Shipping and Cruise Sectors Struggle with the Fear of Coronavirus
With the daily barrage of news reports and warnings fueling concerns of a global pandemic, the shipping and the cruise industries continue to struggle with the ramifications of COVID-19 (commonly known as the coronavirus). With the latest reports showing that the virus is spreading in Europe and South America, the level of fear, founded or not, continues to rise.
With so much unknown, the views vary widely on the potential impact on the global economy. The travel and cruise shipping sectors appear to be especially vulnerable, with some experts suggesting that there will be a lasting reduction in consumers’ willingness to travel. Lawrence B. Brennan, an adjunct professor at Fordham University Law School, expressed the worst-case fears, saying that “both cargo ships and cruise ships face immediate financial problems and the medium to long-range impact could be grim.”
Starting a few weeks ago, most of the concern was focused on Asia, and while it was challenging for the shipping industry there was a hope that it might be confined. Nonetheless, with manufacturing curtailed in key industrial areas of China, top ocean carrier Maersk has already canceled more than 50 sailings to and from Asia, with warnings of more uncertainty to come.
So far, the cruise lines’ efforts seem to have been successful in preventing a repeat of the situation aboard the Diamond Princess, which was quarantined in Japan, and the Westerdam, which was forced to search for a port. However, cruising is still struggling with the growing fears. David Yeskel, a travel journalist who has been covering the industry for over 25 years as The Cruise Guru, reports, “I’ve never seen anything like the effect that the current coronavirus outbreak is having on the travel industry.” Hundreds of cruises have been canceled, and the lines are scrambling to reposition ships away from Asia (or even put ships in layup).
“We find ourselves in an environment where the resilience of our business model will be tested once again by the non-controllable external factors,” Frank Del Rio, president and chief executive officer Norwegian Cruise Line Holdings, told investors recently. “The effects of the coronavirus outbreak in our business has been swift and severe.”
Notably, these remarks come from a company with a smaller exposure to the Chinese market. Industry giants Carnival Corporation and Royal Caribbean Cruises Ltd. have also issued warnings to their investors.
“While all of the cruise companies have quantified the financial impact from known canceled sailings and re-routings, the concern is if there will be additional cancellations and re-routings if the virus is not contained,” says C. Patrick Scholes, a managing director at SunTrust Robinson Humphrey who researches lodging, leisure and gaming.
Initially, analysts pointed to the cruise sector’s ability to rebound from past challenges, like the spread of SARS (Severe Acute Respiratory Syndrome) in 2003. The cruise lines’ resurgence after SARS suggested hope for the future. Chris Woronka, a research analyst at Deutsche Bank, predicted on February 12 “that the impact is largely transitory.” Two weeks later, based on an updated assumption that “the virus’s impact on U.S. travel (broadly) is likely to be worse before it gets better,” he updated his recommendation: “Moving to the sidelines on cruise given rising uncertainty/fear.” After near term cancellations, he expects consumers will remain wary while the companies ramp up marketing. In his report, he speculates “there could be some perhaps lasting, structural impairment to the cruise multiples.”
The cruise industry has taken steps to allay the fears of jittery passengers. The trade group Cruise Lines International Association (CLIA) reports that its members are following enhanced protocols, denying some embarkations and requiring additional pre-boarding screening of all passengers. “Short of halting all cruises, we don’t know what more the cruise lines could do,” says Tanner Callais, the founder of Cruzely.com, a consumer website focusing on cruising.
“So far, the fear when it comes to cruising seems to be limited, but we might be on the verge of this changing,” Callais cautions. This week, the authorities in Jamaica and Grand Cayman refused to permit the MSC Meraviglia to enter their ports after reports began to circulate about a sick crew member, despite medical evidence confirming that the illness was the common flu. MSC Cruises expressed concern that the decision was not made “on a factual review of the ship’s medical records, as well as consideration for the pre-embarkation screening [and] onboard medical and deep sanitation protocols that are in place.”
It could become a far more troubling issue for the cruise industry if additional ships are also refused entry into ports. The Dominican Republic turned away a cruise ship on Thursday, and Cozumel, Mexico delayed letting passengers come ashore while doing testing. Jittery travelers are already taking steps to hedge their trip expenses, and the situation might only get worse. “We’ve seen a surge recently in policy sales with Cancel for Any Reason selected as an optional upgrade,” reports Stan Sandberg, co-founder of Travelinsurance.com, noting an increase of more than 150 percent between the fourth quarter of last year and this January.
Kim Parizek, a travel agent based in Southern California with Boutique Travel Advisors, says that over the past few weeks her clients were mentally linking the virus mostly to China and Asia. “Now that the reports have started coming out of European countries, the sales have stopped and the cancellations are increasing,” Parizek says. Most of the cancellations are for trips through June, but she believes that “the next month is going to be critical as we see how Europe deals with the crisis.”
Most experts agree that the developments of the next few weeks will determine the industry’s outlook and the broader global economy. “It is the potential unknown negative impact on demand for North American and European cruises,” warns C. Patrick Scholes. “Obviously the situation is very fluid and is changing day to day.”
With over $50 billion dollars in annual wages and salary and over $22 billion committed for new ships and technologies, the cruise industry clearly has a lot riding on its ability to address these challenges. For those consumers willing to travel, discounts and promotions are rising, but it will continue to be a period of waiting and watching to see how the global authorities react - and whether they are successful in curtailing the further spread of the virus.
Allan E. Jordan is a regular contributor to The Maritime Executive Magazine.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.