Is the Price Right?

Fewer cruise ships will be maneuvering through Caribbean waters in the foreseeable future. That’s a fact. What’s debatable is how less capacity in the region will affect pricing.

In a supply-and-demand market, less ship supply bodes well for operators who have the leeway to raise or keep rates steady since it’s easier to sell cabins when there are fewer available. Conversely, when new supply floods the market, predictably making it more difficult to keep ships full, the pendulum shifts to the buyer, who doesn’t have to look hard for deals.

Okay, enough Econ 101. What does this mean for you and your clients? According to the most current data announced at this past month’s Seatrade Cruise Shipping Convention in Miami, the cruise industry plans to reduce total passenger ship capacity in the Caribbean by about 5 percent, a trend that has been in the making. The Caribbean’s total market share dropped in 2007 to around 35 percent from 39 percent the year prior.

Now come fresh numbers from Carnival Corp., whose 11 brands and more than 80 ships make it the largest cruise operator around. The company’s 2008 first-quarter numbers and outlook accurately frame the overall cruise landscape—both with regard to current and impending economic hardships (read: escalating fuel costs and housing market turmoil) and trends within the industry.

[PAGE-BREAK]

Projections
Taking a look forward to the fourth quarter, company-wide, Carnival’s cruise capacity will be up 8.7 percent over 2007, bolstered by the deliveries of Carnival Splendor in July and Holland America Line’s Eurodam, too, in July. In North America, fourth-quarter capacity will be up 5 percent, but overall Caribbean capacity will decrease to 42 percent, down 4 percent from the year prior.

Carnival’s presence in the Caribbean—while still the biggest by far in the industry—is nonetheless declining, while its presence in European markets is on an upswing. So too, on an even higher plane, is Royal Caribbean International’s entrenchment in Europe. Carnival’s closest competitor will have seven ships plying European waters this summer, with that number reaching eight next year. Its sister line, Celebrity Cruises, will have its biggest Europe season ever in 2009, deploying five ships.

Still, notwithstanding the lackluster economy, most in the cruise industry are heralding the return of the Caribbean in terms of shored-up pricing. “All brands are performing well with Caribbean pricing rebounding nicely from 2007,” said Howard Frank, vice chairman of Carnival Corp., during the company’s 2008 first-quarter earnings call. Furthermore, he said, “On a companywide basis, we are currently forecasting yields in the second quarter to be in the 6.5 percent to 7.5 percent range. The stronger yields are driven primarily by stronger Caribbean pricing.”

Carnival Chairman and CEO Micky Arison, also pointed to “the continued recovery of Caribbean business.” But it’s coming at a price for some Caribbean destinations and ports, which are losing out on needed tourism dollars that cruise ship visits help spur. Consider Jamaica. According to Pat Bellinfante of the Port Authority of Jamaica, 3,222 ships called in Jamaica in 2007, while that number should dwindle to at or below 3,180 visits for 2008. “Ships are capitalizing on the European market, which is more profitable,” Bellinfante says. Other Caribbean ports, such as Grand Cayman and Cozumel, are also feeling the harmful effects of tapering cruise capacity.

Yet fewer ships in the Caribbean, if we submit to the logic of supply and demand, should result in better pricing as many cruise lines say, right? Well, not so fast. Many travel agents aren’t seeing any real pickup in pricing—in fact, Joan McCarty, owner of Specialty Travel in St. Petersburg, FL, notes the complete opposite. “Prices for the Caribbean are so low that we are back to post-9/11 pricing for this area,” she says.

Sherry Laskin Kennedy, travel manager of AAA, in Melbourne, FL, is seeing it shake out similarly in the Caribbean this summer as friendlier prices have led to a paucity of space. “Availability is becoming scarce as the prices are ridiculously lower than usual for summer cruises,” she says. “Celebrity has no ships in the Caribbean this summer and Carnival’s seven-night cruises are going for $50 per night on some sailings. The fall is also looking like a bargain-basement value.”

Laskin Kennedy isn’t optimistic that pricing in the region will pick up any time soon, either. “We will see panic pricing and added discounts until the new ships begin to arrive, creating excitement and demand—and, in turn, a price point worthy of a new build,” she says, adding that she doesn’t recall ever seeing as many ships open to book nearly two years in advance. Still, while the value message of a cruise has not reached all non-cruisers, it’s loud and clear with repeaters. “I'm seeing repeaters booking and rebooking onboard because they know the value of a cruise and are taking advantage of the best pricing in several years,” Laskin Kennedy says.

Don’t for a moment think cruise executives like this pricing curve. Though they all tout the value of a cruise, they’d still like to push pricing up. Gerry Cahill, Carnival Cruise Lines’ newly crowned president and CEO, said as much at last month’s CLIA cruise3sixty conference in Fort Lauderdale. “We would like to see pricing go up,” he said, explaining it’s a necessity to meet the cost of building more ships. He pointed to $250,000 per-berth prices as evidence and the rise in the euro against the dollar. (All cruise ships are built in Europe.) “We need growth in pricing to keep up.”

Carnival, however, is one line that hasn’t drunk all of the European Kool-Aid. The vast majority of its fleet is remaining in the Caribbean. “We are staying,” Cahill said, “while others are moving.” Carol Marlow, president of Cunard, is in Cahill’s corner when it comes to boosting pricing and not only because they work for the same parent company. She recently voiced her aversion to discounting, saying that within an environment where demand outpaces supply, discounting shouldn’t exist.

[PAGE-BREAK]

Is Europe Replacing the Caribbean?
Other travel agents are ­less convinced one way or the other about the pricing situation in the Caribbean. “Cruise lines that are having trouble filling their ships are offering some Caribbean discounts, but not many,” says Sylvia Berman, president of Post Haste Travel in Hollywood, FL. “The best discounts are coming from cruise lines that had excellent deposits, but the passengers are canceling before penalties set in.”

Scott Davis, national director of cruises for Altour-Classic Cruise & Travel in Woodland Hills, CA, isn’t inclined to think there is a pricing storm in the Caribbean. “[There’s] nothing dramatic either way in the Caribbean,” he says, though he notes that capacity in the region has constricted.

Where it has inflated is in Europe. American-based cruise lines have zeroed in on European waters with unprecedented gusto, redeploying ships there that might regularly serve the Caribbean.

With a glut of new hardware in the water, discounts and customer-friendly prices should be rampant, no? Well, to a point, the answer is yes. “At the beginning of the year,” says Laskin Kennedy, “pricing among the premium lines was still on the high side.”Celebrity Constellation, for example, she says, was averaging well above $125 per night for a European cruise—and Holland America Line wasn’t really discounting either. “Then about two weeks ago,” Laskin Kennedy goes on, “there began not only a price drop for the cruise, but deeply discounted or essentially free air to Europe, including the Baltics. Nearly hourly, I was receiving another discount for a European cruise.”

These discounts also include luxury lines such as Seabourn, which has been touting free airfare to Europe, and Cunard Line’s Queen Mary 2, whose six-night transatlantic crossings this summer can be had for under $1,000.

According to Specialty Travel’s McCarty, 2009 might even be a better pricing year for Europe than 2008, with the expectation of even more ships in the region. “Europe for this year is pretty much holding with a few last-minute deals,” she says. “However, Europe for 2009 is being priced less expensively than for the identical trip and date for 2008.”