Dispatch from Cruise Shipping Miami - Cruise Executives Warn about ECA Regulations and Negative Effect on Ports and Itineraries

The annual “State of the Industry” panel discussion at the Cruise Shipping Miami

Typically, the annual “State of the Industry” panel discussion at the Cruise Shipping Miami conference in Miami Beach covers a balanced mix of topics. That wasn't the case this year, though, as reports from each top-level executive to the audience seemed to flow back to one looming operational issue -- North American Emission Control Area or ECA regulations.

These regulations could have “profoundly negative consequences” for many ports and destinations, not to mention higher costs for cruise lines, according to Stein Kruse, president and CEO, Holland America Line. And, in the end, that could impact consumer choices and the types of itineraries and home port products that agents have to sell.

To put it simply, under current regulations, cruise ships within 200 miles of the North American coastline can use marine fuel that’s 1.5 to 2.5 percent sulfur. But a proposed agreement between the United States and Canada could drop that limit to 1 percent by 2012 and 0.1 percent by 2015. The air emission rules designed by the U.S. Environmental Protection Agency are planned to protect human health and the environment.

That said, the cruise industry objects to the blanket 200-mile limit, which was set by the government without regard for any local conditions. Lines say there is frankly a lack of any human population in many areas and a lack of science used within the entire process. Plus requirements for land-based firms are not as stringent. And the cost of replacement fuel to meet the regulations will be much higher; that will increase costs and make certain itineraries and even potentially certain home ports not commercially viable.

Carnival Corp. said in a recent public filing with the SEC that its estimated costs to deal with ECA are $35 million in 2012 and $185-$215 million in 2015 as worst case scenarios. Royal Caribbean Cruises Ltd. (RCCL) said in an SEC filing that a one percent reduction in sulfur content limit by 2012 may not have a material effect on its fuel/operating costs in that year, but does note that a further reduction in the limit by Jan. 2020 could have a significant impact on fuel and operating costs.

“The implication from new sulfur regulations was a passing reference in company filings but it was a recurring point of discussion at [Cruise Shipping Miami],” cruise industry analyst Robin Farley from UBS Warburg told her investors today. Farley said the issue still “has to play out” and new more efficient, effective technologies may help.

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On the technical side, the lines might comply with the rules by burning lower (yet more expensive) fuel, adding scrubbers for exhaust gas purification, or changing the fuel system to utilize LNG or liquid natural gas, a clean burning fuel. But all that could take time, and cruise lines might simply change itineraries, remove certain home ports or destinations from itineraries and even sail away from certain regions.

Adam Goldstein, president and CEO, Royal Caribbean International, told the Cruise Shipping Miami audience that up until about five years ago, people worried about cruise lines’ interaction with water. Now, he said, it’s largely cruise lines’ interaction with air.

Goldstein gave a gleaning of what’s potentially ahead – noting that borders of the new ECA zones are already drawn on cruise line itinerary planning maps. Cruise lines are beginning to evaluate how much each ship will spend inside and outside the so-called eco-zone, and what flexibility the line has to avoid unnecessary fuel burns at a higher price.

Carnival Cruise Lines pulled out of Mobile recently, citing lower pricing and higher costs. Apparently, the looming ECA rules played some role in that, according to Gerry Cahill, Carnival’s president and CEO. Similarly, Royal Caribbean earlier this year pulled out of the West Coast citing a poor return on investment and noting that it could post more revenue in another market. For destinations and cruise ports, ECA has the potential to cause a loss of revenue and jobs if a ship or a line pulls out. Agents might lose sales opportunities and cruisers may not have as many close-to-home options.

Cahill noted that Carnival operates from more ports in North America than any other line. So the brand is more affected by the looming ECA rules. “It’s a huge deal,” he said, noting that for every itinerary the line runs, Carnival compares options very diligently and looks at the pricing it can get in that itinerary.

So if Mobile was axed, what other U.S. home ports are in potential jeopardy? Could the same happen elsewhere? Hawaii, Alaska and continental U.S. coastal ports will be impacted by the new rules. And similar new rules also may soon apply to such U.S. territories and possessions as Puerto Rico and the U.S. Virgin Islands.

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Kruse commended Alaska Governor Sean Parnell, who spoke at Cruise Shipping Miami this year; he had arrived at the conference for the first time last year under more difficult circumstances. In 2010, cruise lines had begun to pull ships from Alaska given the state’s high operating costs and difficult business climate. But Parnell came to listen, and after discussions with cruise executives, in 2010 he achieved both a reduction in the Alaska cruise traveler head tax and a sizable increase for the state’s tourism marketing budget.

The cruise industry generates 40,000 jobs in Alaska, and while itineraries were cut this year, the ships are already returning next year, an economic plus for the state. So at this year’s conference, Parnell brought the message that Holland America is expecting an estimated increase of 11,000 passengers to Alaska this year. He also said Alaska will welcome several lines that did not sail in the state last year including Disney Cruise Line, Crystal Cruises and Oceania Cruises.
Last fall Princess Cruises also announced an increase of more than 46,000 passengers on its cross-gulf ship, bringing the total increase in passengers visiting in Alaska to more than 60,000 in 2012.

Now, the lines aren’t at odds with Parnell but pleading for his help. Micky Arison, Carnival Corp.’s president and CEO, and Richard Fain, president and CEO, Royal Caribbean Cruises Inc., were among others who met with Parnell today to discuss the ECA issue.

Arison told Travel Agent that Parnell was informed by the executives that the new ECA regulations, if implemented in their present form, could add $100 per passenger to the cost of an Alaska cruise. That could put an Alaska vacation out of reach for many clients, and it could force lines to consider other itineraries. “Ships that sail out of Seattle under ECA are essentially under the ECA the entire time on an Inside Passage Cruise, said Kruse.

The rules may have significant consequences for ports, particularly far flung ports or those where alternate options exist. Arison said that if there is a choice between a U.S. Caribbean destination with ECA rules, such as Puerto Rico or the U.S. Virgin Islands and another Caribbean island – such as Grand Turk -- itineraries could change as lines tend to steer toward the most profitable option.

Officials are hoping they can get adjustments to some of the proposed rules. Kruse stated: “If we can have reasonable dialogue, we may be able to avoid some of the unintended consequences.” But if not, both home ports and destination ports could be affected, stressed Cahill, noting that if nothing is done and the rules go into effect: “There will be more movement of ships.”

For more information, visit www.cruiseshippingmiami.com.

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