Ordering new ships requires a measure of confidence from owners, which is only now starting to return after a period of doubt and anxiety over what the future might hold. Figures produced by Peter Wild, the UK based statistical expert on cruise newbuildings, show there are currently 22 new ships on order for delivery between now and the final quarter of 2015, about half the figure of three years ago. Wild identifies the same number of ships as ‘orders pending and new projects’, some of which have undoubtedly fallen victim to the recession.
The impact of this slowdown in ordering is shown by the influential Wall Street analyst, Robin Farley of UBS Research, who says that in North America, growth in 2012 and 2013 of three and four per cent respectively will be well below the six per cent annual average of the last ten years. Similarly, in Europe a nine or ten per cent annual average expansion is not likely to be matched in the near future.
Farley says financial conditions and the health of corporate balance sheets are both better, but she does not see a return to the ‘unrestrained ordering’ of prior years. Where orders are placed, they are more likely to be for European brands than North American companies. There are two reasons for this: Europe is currently a more thriving market than North America and placing Euro denominated contracts with European shipyards for companies that receive their income in dollars can make owners vulnerable to currency losses if rates go the wrong way.
Micky Arison, chief executive of Carnival Corporation, who takes a personal and practical interest in all new ships ordered for his ten operating subsidiaries, expresses this slowdown in a rather different way. “We have publicly stated that our current intention is to have an average of two or three new ships entering service annually in 2012 and beyond,” he says. “This is less than the five ships per year we averaged in the last decade. We still have great confidence in the North American market, but considering our returns are better for our European brands, there will likely be more emphasis on those lines in future.” At present Carnival companies account for about 45 per cent of global newbuilding capacity and last year no less than 54 per cent of Carnival’s revenues were generated from non-North Americans.
No sooner had UBS and other Wall Street analysts predicted this European dominance than, as if on cue, a contract came along for P&O Cruises with the Fincantieri shipyard in Italy. For the first time in a number of years, the UK market leader did not have a newbuilding on its books. The 3,600-berth ship, P&O’s largest, cost €560 million or €155,000 per berth. On this last basis the vessel is 11 per cent cheaper than P&O’s last new order, placed as long ago as January 2007. She will be built on a hull design being used for two Princess Cruise vessels. So there is an element of cost-saving standard design in the ship.
Carnival Corporation followed the new ship order for P&O Cruises with three more large vessels for other European subsidiaries – one of 3,700 berths for Costa, and two of 3,250 berths, each for AIDA in Germany. The total cost of all three is d1.46 billion. The Costa ship, the line’s largest, is to be built by Fincantieri and is said to be 15 per cent cheaper per berth than the last ship built for the Italian line. The two vessels for AIDA, also its largest, are to be built by Mitsubishi in Japan, which will put the yard back in cruise ship construction after a gap of seven years. These vessels are about seven per cent cheaper per berth than the most recent order for AIDA, UBS’s Robin Farley estimates. The orders push Carnival’s delivery dates for its ten newbuildings out to 2016. Significantly, all three ships have been ordered subject to financing.
Royal Caribbean has decided against ordering any more huge new ships like the 223,000-ton, 5,400-berth Oasis of the Seas and her sister, Allure of the Seas, even though they have proved popular with the cruising public in the Caribbean. Instead, it has reverted to a smaller ‘Sunshine’ class of 158,000 tons and 4,100 berths. Harri Kulovaara, executive vice president, maritime, responsible for newbuildings, says: “We only ever intended to build two of these Oasis class ships, which have exceeded our expectations. But we are an international operation and the Sunshine class will be used in a number of areas.” To justify RCL’s international credentials, he points out that 45 per cent of RCL’s ticket revenues come from non-American passengers.
There is also no doubt that, in addition to the huge design undertaking that the vessels represent, the very large US$1.5 billion cost for each one is formidable in the current tight finance market and, in the case of the first ship, Oasis of the Seas, threw up problems. For example, the Finnish export credit agency, which (in line with OECD credit guidelines) was due to guarantee the shipbuilding loans, had to be recruited to actually participate in the Oasis loan by taking a share. RCL has also switched shipyards for the Sunshine ships from Aker in Finland to Meyer Werft in Germany. In general terms, however, Kulovaara says the fundamentals of the cruising business remain good and companies will continue to grow, even if at a more modest pace.
The strength of the industry before the onset of recession took it down some surprising paths. For example, a company representing Colonel Gadaffi’s interests, General National Maritime Transport, was set to build two 139,000-ton ships at the STX French shipyard in St Nazaire. In spite of the turmoil in Libya, the first ship continued to be built for a while, but the contract has now been rescinded by the French shipyard, which is confident it can secure a buyer for the incomplete newbuilding. The two ships were each reported to be worth US$800 million.
Unlike cargo shipbuilding, which left Europe for the Far East years ago to facilitate series building at cheap prices, construction of cruise ships, with their individual, tailor-made requirements, has remained firmly rooted in European countries like Finland, France, Germany and Italy. Together they have an order book worth the best part of US$14 billion. So there has been some surprise at a report that Japan, part of the cargo ship cartel, wants to get back into cruise ship production after a gap of seven years.
AIDA Cruises announced in August that it had signed a memorandum of agreement with Japan’s Mitsubishi Heavy Industries for the construction of two innovative new-generation Clubships. The 125,000-ton ships with 3,250 berths each will be delivered in March 2015 and March 2016. The all-in cost for these vessels will be approximately €140,000 per lower berth. These latest ships are representative of a new breed of residential vessel.
Another company that, like Royal Caribbean, is scaling back post-recession, is the industry’s third force, Norwegian Cruise Line, whose largest vessel to date was the US$735 million Norwegian Epic, which weighed in at 153,000 tons when she started service last summer. But NCL’s two latest new ships, due for delivery in 2013/14, are 10,000 tons (seven per cent) smaller and are being built at Meyer Werft in Germany rather than the STX shipyard at St Nazaire.
In ordering the two latest ships, known as ‘Project Breakaway’, NCL chief executive Kevin Sheehan says: “I pitted all the yards against each other to get the best deal. We ended up getting best-in-class pricing with a great financing structure.” The German shipyard had built ships for NCL in the past so this was not a leap in the dark. The French yard, he adds, were “nice people, but it was not as easy to get things done.”
Disney Cruise Line took delivery of a new ship, Disney Dream, at the start of 2011, its first new vessel for 12 years. At 122,000 tons, the vessel is too big to negotiate the Panama Canal, but this problem should be resolved when the canal is widened by 2014. A sister ship, Disney Fantasy, is due out next year. Disney is only the second cruise line outside the Carnival/Royal Caribbean stables to operate a post-Panamax ship. The new ships are 40 per cent larger than Disney’s earlier two ships and adults have their own dedicated areas on the vessels. Disney COO Tom Wolber says that these two larger ships, which raise DCL’s lower berth capacity by 70 per cent, are part of a long-term strategy for growth.