Fiscal realities now tempering cruise lines’ China infatuation

The Norwegian Joy, built for the Chinese market, will move to Alaska next spring.

The Norwegian Joy, built for the Chinese market, will move to Alaska next spring.

Wall Street has long questioned whether the international cruise industry’s romance with China is the beginning of a lifelong affair or just one of those things. While it is still too soon to call, that relationship in recent months has shown signs of cooling.

The latest evidence is the decision by Norwegian Cruise Line to pull its year-old Norwegian Joy out of China, where it was sent in 2017 to cruise year-round.

The Joy, which was custom-built for the China market, will move to Alaska in April, then remain on the West Coast through the winter of 2020.

In its place, Norwegian will send the 20-year-old Norwegian Spirit to cruise from Shanghai seasonally starting in summer 2020. That would leave a gap of more than a year when the cruise line will be altogether absent from China.

While the move is welcome news for U.S. travel agents and will put Norwegian’s two newest ships in Alaska next summer, it seems to write off much of the investment that Norwegian made to enter China.

Norwegian president Andy Stuart said the switch is more a reflection of hot demand for Alaska than it is discouragement with China.

“We’re still optimistic about China,” Stuart said. “China’s a good market. We introduced Bliss in Alaska, and we’ve seen a tremendous strength and a lot of excitement around the introduction of a new ship to the Alaska market.”

He added: “We’re seeing such strength in Alaska, good strength in Europe, and the beauty of our industry is that assets are flexible. So it’s really right-sizing the market as we’re seeing demand today.”

Stuart said the recent tension in Sino-U.S. relations, with each side imposing new tariffs on goods imported from the other, had no bearing on the decision to move the Joy out of Asia.

But even before that, cruise lines were not enjoying the smooth sailing they had once hoped for in the world’s most populous country.

The Norwegian Joy arrived in June 2017 in the wake of the installation of a U.S.-provided defensive missile system in South Korea. The system gave Chinese military officials heartburn, and they moved to punish South Korea economically, in part by ending permission for China-sourced cruises to visit Korea.

That left cruise lines cutting the prices on their charter contracts with Chinese travel wholesalers.

Still, officials at Norwegian Cruise Line Holdings (NCLH), parent of Norwegian Cruise Line, remained upbeat. Asked in a February conference call which world markets were the least robust, CEO Frank Del Rio said that all were good enough.

“It’s one of those few times in my tenure, in the 25 years I’ve been in the industry, that I wouldn’t move any of my ships. I like where they are,” Del Rio said.

But he went on to add he wouldn’t necessarily put the second ship in China.

“There are still challenges in China,” Del Rio said. “I don’t think China’s hitting on all cylinders like it can.”

He went on to reel off the names of a half-dozen unserved or underserved markets in North America, among them Los Angeles and Alaska.

The Joy news cheered Wall Street. NCLH shares rose 5.4% on the day of the announcement, with other cruise companies seeing smaller increases. In an investor note, Citigroup analyst Greg Badishkanian said Norwegian’s move “should help right-size capacity in China.”

Analyst Robin Farley of UBS Group said in May that yields for the Joy in China this year were likely to be 25% below the other Breakaway-class ships, such as the Norwegian Escape. She said it would boost Norwegian’s earnings to move the ship to North America.

The news was also greeted warmly by travel agents.

“It’s really exciting to have new hardware and new experiences for our customers in Alaska,” said Ashley Hunter, vice president of business development at Avoya Travel, which has its operations office near San Diego.

Agents on the West Coast have been starving for up-to-date inventory, and having the Joy for a year, sailing Mexican Riviera cruises from Los Angeles in the winter of 2019-20, will expose more people in Western states to the brand.

Many cruise lines cut back their already small presence on the West Coast after the 2009 swine flu outbreak and unrest in Mexico, Hunter recalled, but she said the trend is starting to reverse.

“I think we’re starting to see a movement back over to the West Coast,” Hunter said, citing new Carnival Cruise Line capacity in Long Beach and San Diego in addition to the Norwegian Joy announcement.

Conversely, the urge to add capacity in China is ebbing.

In 2015, Princess Cruises said it would devote the new Majestic Princess to year-round cruising in China and customize it to Chinese tastes, even giving it a Chinese-language name. But in September, the 3,560-passenger ship will begin an eight-month deployment in Australia.

The brands with a remaining multi-ship commitment to China are Royal Caribbean International and Carnival Corp.’s Costa Cruises.

Stuart said Norwegian’s size relative to the two other big cruise companies gives it more flexibility.

“We’re not the largest brand,” he said, “and the size of our fleet allows us to be a little more nimble in making sure you capitalize on opportunities where you have overperforming markets.”

Norwegian plans to spend $50 million on the Joy before it arrives in Seattle to make it a virtual twin to Bliss, Stuart said. But it plans to keep the hull art by Chinese artist Tan Ping of a large red phoenix, a symbol of beauty and good luck in Chinese culture.

Stuart said that while it might strike a note of discord with some in Alaska, others will view it differently.

“It feels like a beautiful piece of art on the side of the ship,” he said.

“I’m not sure if everybody started from scratch and said, ‘Look at the art on Norwegian Joy. What country does it represent?’ I don’t know that everyone would immediately say China,” Stuart said.

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Norwegian Changes 2019-2020 Itineraries, Pulls Joy From China

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Norwegian Joy
Norwegian Cruise Line has announced changes to its 2019 and 2020 itineraries. Among these, the Norwegian Joy is leaving China to join the Norwegian Bliss, sailing seasonally in Alaska in the summer 2019, and will offer Mexican Riviera and Panama Canal voyages during the winter 2019-2020. The Norwegian Spirit will replace the Joy in China in 2020, leaving Norwegian out of the Chinese market for one year, and the Spirit will only sail there on a seasonal basis.

The Pearl, which is in Alaska now, will sail to Europe as the cruise line’s sixth ship in the region in summer 2019, while the Jade and Jewel will expand Norwegian’s presence in Australasia in winter the 2019-2020 winter season.

The Joy repositions to Seattle in April 2019 to offer seven-day voyages to Alaska, replacing the Pearl as Norwegian’s third ship in the region, joining the Bliss and Jewel. Prior to her arrival in Seattle, the Joy will undergo approximately $50 million in work to match her sister ship, the Bliss.

When she goes to Europe in 2019, the Pearl will be sailing from Amsterdam as well as Civitavecchia, Barcelona and Venice.

With the Joy on the West Coast, the Jewel will go to Australia, New Zealand and the South Pacific, sailing from Honolulu, Papeete, Sydney, Auckland, Singapore, Hong Kong and Yokohama.

In addition, the Jade will offer sailings throughout Southeast Asia departing from Singapore and Hong Kong for the 2019-2020 season.

Norwegian Cruise Line said it remains committed to serving the Chinese cruise market. Prior to her 2020 arrival in China, the 1999-built Spirit will undergo a previously scheduled bow-to-stern revitalization as the final ship to undergo enhancements under the Norwegian Edge® fleet refurbishment program.

 

Cruise cools to China

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By Tom Stieghorst
The cruise industry’s gold rush to China, if not over, has entered a new phase: For the first time in at least four years, cruise capacity in China will not grow in 2018.

That means that the focus and management attention that has been lavished on the world’s most populous country may now be turning elsewhere.

To hear evidence of that, listen to the list of places that Norwegian Cruise Line Holdings CEO Frank Del Rio reeled off when asked if he’s ready to put the second ship in China.

“We have many other either unserved or underserved markets that we would also consider in the mix, should ships become available to us,” Del Rio said in response to a question from a Wells Fargo analyst. “We don’t have a presence in the mid-Atlantic states. We’re not in Baltimore. We’re not in Charleston. We don’t have a presence at all in the world’s second-largest port, which is Fort Lauderdale. We don’t have a presence in the Gulf States of Texas or Alabama. We don’t have a year-round presence in Tampa or New Orleans or in Los Angeles.”

Del Rio went on to say that the Norwegian Cruise Line brand will have three ships in Alaska this summer, where some competitors have as many as eight.

“So, given our fleet size today and the fact that we will only be taking one ship per year, it could be a couple of years before we consider adding more tonnage to China, if the conditions in the rest of the world remain as robust as they are today,” Del Rio said.

The Chinese boom really got going in 2014 when Royal Caribbean Cruises Ltd. announced it would devote its brand-new Quantum of the Seas, the first of a new class of ship, to the Chinese market.

In a world full of supposedly bold moves, that one really was. And it prompted other lines for the first time to put brand new ships in China, as everyone feared being left behind in the scramble to impress the Chinese.

Being the preferred brand in a market that was projected to be the biggest in the world in a decade or so was worth the gamble of putting brand new tonnage in an unproven and opaque market.

So when Princess Cruises sent the Majestic Princess to Shanghai last year and Norwegian sent the Norwegian Joy, in addition to the Quantum and ships from Costa Cruises and others, the result was a crowded field.

Throw into the mix the spat between China and South Korea that limited itineraries out of northern China, and China became a much weaker cruise market last year.

While cruise lines insist that they’re in it for the long haul, and even in the short term it has been profitable, the sense that China is going to deliver a big increase in global cruise revenues has been tempered.

Already Norwegian’s focus for 2018 has turned to introducing Norwegian Bliss to the North American market, and in particular the U.S. West Coast. Who knows where else in the U.S. Norwegian ships might be coming next?