Can the industry recapture its pre-pandemic momentum?
(Article originally published in Jan/Feb 2021 edition.)
While 2020 was obviously a lost year for the cruise industry, it also helped accelerate change and, in unexpected ways, may have strengthened its long-term outlook. Confronted by the first total stop in passenger traffic since World War II, companies were forced to repeatedly turn to the capital markets for survival while also taking the opportunity to reexamine their fleets along with other aspects of the business.
Despite the long pause, most analysts believe the industry will rebound.
“The best ‘good news’ is it’s undeniable there is a tremendous amount of pent-up demand for cruising combined with an eventual light at the end of the tunnel,” wrote C. Patrick Scholes, an analyst at Truist Securities. Loyal cruisers continue to bemoan the loss of their preferred travel experience while cruise lines have issued millions of dollars in “future cruise credits,” managing cash flow by converting canceled reservations into credits – as opposed to having to make refunds.
The travel community also points to consumers who are planning future vacations. Carnival Corporation recently said that advance bookings for the first half of 2022 are ahead of 2019 levels. However, some travel agents remain concerned.
“The cruise industry’s outlook going into 2021 is still bleak,” says Jonathan de Araujo, owner of The Vacationeer, a travel agency based in Watertown, Massachusetts. He looks for “a continuation of the misery,” possibly through the first half of 2021. “There’s no chance of a meaningful return to normal in the cruise industry until vaccine distribution has reached the majority of the population,” he predicts.
Many analysts echo that belief. Scholes highlights the travel agent’s concern that recovery only comes with a vaccine as his “leading ‘bad news’.” Some observers expect that travelers will be required to have a “vaccine passport,” a concept not unfamiliar to the professional mariner but not something the casual vacationer has had to deal with in nearly 60 years. The U.K.-based cruise line Saga in January 2021 became the first to announce that it would require travelers to be vaccinated to sail aboard its cruise ships.
“Operators will face a lot of headwinds when restarting/ramping operations in 2Q-3Q21,” forecasts J.P. Morgan analyst Brandt Montour, who nonetheless sees a recovery. However, like many in the industry, he says, “There’s no doubt 2021 will be a transition year.” The challenge is to recapture the excitement and restore the momentum the industry enjoyed prior to the pandemic.
Optimism was high as 2020 began with the industry seeing record demand and improved pricing. Nearly 30 million people took a cruise in 2019, according to industry trade group Cruise Lines International Association (CLIA), and the outlook was for strong growth. Forecasts expected more than 32 million cruisers in 2020 with some analysts predicting 40 million by 2027.
Fueling growth was a record orderbook for more than 100 new ships, valued at more than $65 billion. Some were being used to launch new markets, such as the rapid growth in luxury expedition cruising to unique destinations like Antarctica and the Galapagos Islands, while others were part of modernization and expansion programs for the larger cruise brands that cater to the broader traveling public. Only a few of the oldest ships were being retired, and even then they were mostly being sold to second-tier operators.
As the novel coronavirus spread, cruise lines – like every segment of the travel industry – tried to adapt. However, with a growing number of widely reported incidents, cruising came to an abrupt halt in mid-March.
The first effort was to get all the passengers home safely. Then followed the challenge of what to do with all the idled ships. As the pause stretched on, the industry undertook the monumental task of repatriating more than 100,000 shipboard employees, often using their own cruise ships to transport crews home to Europe, the Caribbean, the Philippines, Indonesia, India and other destinations.
Then came the more fundamental, structural changes.
Bankruptcies, Downsizings & Extended Deliveries
One of the first and most obvious was the downsizing of the industry. While larger corporations were able to raise additional capital to cover their costs, smaller, niche operators were not so fortunate.
In Spain, 20-year-old Pullmantur Cruises was forced into reorganization with its part-owner, Royal Caribbean Group, taking possession of the line’s ships. In the U.K., Cruise and Maritime Voyages (CMV), which had built its business operating classic, older cruise ships, also went into administration before five of its cruise ships were sold at auction. The start-up cruise line Jaleesh Cruises, which had been attempting to develop a domestic cruise business in India, also folded under the financial pressures.
In the past, older cruise ships often found a buyer, but in 2020 the cruise industry began its first large purge of older tonnage. Two of the 70,000-gross-ton cruise ships operated by Pullmantur were among the first to arrive for recycling at the yards in Turkey. Three of CMV’s classic ships have also been sent to the breakers. All told, 20 cruise ships or approximately 10 percent of the global industry has either been sold for scrap or retired from cruising since the pandemic began.
Significantly, the major cruise lines also began to shed older ships to both lower near-term costs and make future operations more efficient. Carnival Corporation, which traditionally sold a few old ships each year, launched a program to accelerate the disposal of less productive ships. Reaching across its brands from Carnival Cruise Line and Holland America to P&O in both the U.K. and Australia, Costa Cruises and Princess Cruises, Carnival is selling 19 cruise ships, four of which went for scrap, reducing its total capacity by more than 10 percent.
Royal Caribbean also sold two of its oldest and smallest ships and early in 2021 announced the sale of niche brand Azamara Cruises to a private equity firm.
There had also been much speculation on the status of the orderbook. Early in the pandemic, Bernard Meyer, Managing Director of the Meyer Group, one of the largest builders of new cruise ships, lamented, “One of our customers said that he doesn’t really need your ships anymore.”
The shipyards, however, worked with those cruise lines seeking to extend the timeline for deliveries. New cruise ships are continuing to be built, and the major yards – including Fincantieri and Meyer – have delivered new ships while preserving all of their orders.
The question on everyone’s mind now is when and how the cruise industry restarts. Hopes that the first cruises in the major markets might resume before the end of 2020 were dashed by a resurgence of the coronavirus.
Yet a few large cruise ships were able to resume sailing from Germany, Italy, Greece, the Canary Islands, Singapore and Taiwan. While there were a few well-publicized incidents, more than 200 cruises were operated in the second half of 2020 with no large outbreaks of the virus similar to what happened in March 2020.
Meanwhile, the industry has invested in developing new health and safety protocols that will likely have a positive impact not only with COVID-19 but also with other problems such as the repeated occurrences of norovirus. Health authorities like the U.S. Centers for Disease Control have promulgated new regulations addressing areas such as onboard medical facilities, and they will have a long-term positive effect on cruise operations as well.
Even the shipyards and suppliers and vendors that focus on cruise ship repairs are offsetting some of their losses as cruise lines canceled the modernization of ships by developing new solutions to retrofit existing ships in areas such as HVAC systems and how food is handled aboard vessels.
“We expect all operators will have 100 percent of their fleets running by the end of 2021,” says J.P. Morgan’s Montour. “2022 will be characterized by fully ramped capacity, near-full occupancies, and so far manageable pricing pressure (with a potential boost from the reopening of Cuba).”
The first cruises will likely continue to impose many of the new safety protocols that have been developed, ranging from masking in public areas to reduced capacity and social distancing. “There’s no shortage of desire for cruising,” says Alex Miller, Founder & CEO of the consumer website UpgradedPoints.com, but what everyone agrees is that the industry must demonstrate safety upon its return.
Once that is achieved, there’s an expectation the industry will quickly rebound. ”I think we will see a trend towards revenge travel and a desire to make up for lost time by many travelers,” predicts Jamie Weitl, owner of Pineapple Escapes, a travel agency in Illinois.
The industry is hopeful that this will be the case and that passengers will flock back to the ships as the cruise lines in the meantime have upgraded health and safety protocols and become both better informed and more efficient in their operations.
Allan Jordan is the magazine’s Associate Editor.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.