BA Cruise Bulletin – Another Global Hurdle for the Cruise Industry?

An Industry on the Rise

According to the most recent World Bank’s latest Global Economic Prospects Report, compounding the damage from the pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation. The U.S. inflation rate passed 8.3%, the highest in more than 40 years, accompanied by the highest nationwide gas prices ever, and amidst the need for workers in many service industries, there have been layoffs in key tech sectors. 

While the report suggests that growth in advanced economies will decelerate from 5.1% in 2021 to 2.6% in 2022 and 2.2% in 2023, the leading cruise lines are not worried about another industry stoppage or slowdown. Historically, the cruise industry has performed well during economic crises, and we would venture to bet that no other global industry would have been able to survive a virtual complete business shutdown the way cruise has done over the past two years! 

But yet, here we are again, contemplating the next big question. 

Can these cruise corporations — who, after two years since the start of the pandemic, are now just resuming full fleet operations — come out on the other side of yet another global hurdle? 

Our last bulletin touched on the fact that the big three cruise operators (CCL, RCG, and NCLH) had voiced zero recession concerns. Over a month later and CCL again confirmed that “while not recession-proof, our business has proven to be recession-resilient time and again.” 

The history of the industry shows steady growth, year after year, irrespective of recession, political turmoil, or other factors that have impacted the tourism and travel industry.

Take for example the 2007-09 U.S. Economic Crisis, a (potential and directly) applicable historical precedent. This was a time when typical American families did not fare well. According to a Federal Reserve survey, the total wealth of 63% of all Americans declined in that period. And while the recession ended in 2009, economic weakness persisted. Economic growth averaged about 2% in the first four years of the recovery – and the unemployment rate, particularly long-term unemployment, remained at historically elevated levels.

Assuming the recession and its economic impacts lasted from 2007 through 2013, global cruise passengers increased every year. In fact, during these seven years, more than half of those years saw capacity grow by more than the industry’s 20-year compound annual growth rate (CAGR) of 5.1%

While pegged as a transportation provider and not a tourism product, a comparison to air travel shows that this industry did not fare so well during the same period. In 2008 and 2009, the growth of passengers carried in the U.S. declined. While it rebounded in 2010, it leveled off below the average 20-year growth rate of 1.8%.

The major cruise operators chalk this success up to the industry’s all-inclusive value proposition when compared to other vacation options. On Carnival’s call this week, the outgoing CEO – Arnold Donald – confirmed that in prior downturns, employed people take vacations, and cruise remains an especially appealing vacation option because of its value proposition relative to land-based alternatives. This coupled with the pent-up demand for travel globally is a powerful tailwind. The call ended with Donald saying, “remember, vacations are no longer a luxury, they’re a necessity in today’s world.” 

Frank Del Rio stated in his last earnings call, “Demand is rising. Gone are the days when the family budget was going to antibacterial wipes, hand sanitizer, delivery apps, stationary bikes, and streaming services. Consumers today are spending to catch up on over two years of missed experiences.” 

Other factors that play a role in the industry’s recession resilience is its ability to change itineraries – whether it be shifting to regions experiencing strong demand, controlling and reducing costs by shifting capacity from longer to shorter cruises, or a combination of both. 

Brands have shifted, temporarily, from Northwest Europe to the North American markets. We may also see sailings modified to 3-,4- and 5-day sailings across the key Caribbean homeports as needed. This reduces the overall ticket price for the consumer who still wants to go on vacation while increasing overall passenger days when accounting for the extra turnaround days required. 

More passengers per week also lowers the total operational costs per passenger on a weekly basis. Additionally, the bonus for sailing on the shorter cruises from Florida homeports is the ability to use their private island facilities to control the experience and generate additional revenues. 

All in all, the fact that demand kept up with supply during a recent U.S. recession for the cruise industry (and not others) bodes well for the future of the cruise industry and demonstrates its historical resilience as well as the untapped future potential of the industry. 

There have been some recent speculative articles written on the ability of the cruise industry to recover based upon a large debt load and the structuring / repayment of that debt, occupancy assumptions based upon future protocols related to Covid, etc. 

In the short term, the cruise industry will need to repay this debt, cut operational costs, and accelerate programs that generate higher occupancy and APCD levels overall. This means deploying to high-demand markets and presenting products to meet passenger demands for a wide-ranging consumer demographic. 

In the mid-term, key destination product development, vessel investments, and supply chain adjustments that allow for sustainable growth will be required to propel the industry forward in key regions to meet the global consumer demand that new builds and higher passenger deployment levels will have on the industry. 

It is an unusual time for ALL of us as we come out of a global pandemic, but we are confident the cruise industry can once again right the ship and sail into fair seas.

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