Cruise chiefs talk expansion, recession

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Norwegian Encore after float-out from Meyer Werft.

Another year, another non-recession.

How long can this go on?

It has been a decade since the so-called Great Recession bottomed out in June 2009. Since then the U.S. economy has experienced a remarkable 125 months of uninterrupted growth, breaking the 120-month record set by the 1991-2001 expansion.

Ten years of steady climbing has had a predictable effect on cruise sales. According to executives of Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings, which recently reported third-quarter results, things couldn’t be better.

“I can’t stress enough the underlying strength of the business,” Frank Del Rio, CEO of NCLH said in a conference call with analysts.

Despite doing nothing strategically to extend the booking window, it expanded by 10% in the third quarter, Del Rio said, “underscoring consumers’ underlying appetite for cruising on our three brands.”

Cruise lines are at that happy point where, at least in North America, an abundance of bookings is creating scarcity, driving prices higher, and stampeding more consumers to book even earlier to lock-in early booking savings.

All good things come to an end, to be sure, but the chances of them coming to an end in 2020 aren’t that likely.

In its monthly survey of economists for November, the Wall Street Journal found that only 34.2% of economists expect the expansion to end in 2020, with another 29.3% saying it will end in 2021.

One of the main drivers of a classic recession, inflation, is expected to clock in at 1.9% in November, just below the Federal Reserve’s target. The unemployment rate next month is forecast at 3.6%, meaning most of the people who want a job have one, providing fuel for further consumer spending.

Economists used to talk about the Goldilocks economy – not too hot, not too cold – and without much fanfare, we may be in one. But one troubling footnote is that the growth in the current expansion – 25% since 2009 – has been only half as strong as the 42.6% growth in the 1991-2001 period.

“It’s been the slowest recovery in American history,” said RCCL chairman Richard Fain in a talk at Travel Weekly’s CruiseWorld event last week.

Fain said that expansions don’t die of old age; there has to be a trigger, which right now isn’t blindingly obvious to most observers. He said that when the recession does come, the cruise industry will do okay.

He recalled that the Oasis of the Seas, then the biggest cruise ship in the world with a startling capacity for 5,400 guests, was delivered in 2009 when the economy was flat on its back.

“The truth is it did beautifully even in 2009. Oasis was gangbusters, and it was because it met a need,” Fain said.
He added that it was important that Royal Caribbean’s cost-cutting during the last recession didn’t cut from the guest-facing functions.

“Lots of businesses say ‘Oh business is bad, we’re not selling so many shoes, so we’ll cut costs and lay off some people.’ If we fill our ships, we can’t let one customer feel like we’ve cut back in order to make our earnings look better,” Fain said.

“We’re going to continue to function, continue to operate, continue to market because it’s the right thing to do to be in business five years from now,” Fain added. “And everybody in this room will remember what we do.”

Norwegian Cruise Line follows the money with itinerary optimization

The pier at Icy Strait Point. Alaska is one of Norwegian Cruise Line's most lucrative destinations.

The pier at Icy Strait Point. Alaska is one of Norwegian Cruise Line’s most lucrative destinations.

Last winter, the Norwegian Spirit did 11-day runs from Barcelona to the Canary Islands and back, a traditional warm-weather cruise in Europe’s colder months.

But on a recent conference call, Norwegian Cruise Line Holdings CEO Frank Del Rio described it as “one of the historically lowest-yielding areas” to sail.

Jump forward a year, and the Spirit will emerge in February from a $100 million drydock and head for Asia, where it will sail nine-day cruises around Japan and cruises of 12 days or longer to Japan and China.

Del Rio said it is an example of Norwegian’s strategy of itinerary optimization, in which the line looks for the highest-returning itineraries available at a given time and concentrates its ships in those areas.

Asia, Del Rio said, and other exotic itineraries will “take advantage of our huge customer base, our past guests who have never been to those areas because we’ve never sailed to those areas before.”

Norwegian is scouring its deployments to see where customers are willing to pay the most, and it is capitalizing on their extravagance.

One area in which it is loading up on capacity is Alaska, where other lines have traditionally reaped the market premium. Although Norwegian has been sailing to Alaska for 20 years, its interest deepened in 2018 with the success of the 4,000-passenger Norwegian Bliss in its first Alaska season.

Christened in Seattle, the Bliss was a smash hit, according to Norwegian — so much so that when faced with obstacles in the Chinese market, Norwegian pulled its purpose-built Norwegian Joy out of Shanghai and sent it on short notice to Alaska in 2019.

Norwegian Bliss, Photo credit Dave Jones – https://flic.kr/g/GZdoW 

Next summer, the line will repeat the feat, while also redeploying the 1,936-passenger Norwegian Sun to Alaska from the Bahamas — another low-yielding market, according to Del Rio.

In addition, to squeeze in more high-yielding cruise days, Norwegian is pushing the limits of what until now has been considered the cruising season in Alaska.

“Alaska used to be a three-month season — June, July and August. Now we’re getting there in April, and we’re not leaving until October,” Del Rio said. “It’s now a six-month season of very, very high-yielding — not only on tickets but incredibly high-yielding on onboard [spending]. And so we’re going to continue doing that.”

One of the keys to high yields in Alaska is to have land infrastructure that maximizes revenue opportunities from shore excursions as well as pre- and post-cruise extensions to lodging in the interior.

Norwegian recently announced a new aerial lift transportation system at Icy Strait Point designed to make its dock there more attractive.

The line is also extending the season in Europe, rather than bringing ships back to the Caribbean in October. Del Rio said he likes Europe because, for Norwegian, it means carrying high-spending guests.

In addition to North Americans, Del Rio said, “Guests for these itineraries do not come from locally sourced Europeans but from the rest of the world, including Australia, Asia and South America.”

He added: “And that’s a very important differentiator for us because we know that a guest who flies long distances to board the ship is a higher-yielding guest than one who drives their car or takes a bus or train to the port of embarkation.” 

Next year, Norwegian is going back to the eastern Mediterranean, another high-yield area that Norwegian was one of the first to drop in 2016 after a spate of terror attacks and a coup attempt in Turkey.

At times, however, the itinerary optimization strategy backfires. The most recent example of that is Cuba. It was a natural destination for itinerary optimization when it opened to cruises from U.S. ports in 2016, and NCLH put more resources, proportionately, into Cuba than some of its rivals did. 

But that also meant that when the Trump administration abruptly shut down U.S. departures to Cuba in June, NCLH was disproportionately hurt. In the third quarter, the withdrawal from Cuba reduced NCLH net income by $53 million from a year earlier. 

“The year-over-year comparisons are night and day, in terms of pricing, because Cuba’s demand was at such a high price,” Del Rio said.

Literally overnight, twice-weekly Norwegian cruises from Miami and Port Canaveral that had included Havana had to be repriced as “Bahamas-intensive” cruises, said NCLH CFO, Mark Kempa.

Redeployments that will fully take effect in the second quarter of 2020 will finally end the economic penalty that resulted, Kempa said. 

By sending the Norwegian Sun to Alaska next summer from Port Canaveral, Norwegian will halve its Bahamian deployment, “thus reducing capacity from this historically lower-yielding destination,” he said.

Two cruise lines regroup after Caribbean setbacks

The Norwegian Sky in Havana in a 2017 photo.

Norwegian Sky outside Havana Port, Cuba.

Two cruise companies affected by sudden upsets in the Caribbean and Bahamas region are slowly regaining their footing.

For Norwegian Cruise Line Holdings (NCLH), the big blow was the abrupt end to U.S. cruises to Cuba in June. NCLH had bet heavily on Cuba’s reopening, scheduling not only short cruises on its contemporary Norwegian Cruise Line brand but longer visits by its two premium brands, Oceania Cruises and Regent Seven Seas Cruises.

As detailed in a conference call with investors, the U.S. government decision to shutter Cuba with no advance warning hit NCLH third-quarter earnings big-time.

“Given the suddenness of the termination and the lack of lead time we had to make any meaningful fleet redeployment changes, the third quarter bears the largest negative earnings impact from the Cuba travel ban,” said Frank Del Rio, the company’s CEO.

The hit was more than $47 million.

Overnight, high yielding routes to Cuba for the Norwegian brand turned into low-yielding routes to the Bahamas. And several months later came Hurricane Dorian, which made its own dent in NCLH’s earnings through cancelled sailings and reworked itineraries.

Del Rio said Norwegian plans to redeploy half of its Bahamas capacity to higher-yielding areas such as Alaska, the eastern Mediterranean and Asia, and will slowly get out from under the Cuba aftermath.

Even more impacted by Dorian than Norwegian was Bahamas Paradise Cruise Line, whose only destination is the Bahamas.

It suspended its two-day sailings to Grand Bahama for most of September, filling in the time by providing much-need relief and evacuation services.

The silver lining, of sorts, is that Dorian forced Bahamas Paradise into a new market, Nassau, which was not much affected by the storm. It now runs one of its ships from West Palm Beach to Grand Bahama and the other to Nassau.

Bookings for Nassau started slow, said Francis Riley, senior vice president of sales and marketing, but are now on par with those to Grand Bahama. Part of the attraction is the Cruise & Stay program where guest can vacation for two or four nights at one of four Nassau hotels:  Atlantis, The Melia, the Comfort Suites Nassau or the SLS Baha Mar.

Bahamas Paradise has a similar program in place on Grand Bahama with the Lucayan, which has reopened, and the Viva Wyndham, which plans to reopen Dec. 10.

Unlike Norwegian, Bahamas Paradise doesn’t have plans to go elsewhere, and it is busy selling the Bahamas to Canadians and New Yorkers, who have just started getting the frosty temperatures they can look forward to until next spring.