By
Tony Peisley |
At the beginning of last year, Royal Caribbean Cruises (RCC) was forecasting a record financial performance in 2011 but the fates – mainly in the form of the Arab Spring – intervened and it never happened. It is safe to say that no-one predicted any financial records for 2012 and, if they had done, they would rapidly have withdrawn their forecast on 13 January when Costa Concordia capsized off the Italian coast with loss of both crew and passenger lives.
The impact of that on bookings – mainly but not exclusively in Italy and the rest of Europe – was immediate and continued to a slowly declining extent into the summer.
Coupled with the general economic malaise and the specific eurozone crisis, this created great concern among those with cruises to sell across Europe. It required continued promotions, campaigns and discounting to keep bookings coming in.
The exact result of this will not be known until the crucial third quarter (3Q) financial results are published for Carnival Corporation, RCC and NCL Corporation but the signs are not good. The best the RCC management team could say by June 2012 was that the promotional terrain was “not the worst” it had ever seen.
Passenger volumes have largely recovered and most source markets in Europe will show growth once again for 2012 but ticket yields are a different matter. Having seen booking levels drop 80 per cent in the immediate aftermath, Costa did manage to achieve a million bookings by May. It acknowledged that this recovery had been entirely price-driven, and with parent company Carnival’s half-year results came a reiteration of its earlier forecast that Costa was still on course to lose about US US$100m – a US US$500m turnaround from the pre-Concordia prediction for the brand.
Then there is the whole question of fuel cost, which clearly impacts brands globally and not just those marketing in Europe where the Concordia effect and economic issues have been much more severe. Were it not for rising fuel costs, all the major companies would have enjoyed much better 2011 results than they managed.
For Carnival, average cost per metric ton rose from US$489 to US$646 which meant that, instead of returning above the US$2bn profit mark as it had hoped, net income fell 3 per cent to just over US$1.9bn.
After more fuel price increases in the first quarter (1Q) of the 2012/13 financial year, it revised the predicted cost for the year from US$650 to US$766.
In that quarter, an increase in fuel cost of US$142m was one of the two main reasons for its US$291m turnaround from a US$152m profit in 1Q 2011 to a US$139m loss. The rest was due to a US$173m write-down in value of its Ibero Cruceros brand which was more a stark commentary on the ongoing tribulations of the Spanish economy than a specific indictment on that brand’s own performance.
Although there was media speculation to the contrary, the quarter (which ended on 28 February) was too early for any major Concordia impact to have affected the results. The main Costa-related impact was the US$34m impairment charge relating to Costa Allegra, which broke down a couple of weeks after Concordia capsized and was subsequently permanently withdrawn from service.
Carnival’s second quarter gave a clearer view of the situation with no write-downs involved, just two one-off US$17m benefits, without which the US$14m profit would have been a US$20m loss and a US$226m turnaround from the US$206m profit of 2Q 2011. Fuel cost was not quite as high as predicted but it still meant Carnival paying out US$66m more than in 2Q 2011. The rest of the turnaround was largely down to the unspecified drop in Costa’s bookings and yields because Carnival reported growth in these areas across its other brands.
Fuel cost was clearly the main reason for RCC’s US$31m drop in profit to US$47m in its 1Q results as that rose by US$62m (out of a total US$154m operating cost hike).
As Carnival’s 2Q results suggested, there has been some amelioration in the fuel cost rises since 1Q but the companies are all still staring down the barrel of a gun in the form of the extension of the low-sulphur fuel use requirement in 2015 designed to reduce SOx emissions. MSC Cruises has estimated that this will mean the cost of fuel will more than treble between 2009 and 2015. Cruise lines were therefore encouraged to hear reports from Brussels that there might yet be a European Commission (EC) delay in the application of the new rules in the European (Baltic and North Sea) Emissions Control Areas (ECAs).
The total cost of the North American ECA has been estimated by CLIA at US$1.5bn so this potential delay would be particularly good news for the Baltic which is enjoying substantial growth of 6 per cent in cruise calls and 13 per cent in cruise visitors during 2011 and a further 10 per cent and 6 per cent predicted for 2012.
There have also been record numbers for Norwegian ports with 11 per cent more cruise visitors in 2011 and a predicted 20 per cent rise in 2012.
Much of that growth is coming from European brands, led by AIDA Cruises from Germany. In fact, the rising number of Germans also heading for Norway – they now represent a third of all passengers at the country’s ports – has prompted an unusual alliance between the ports of Oslo and Hamburg. They recently formed a ‘leisure partnership’ to share knowledge and best practice on handling cruise tourism.
In fact, the growth of all European source markets, which continues despite the economic problems, is good news for most European destinations, as more than three quarters of European passengers cruise within Europe.
The 9 per cent growth in 2011 – to 6.1m European passengers – was again higher than North America’s 4 per cent rise so the stage appears set for Europe to become the number one source market within the next 10 years. However, the pressure on yields and the unresolved eurozone issues have prompted some small but subtle changes in deployment, notably by RCC, which has lowered its European capacity from 31 per cent in 2011 to 29 per cent this year and 26 per cent for 2013.
It described this as a “course correction” rather than any lessening of its commitment to the region but less capacity does means less sourcing so it might take a little longer than expected to close that gap with North America, which currently stands at about 5.5m passengers.
Within Europe, though, Germany seems certain to overtake the UK as the leading market within five years. A 14 per cent increase in 2011 took the German total to nearly 1.4m – just 300,000 behind the UK.
This is an abridged version of an article that appeared in the Autumn/ Winter 2012 edition of International Cruise & Ferry Review. To read the full article, you can subscribe to the magazine in printed or digital formats.