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The Cruise Industry's March to China: What's In It for Lines and Agents?October 27, 2014 By: Susan Young
|Quantum of the Seas' move to China is part of a larger trend. // Rendering by Royal Caribbean|
As the cruise industry heads into 2015, what’s the biggest trend out there? What’s the number one factor that might change the look of the industry for years to come? Experts say it’s big, it’s exotic and it’s a massive opportunity for cruise lines. Simply put, it’s an emerging dragon.
“Right now the number one trend developing in the industry is China,” emphasized Brad Anderson, co-president, Avoya Travel/American Express. Just how much potential is there? In 2013, the Asia Cruise Association estimated the Asian market could grow from 1.3 million passengers in 2012 to 3.8 million in 2020, with a full 1.6 million of those people coming from China.
“While this [the strategic move for Chinese sourcing] most likely won’t affect the North American market within the next year, it will have a longer-term impact in regard to inventory and movement of product,” believes Anderson.
|Vistarama onboard Quantum of the Seas // Rendering by Royal Caribbean|
Expanding in Asia
Desiring to establish a competitive advantage, Royal Caribbean International opted to home port its newest ship, Quantum of the Seas, in Shanghai year-round starting in spring 2015. The line also has other ships in the marketplace.
Adam Goldstein, president and chief operating officer of parent company, Royal Caribbean Cruises Ltd (RCL), was interviewed by Forbes magazine about the potential. In that recent story, he stated: “China is among our most profitable markets — it is already our third-largest market in the world, behind the U.S. and the UK, and we believe it will grow even more. The number of Asians cruising today is very similar to the number of Americans who were cruising in the 1980s. No other market has comparable growth potential.”
Next year, China will represent 10 percent of RCL’s summer capacity, while Asia overall will be 15 percent of the company’s deployments, up from 12 percent this year, according to Robin Farley, a cruise industry analyst for UBS Investment Research.
Carnival Corporation also is strongly jockeying for position in China, sending Alan Buckelew, its chief operating officer, to Shanghai to head up all Carnival brands’ operations there. By summer 2015, the company will have four ships based in China.
Three are from Costa Cruises, including the new Costa Serena, home ported year-round from Shanghai starting in April 2015. That vessel will join two other Costa ships already there. Another Carnival Corp. brand, Princess Cruises, began sailing with Sapphire Princess from Shanghai this past summer.
It's also not just European or North American brands looking to expand. Based in Hong Kong, Genting Hong Kong, formerly known as Star Cruises Ltd., is highly active within the Asian cruise sector. It owns a stake in Norwegian Cruise Line Holdings and sails Asian waters with a fleet of Star Cruises ships.
|Celebrity Century was recently sold to a Chinese company.|
Chinese Firms Also Step Up
Home-grown Chinese companies hope to get a piece of the pie, either by building ships or developing partnerships with the major global cruise brands. Earlier this month, China State Shipbuilding Corporation (CSSC) and Carnival Corporation signed a memorandum of understanding to explore the possibility of a joint venture.
In addition, Farley said Royal Caribbean is talking to CTrip.com International, China’s biggest online travel agency, headquartered in Shanghai, about a potential partnership. CTrip.com recently bought the Celebrity Century and reportedly may be in the market for other older tonnage from either Royal Caribbean or other operators.
“We believe RCL’s September 2014 sale of an older ship to a leading Chinese travel company Ctrip is far more significant than just a ship sale,” Farley told her investors in a research note. “We don’t believe that a cruise brand would have the strategy of having just one ship in its fleet, so we see more opportunity for ships to be sold to Ctrip.”
Employing 23,000 people within Asia, Ctrip.com reportedly sells 10 percent of all cruise tickets bought by Chinese citizens. CTrip.com has 17 branch offices in Beijing, Guangzhou, Shenzhen and other major Chinese cities throughout China. It’s also has invested in Taiwan ezTravel and Hong Kong's Wing On Travel, as well as ToursForFun in North America.
|Mitchell J. Schlesinger|
Training Potential Players
Interest in the tapping into the vast undeveloped Chinese cruise market has entered academic circles. Shanghai Maritime University has developed an Executive MBA program in response to the dramatic growth of China’s cruise market. It is now educating Chinese organizations and entrepreneurs interested in being part of the potential growth.
Mitchell J. Schlesinger, a veteran cruise industry executive who was formerly with Orient Lines, Norwegian Cruise Line and Voyages to Antiquity, is conducting three days of seminars for Chinese maritime officials this month at Shanghai Maritime University. His lectures are focusing on cruise product segmentation; ship acquisition, deployment and itineraries; marketing and branding; sales management and organization; and implementation of strategic business and marketing and sales action plans. Previous lectures focused on financial and operations management, as well as cruise terminal development.
Looking at the evolution of Chinese cruising, “there are two aspects that will occur simultaneously,” believes Schlesinger, president of MJS Consultants, based in South Florida. “Akin to the announcement of the Carnival partnership with the China State Shipbuilding Corp., the existing lines will begin to join Royal Caribbean [in] operating cruises for the Chinese market.” Secondly, Schlesinger says “an organically grown Chinese cruise industry is starting to develop.”
So what’s the benefit for U.S. travel agents? It may be a long-term perk. As tonnage shifts to Asia, capacity could drop in already overcrowded markets, like the Caribbean. That could mean a bit higher pricing, fewer discounts and yields transiting to a healthier level.
But, as for the China cruises themselves, “in the initial stages the opportunity for U.S. agents is limited as these products are being developed directly for the Chinese market,” Schlesinger acknowledges.
“The most immediate challenge for Chinese-based companies [seeking to compete with Carnival Corp. and RCL] is how quickly they can ramp up from a ship standpoint,” Schlesinger said, noting typically an initial contract to build a new ship at a Chinese shipyard means five years of planning and construction. But within that same five-year period, more North American cruise brands are likely to enter the marketplace with modern ships.
He also said Chinese companies also will need to ramp up their sales and marketing training. “The sizable customer base in China looking primarily for a three-to-five-day cruise vacation is primed for the creation of Chinese-operated cruise lines,” Schlesinger stressed. “It is a bit reminiscent of the U.S. cruise industry in the very early 80s.”
Eyes on the Prize
The prize for cruise line executives is easy to spot. China's urban middle class population is bigger than the entire U.S. population. These potential cruisers, unlike first-timers trying out cruising from Europe or the U.S., are accustomed to staying the best, most luxurious hotels across the globe.
So while the North American brands have often shipped older ships to Europe for a second life afloat, that won’t necessarily work for the Chinese market. The Chinese middle class desires to sail on the newest, top-notch ships with the latest bells and whistles. Thus, Royal Caribbean is sending its latest technological wonder, Quantum of the Seas, and Costa is also sending a new ship.
But it won't be the same North American onboard product that cruisers might experience in Europe or the Caribbean; once Chinese travelers venture onboard these and other ships from North American or European lines, they’ll have a mix of both Chinese and western dining, activity and entertainment options.
Recently, Farley noted that price checks of Chinese travel agents show higher yields for ships in China compared with ships sailing in the Caribbean. She also has told her firm’s investors that Carnival Corp. began sourcing in China during 2006, broke even in 2012 and has made money in the country ever since. It will post a 140 percent increase in Chinese sourcing capacity in a two-year period.
One factor all cruise lines will undoubtedly love is that Chinese guests love onboard shopping and entertainment. Farley told her investors that for ships based in China, the voyages tend to generate higher onboard spending by guests. That said, costs to operate there are also a bit higher.
A Focus on Shanghai
Shanghai has good cruise infrastructure and several cruise terminals now home porting ships. Hong Kong too has multiple terminals, including the new Kai Tak terminal. But the lines, for the most part, have centered their focus on Shanghai.
Buckelew is now operating from Carnival Corp’s office there, while Goldstein told Forbes that Shanghai is the largest populated area in China and offers the company the infrastructure needed to service its ships.
The Chinese-sourced cruise market is in its infancy, so the players grabbing the biggest initial market share likely will solidify a long-term advantage. Farley said CTrip.com has named Royal Caribbean and Costa as the foreign brands best known to Chinese consumers.
What about Norwegian Cruise Line? Farley told her firm's investors that “Norwegian sees enough opportunity in existing markets not to focus on China sourcing at the moment, though the company believes there could be some announcements in that regard looking into 2015-2016.” Farley also said Norwegian will benefit [in cruise fares] as other operators move capacity out of the Caribbean and other markets.
While Genting Hong Kong owns a 27.7 percent stake in Norwegian Cruise Line Holdings at the moment, the company has filed for and received permission to sell its entire stake in NCLH, though it has not done so. “But the intention to sell does make it unclear whether Genting would partner with Norwegian to help Norwegian enter the market in Asia or whether Genting would view Norwegian Cruise Line Holdings as a competitor if Genting were to no longer have an economic stake in NCLH’s operations,” Farley noted.
Farley also said the recent year-round expansion into China by the two biggest cruise companies “has not been lost on privately-held MSC.” She noted that MSC Cruises has four new ships planned for delivery between 2017-2019, “so they have available tonnage to send a new ship to China.”
In addition, MSC Cruises’ CEO Gianni Onorato was employed with Costa Cruises when it sent a ship to source passengers from China in 2006, so he and the line know the market. “However, MSC has time to watch others pursue year-round sourcing in China before having to make any decisions about deployment and sourcing for all its new ships,” Farley added.
No one knows which companies will be the most successful long-term in Asia, but what is clear is that the guests will materialize. Both Carnival Corp. and Royal Caribbean Cruises Ltd. have secured a commercial license from the Chinese government to sell cruises direct to consumers in China, but experts say direct sales will be a small percentage of all business sales there.
Royal Caribbean has said publicly that most Chinese sourcing will come through agency distribution, as is the case elsewhere in the world. Given that cruising is so new to the Chinese market, it’s not a vacation that Chinese consumers will likely feel comfortable in booking on their own, officials believe.
Schlesinger noted that the Shanghai Maritime University's MBA program is working with China’s National Tourism Administration to create and implement a national sales and marketing training program for travel agents.
As interest builds among the Chinese population, cruise lines headed to China will also have to adapt to cultural differences. Bookings tend to come closer to departure, for instance. But with challenges also come opportunities.
Schlesinger says that with China’s population of almost 1.4 billion people, the cruise lines are looking, in particular, at the 25 to 54 age bracket, which alone has 660 million people, more than twice the U.S. population. Even more interestingly, “by 2022, the upper middle class will grow from 15 percent of the population to 55 percent,” he stressed.
“It is a significant opportunity [for the cruise industry] to continue to expand global deployment and introduce cruising to a new market, similar to the expansion in Europe," Schlesinger said.
Agents will have to wait and see about potential bottom-line benefits from any China growth. If cruise lines pull ships from such markets as the Caribbean where there is an over-saturation of capacity, then cruise pricing may improve. Agent commissions, in turn, may rise.
In Farley’s opinion: “As a rising tide carries small boats, all operators will benefit from less capacity in the North American market as ships are moved to China.”