The Cruise market in 2003

Whilst the shipping world is enjoying an exceptional year which will certainly be something of a landmark, cruise ships operators did not have any regrets in reaching the end of 2003. As with the tourist industry, the cruise business has been badly buffeted in the course of the year, which has left some bruises.

The year began with the preparations for the Iraqi invasion, which put a damper over the development of tourism and was a serious cause of anxiety - little conducive to new cruise projects. In addition, the world economy was still stuttering and to crown it all the SARS epidemic brought a large part of the globe to a standstill.

As early as February, reservations were proving to be well below predictions and it was necessary to launch a vigorous commercial campaign with discounts and promotional offers in order to fill up ships.

People going on cruises have reacted to the current circumstances by booking at the last moment and having a preference for cruises closer to home and less dependence on air travel.

In addition to the difficult economic climate, owners also had to contend with the arrival of a massive capacity of new ships coming onto the market, 2003 being in this respect a record year with nearly 24,000 lower berths (12 ships) delivered.

Rarely have cruise ship owners� nerves been put through such a thorough examination.

With the price of cruises dropping, owners have been looking to recover part of their income with increased onboard sales, which now represent over 20 % of their turnover.

In order to find ways of getting necessary supplementary income, the cruise product is evolving with ships becoming bigger and bigger, thus permitting a diversification of profit centres across a range of paying activities.

Despite a difficult year, the number of cruisers has increased in the US and should reach 8.3 million passengers at the end of the year thanks to the new units coming into service, an annual increase of 12 %, with however a drop in the occupancy level to an average of 90 %, which nonetheless is exceptional within the tourist industry.

Once again the figures show that to a certain extent in this sector the offer creates its own demand.
 

With all these besetting problems owners were not encouraged to order new ships and it was not until September that we saw an order from Norwegian Cruise Line with Meyer Werft for two ships of 93,000 gt, 2,400 berths, for delivery respectively at the end of 2005 and end 2006, for a price of $ 360 million each, followed by an order from Royal Caribbean with Kvaerner Masa for a ship of the �Ultra Voyager� class of 160,000 gt, 3,600 lower berths, delivery in May 2006 at a price around $ 700 million - the owner having finally abandoned the two options held at Meyer Werft.

It is true that the upsurge in value of the euro against the dollar during the year (more than 52 % in two years) has considerably softened the enthusiasm of orders for those operating in the dollar zone and whilst the Asian orderbooks are filled with commercial ships of all types, the European shipyards are getting desperate at the few projects being seriously studied not only for cruise ships but also passenger ferries and their likes.
 

Twelve ships were delivered this year to enlarge the fleet by 24,000 lower berths, hereunder listed by size:

• for Radisson Seven Seas, �Seven Seas Voyager� (41,500 gt, 714 lower berths) built by Mariotti/Visentini,

• for Aida Cruises, �Aida Aura� (42,200 gt, 1,266 lower berths) built by Aker MTW,

• for Mediterranean Shipping, �MSC Lirica� (59,100 gt, 1,526 lower berths) built by Chantiers de l�Atlantique,

• for Crystal Cruises, �Crystal Serenity� (68,000 gt, 1,080 lower berths) built by Chantiers de l�Atlantique,

• for Holland America Line, �Oosterdam� (81,800 gt, 1,848 lower berths) built by Fincantieri

• for Celbrity Cruise Line, �Serenade of the Seas� (90,100 gt, 2,100 lower berths) built by Meyer Werft,

• for Princess Cruises, �Island Princess (91,600 gt, 1,974 lower berths) built by Chantiers de l�Atlantique,

• for Costa Crociere, �Costa Fortuna� (105,000 gt, 2,720 lower berths) built by Fincantieri and the �Costa Mediterranea� (85,700 gt, 2,124 lower berths) built by Kvaerner Masa,

• for Carnival Cruise Line, �Carnival Glory� (111,000 gt, 2,974 lower berths) built by Fincantieri,

• for Royal Caribbean, �Mariner of the Seas� (137,300 gt, 3,138 lower berths) built by Kvaerner Masa,

• for Cunard, �Queen Mary 2� (150,000 gt, 2,620 lower berths) built by Chantiers de l�Atlantique.

The French can take pride in the total success with the delivery of the �Queen Mary 2� on time despite the complexity of the ship and to owners� entire satisfaction.

This ship will not keep its title as the largest cruise ship in the world for long as the size of the �Ultra Voyager� which is on order already surpasses the 150,000 tons of the �Queen Mary 2�.
 

In April as was foreseen the general meeting of P&O/Princess shareholders endorsed the absorption within the Carnival Group, thus creating the largest cruise ship company in the world with 65 ships of which 18 are on order.

This integration should allow the two groups to achieve certain economies of scale and to reinforce the supremacy of the Carnival constellation in the market for a long time.

At the end of the year Carnival Corporation whose financial year ended on November 30^th, announced a consolidated turnover of $ 6.7 billion dollars and a net profit of $ 1.2 billion (18 %) compared to $ 4.4 billion and $ 1 billion in 2002 (23 %). These figures although enviable show nonetheless the erosion of profits over the year (everything being relative with this group!).

As soon as this acquisition was announced, a ship of 116,000 gt and 3,100 lower berths was ordered with Fincantieri Monfalcone for Princess Cruises, to be delivered in June 2006 for a price of $ 460 million replacing an order for Holland America Line on the site at Marghera.
 

As in previous years we have seen very few second-hand sales, with buyers of older ships becoming a rare species due to the concentration of the market.

We nonetheless can list out some significant transactions such as:

• The purchase by Norwegian Cruise Line of the �United States� built in 1951 and out of service for 34 years and of the �Independence� built in 1950. This purchase took everyone by surprise but of course is related to the requirement, under the Jones Act, imposing only US built vessels on American coastal cruises. Will the new owners pursue this process by having these old ships refitted at high cost? NCL who has resumed the cruises around the Hawaiian archipelago and who is about to complete the �Project America� begun in the Ingalls shipyard with Lloyd Werft, is the only company that has placed part of its activity on American cruises under American flag, thus benefiting from the protection that the latter offers despite higher running costs.

• The �Song of Flower�, built in 1974 -190 passengers- was sold for $ 7,2 million to the Compagnie des Iles du Ponant to become �Le Diamant� under French flag.

• Saga Holidays bought the �Caronia� ex �Vistafjord� built in 1973 -677 passengers- for $ 20 million. This ship will be delivered in 2004 and team up again the �Saga Rose� ex �Sagafjord� on the very lucrative market for retired English.

• Seized in 2002 after the financial problems that her owner ran into, the �Hyundai Pongnae� (1972, 728 passengers) was sold for around $ 11 million to a Hong-Kong operator.

• the �Superstar Capricorn� (1973, 800 passengers) was sold for $ 20 million to Spanish Cruise Line to serve the Spanish market in full flight.
   

In a market which is more and more concentrated, it is interesting to note the creation of new companies, operating in niche markets, such as:

• Mauritian Island Cruises, which bought the small �Renaissance Seven� and �Renaissance Eight� to operate in the Indian Ocean out of Mauritius under the names of �Island Sun� and �Island Sky�
• Discovery World Cruises, created by the veteran of cruises - Gerry Herrod, who has put into service the �Discovery� ex �Island Princess�, built in 1971 with 610 passengers.
• Oceania, the company created after the folding of Renaissance, has put successfully into service the �Regatta� and the �Insignia�, both built in 1998 - 700 passengers - and has already project for a third in 2005, the �Nautica�.

Two companies were sadly in serious difficulties:

• Regal Cruises has been declared bankrupt and the �Regal Empress� (1953 - 875 passengers) has been sold at auction for $ 1,75 million and been chartered to Imperial Majesty Cruises
• Royal Olympic Cruises has encountered at the end of the year serious financial problems, which has immobilised its two new ships built by Blohm & Voss.

Small and medium size companies in the cruise industry have emerged from this difficult year more fragile, not always having the necessary critical size to be able to handle the difficult challenges.

Let us hope that the recovery of the market will allow them to surmount these difficulties, given the patience of their creditors, as it is neither in the interests of clients, nor the one of suppliers, that the market is increasingly concentrated in the hands of few.

It was regretfully not the choice of a French bank, who abruptly decided in the first days of January to arrest the three modern cruise vessels of Festival Cruises, all built in Chantiers de l�Atlantique, taking the risk to cause a fatal blow to this young company, which contributed successfully to the development of the European cruise market.
 

Faced with an orderbook which is becoming depleted and the large number of ageing ships still in service, can one still talk about an over-capacity? It should be remembered that safety regulations require all ships having asbestos on board and built with combustible material, to be out of service by 2010. This means that nearly 40 ships representing about 20,000 lower berths, can no longer be in operation in the course of the next 6 years. These ships serve primarily the European and the Asian markets.

Already 6 ships have been scrapped this year.

Eighteen new ships are due for delivery up to 2006, including 11 in 2004, 3 in 2005 and 4 in 2006, for a total of about 42,000 berths, which in view of old ships going out of service, should increase the fleet by about 8 % over the period, compared to an average annual increase in the number of cruisers of 8 %.

Between 1999 and 2004, there were 63 ships built totalling 115,000 berths. It is therefore clear that, in order to meet the continuing growth of the market at the same pace as in previous years, owners will need to order new ships.

With the coming three years seeing fewer deliveries, owners will be able to �breathe� again and possibly, we hope, will allow them to increase the price of cruises to find a better return.

Nobody wants the market to stay at current levels but with new ships becoming bigger, with an average capacity over 2,600 passengers, the American market will need between 5 to 6 ships per year to match their needs, whereas the E.U., expanding to 25 states and becoming the biggest potential market within the developed countries, will need to put into service some 10 ships of around 2,000 passengers before 2010, to compensate for those being scrapped and the market development.

The Asian zone, which should experience a very strong progression, led by the awakening of China and the next Olympic games in 2008, should also be able to absorb 3 to 4 new ships before 2010.
 

We expect a slower and more reasonable development, which should be able to satisfy to some extent the needs of European shipyards, but the pace of new orders will depend to an enormous extent on the parity of the dollar / euro which is very difficult to predict.