacific has increased due to the weak dollar. Business is booming.... The American trade from the mainland is down some but the slack is more than taken up by those from other countries.

 

He relates that many people who live in Maui, particularly West Maui, are pleased that there aren't thousands of people arriving by ship anymore.

[MattInFLL]

First - RCI hedges its fuel costs (it "buys" its fuel in advance as a commodity locking in lower prices. Southwest Airlines has been very successful doing this, too). Their fuel costs are actually not escalating as fast as their competitors'.

 

Second - all cruise lines have put the brakes on newbuilds for the US market past what has already been announced. Building bigger ships actually adds to economies of scale. And ships like Oasis are truly destinations in themselves that will have audience.

 

Third - cruise ships are moveable. They can shift to different homeports in the US, or shift them completely to other parts of the world where cruising is still growing fast and economies are stronger. Why do you really think RCI has been experimenting with these "immersion" cruises? Maybe they are testing the waters (so to speak) for the strongest markets to move to if they have to?

 

There are tougher times ahead, for sure, but I would bet of all the travel company types out there - from hotel chains to airlines - cruiselines are probably the best able to adapt.

[GXmanDC]

The cruise industry is feeling some pain of the economy, but there are still lots of loyal customers. I think RCI is in a good place because they are seen as a premium line; their ships are modern, larger and more efficient than many competitors enabling them to sell more cabins while using less fuel; and like others have said, they can move their ships to areas of the world less affected by the downturn.

 

I know that they have Oasis, Allure, Solstice, and Equinox currently under construction. Do they pay for the ship based on the negotiated price when the build contract was signed or does inflation make these new builds more costly? I thought I read that they have 2-3 more Solstice-class ship in the works and negotiating a fourth Freedom-class ship, I wonder if any of these will be affected?

[Gonzo70]

First - RCI hedges its fuel costs (it "buys" its fuel in advance as a commodity locking in lower prices. Southwest Airlines has been very successful doing this, too). Their fuel costs are actually not escalating as fast as their competitors'.

 

Second - all cruise lines have put the brakes on newbuilds for the US market past what has already been announced. Building bigger ships actually adds to economies of scale. And ships like Oasis are truly destinations in themselves that will have audience.

 

Third - cruise ships are moveable. They can shift to different homeports in the US, or shift them completely to other parts of the world where cruising is still growing fast and economies are stronger. Why do you really think RCI has been experimenting with these "immersion" cruises? Maybe they are testing the waters (so to speak) for the strongest markets to move to if they have to?

 

There are tougher times ahead, for sure, but I would bet of all the travel company types out there - from hotel chains to airlines - cruiselines are probably the best able to adapt.

 

So why has RCL stock dropped 50% in recent months and Carnival stock performed nearly as bad? Royal Caribbean did not do nearly as good a job as LUV (Southwest) in hedging fuel. Sure they helped themself a bit for the very short term, but did not help themself for long.

[Gonzo70]

I know that they have Oasis, Allure, Solstice, and Equinox currently under construction. Do they pay for the ship based on the negotiated price when the build contract was signed or does inflation make these new builds more costly?

 

That is a good question. The costs of building materials has really gone up a lot as well; hopefully they did lock in a rate.

[SelectSys]

... will we see orders and options for new ships start to be canceled?

 

Perhaps options will be delayed. I would expect the current orders to be filled as the contract penalties for cancelling are likely to be severe.

 

... So what we will likely see is more ships moving their homeports to foreign countries, especially around Europe.

...

 

This could be true. I can see more ships from RCI and other lines moving out of the Caribbean to other locations.

 

... Third - cruise ships are moveable. They can shift to different homeports in the US, or shift them completely to other parts of the world where cruising is still growing fast and economies are stronger. ... There are tougher times ahead, for sure, but I would bet of all the travel company types out there - from hotel chains to airlines - cruiselines are probably the best able to adapt.

 

The fact that ships are moveable provide a significant advantage in terms of moving ships to where the demand for travel is greatest. Compare this to the mega resorts in Vegas. They are dependent on low cost airfare to fill those new rooms.

[aqhacruiser]

In my opinion they over extended themselves. Anyone involved with the market or big business could see the housing/financial crisis coming for a long time and they had to know it would impact the economy yet they did order more ships and huge ones at that. The price of high oil is just the perfect storm scenario. The cruise industry makes the bulk of their profit from onboard revenue so even if they manage to fill the cabins, disposable income is becoming less so I foresee less onboard spending becoming a reality and that will really hurt the industry more. Yes, as someone mentioned they can move the ships around but with England paying 9.00 US for fuel and France 11.00 as of last week, disposable income is quickly drying up in Europe as well so that's not the answer they hoped it would be. This is a worldwide problem now and the cruise industry is one of the industries that is hit hardest and will continue to feel that pain for a long time to come. The airline industry will be grounding planes and consolidating flights after the summer trying to survive as well. RCL and other lines will have to make some hard decisions as well to survive the next few years and we'll see what they do but you can be sure they are trying to figure it out. JMO

[MattInFLL]

Gonzo - I didn't say the future was all rosy. I said of all the travel providers, cruiselines are in the best position to adapt. Travel stocks are being pummelled, as is the rest of the stock market, because investors are scared. That doesn't mean that RCI is going down the tubes. The cruise and travel industry will rebound, like the rest of the economy.

 

aqha - I have to agree that in hindsight a lot of people should have seen it coming... but a lot of very smart people who get paid to analyze this kind of thing every waking hour of their days missed the boat (sorry for the pun). Also Europe has been paying a fortune for gas for years - it has not been as much of a shock for them as it has been for us. They have been focused on fuel efficient vehicles for years now. The rest of the major world economies are not hurting as bad as we are. Yes, sure they are hurting, too - I am saying not as bad.

 

I just don't buy into doomsday scenarios. Everything goes in cycles - always has, always will.

 

(Oh and GXmanDC: ships are bought on contract - the price is set at the start of the contract and is the price the cruiseline pays)

[aqhacruiser]

Gonzo - I didn't say the future was all rosy. I said of all the travel providers, cruiselines are in the best position to adapt. Travel stocks are being pummelled, as is the rest of the stock market, because investors are scared. That doesn't mean that RCI is going down the tubes. The cruise and travel industry will rebound, like the rest of the economy.

 

aqha - I have to agree that in hindsight a lot of people should have seen it coming... but a lot of very smart people who get paid to analyze this kind of thing every waking hour of their days missed the boat (sorry for the pun). Also Europe has been paying a fortune for gas for years - it has not been as much of a shock for them as it has been for us. They have been focused on fuel efficient vehicles for years now. The rest of the major world economies are not hurting as bad as we are. Yes, sure they are hurting, too - I am saying not as bad.

 

I just don't buy into doomsday scenarios. Everything goes in cycles - always has, always will.

 

(Oh and GXmanDC: ships are bought on contract - the price is set at the start of the contract and is the price the cruiseline pays)

 

I agree with you about cycles and yes those in Europe have always paid higher for fuel then we did but like us they are getting slammed by high cost of food and everything else at once now. Cycles are one thing and I'm not promoting the doomsday theory but we really are in uncharted territory now and this is like no cycle seen before so it is a little unnerving and perfect for the doomsday people which is a PIA as a lot of what we see in the market today is becoming a mindset based on fear. You bet many missed the boat but you know that's a mindset too, the good times were SO good this last cycle you had people who just could not believe it couldn't continue or if we had a downturn it would just be a little bump. Surprise! And its a HUGE shock to some people now but for some of us, we seen it coming and were prepared for it, not that it takes away the pain but at least we were braced for it. The first cost cuts I would make at RCL is firing all the high paid analysts as I have no idea what they were looking at it but boy did they miss this by a mile! But then again you never know. You can get the best financial advice money can buy but if a person or a company doesn't listen, they pay the price so we'll never know who was really to blame but it's a rough ride for the shareholders in this industry also. I know about all the subprime resets that are coming in April 2009 and I know we are in this mess for a long time to come but I know we'll survive it also as long as people adjust to it and deal with it realistically and not let fear drive the economy or we'll really be in trouble.

[FL_Cruiser64]

With the news dropping today that Starbucks is going to now close 600 stores, up from the original forecast of 100, I was struck by a line in the story.

It begs the question of if you think the cruise lines have indeed over expanded their capacity in light of a weakening economy? I am positive they will do whatever it takes to fill their ships, but will we see orders and options for new ships start to be canceled?

 

That is one of the concerns I and others had with Oasis and bigger ships and not replacing smaller ships. Everybody is telling me that RCI knows what they are doing and Fain is a great business man. Well, considering he botched the take over of Costa and Princess (both went to Carnival) I'd be really careful with statements like that.

 

Carnival positioned itself to be able to go low cost with smaller ships at any given time. If RCI dumps all their smaller ships and sticks with Mega Ships only they will loose the ability of flexible pricing.

[curley23]

First - RCI hedges its fuel costs (it "buys" its fuel in advance as a commodity locking in lower prices. Southwest Airlines has been very successful doing this, too). Their fuel costs are actually not escalating as fast as their competitors'.

 

Second - all cruise lines have put the brakes on newbuilds for the US market past what has already been announced. Building bigger ships actually adds to economies of scale. And ships like Oasis are truly destinations in themselves that will have audience.

 

Third - cruise ships are moveable. They can shift to different homeports in the US, or shift them completely to other parts of the world where cruising is still growing fast and economies are stronger. Why do you really think RCI has been experimenting with these "immersion" cruises? Maybe they are testing the waters (so to speak) for the strongest markets to move to if they have to?

 

There are tougher times ahead, for sure, but I would bet of all the travel company types out there - from hotel chains to airlines - cruiselines are probably the best able to adapt.[/qu

 

There is a video on Bloomberg with Dave Liebowitz regarding the cruise industry and RCI. Maybe you have seen it, based on some of your comments.

Most of RCI's ships are already pretty much sold for this year thru the first half of next year as well. Once the new ships go online they are the most fuel efficient in the industry and will be able to be operated at a much lower cost per passenger. The outlook for the industry is not as bad as one may think. Obviously time will tell.

 

Gonzo, although the stock price may be falling, I doubt it has to do with the financial strength of the co, or less profits, their dividend has been nothing to get excited about. I think it has to do with fuel, which has an effect on everything else, but also profit taking by fund mgrs. as well. I look at it right now as a nice buy opportunity. I have played this roller coaster several times over the past 9 or so years buying, in the 20's or low 30's, and selling over the $40 range, and it has worked out very well. I am just waiting to see if it will go below 20 before the next buy, which I think is going to depend on what oil does in the next few weeks.

[Cruising89143]

Here is the link to the Bloomberg video. Of course the person in the video has a much different take on the Oasis than some of our so called cruise experts here. I guess thirty years as a TA does not make one an expert. ;)

 

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vm2jnQzf.M3Y.asf

[FLASHINGLIGHTS83]

my personal opinion is that w/ the expanding cruise markets into asia, australia, and the ever more popular europe, cruise lines are starting to move smaller ships over to those markets. smaller ships because the ports arent as big, and cant accomodate the bigger ships.

 

in moving these ships, they need to be replaced, so cruise lines are ordering bigger, better ships to fill in the voids left in the carribbean.

 

take the oasis for instance. its the 1st time that the cruise ship alone has become a major destination. there will be so many innovative and new things to do on this ship, people will have to sail it 3 of 4 times just to do everything.

 

so to answer your question of "have they over expanded themselves" i would say no.

 

greg

[Moeve]

Home port in the US - says who??? That would probably be an even bigger mistake. You forget that other economies are not suffering as much as you and some of them are discovering cruising tooo. What we could see is cruiselines moving ships else where and trying to get alternative passengers - what do you think all thoses immersion cruises are all about?!! Believe it or not Indians (as in people from India) have discovered cruising - had 150 of them on a med cruise last year. This is one of the fastest growing economies in the world........ So I would think that cruiselines would be looking into alternatives rather than parking ships in US ports and then maybe not filling them all or only at reduced rates. Why would they do some thing this stupid when other markets are going to bring more revenue. Another example are the skandinavien countries - traditionally RCCL fans. The Jewel of the Seas was sold out for this years noridc shorts within 8 weeks. Last insides going for over 1.000.- Euros for a 4 nighter. Need I say more???

[yogimax]

Have the cruise lines overexpanded?

 

Yes... Yes... and Yes

 

Build, build, build works in an expanding economy when people have more disposable income to spend on non-essential activities.

 

The problem right now is that the economy stinks and people are feeling the pinch.

 

Use the airline industry as a model. All we are seeing are bankruptcies, mergers made out of desparation and shrinking schedules and fleets.

 

The airlines are retiring their planes at an increasing rate.

 

With airfares increasing, disposable income shrinking, oil prices held hostage, Israel threatening to bomb Iran, etc., etc., it is clear that the cruise industry is and will be in ever increasing difficulty.

 

Did they expand recklessly? Absolutely!

[GXmanDC]

Carnival positioned itself to be able to go low cost with smaller ships at any given time. If RCI dumps all their smaller ships and sticks with Mega Ships only they will loose the ability of flexible pricing.

 

I respectfully disagree. Carnival is in a more precarious position because their low cost business model is also a low fare business model. They do not have as much room to cut their fares as RCI does. Also, the smaller ships cost more to operate than the Freedom and Oasis classes. Oasis will be the most fuel efficient ship in the fleet and carry 30% more passengers than Freedom.

[Gonzo70]

The cruise and travel industry will rebound, like the rest of the economy.

 

Maybe, maybe not. If oil somehow drops significantly (I don't think it will) or if a cost effective alternative energy source becomes ready (I think this is years away) the travel and cruise industry will not rebound - if by rebound you mean go back to how it was last year and the years preceding it. They will have to make massive adaptations and endure significant hardships while doing so. If oil keeps going up the travel industry will look very different in a couple of years from now than it has been. Some businesses will survive in that sector, but if oil keeps skyrocketing many will not. Sadly this is not a typical economic downturn where things will soon rebound and go back to normal; this is a much different scenario.