Friday, April 3, 2009

Why the Cruise Ships Are Leaving Alaska

For the first time in history, Alaska's lucrative tourism industry is going to begin shrinking next summer. Cruise lines are withdrawing ships from the market, probably having a significant impact on the state's economy, and most Alaskans don't even seem to know why.

The local media hasn't put all the pieces together for them. They have covered various aspects of the story, but they don't seem to connect all the parts to show the whole picture.

Most people in Alaska by now have probably seen stories about some ships not coming back in 2010, and they know that's a bad thing, but the stories have never explained why the cruise lines made their decisions. For many, the story probably won't hit home until next spring when seasonal hiring goes down and a lot of people don't find jobs where they always have.

The ships are not leaving Alaska because of the $50 tax enacted in 2006 or because of environmental issues. They aren't leaving because of the economy or lack of passengers. They aren't leaving to punish anyone or to send any kind of message.

The ships are leaving for one reason only: money.

Because the major cruise lines operating in Alaska are publicly traded corporations, they are under constant pressure to maximize profits for investors.

Two things affect those profits in Alaska, as they do everywhere cruise lines operate: The amount of money people are willing to pay to sail on the ship and how much it costs them to operate the ships where they are. The difference between them is the profit, and changes to either or both elements affect the profit.

In Alaska, currently both the income and the costs are moving in ways that adversely affect the cruise lines' profits. There are some aspects of the equation the people in Alaska can do something about if they want to, and some things that are out of their control.

Let's begin by looking at what's affecting the costs.

Alaska has traditionally been an expensive place for cruise lines to operate, for a number of reasons. Lately, however, their costs have been increased by the 2006 citizens' initiative. It added a number of taxes and fees on cruise lines operating in the state, some of which the state is still figuring out how to implement. Those have increased costs of doing business in Alaska for cruise lines beginning in 2007 and will continue to do so as they are implemented.

The other big expense for cruise lines in Alaska is complying with very stringent environmental rules in Alaska and acquiring and operating the special equipment to do so. Add to that when they don't or can't comply, they pay sizable fines. (Whether you believe cruise lines intentionally pollute or not, is a side issue that doesn't affect this one. Whether they comply with the laws or pay fines, these are costs which are much higher when operating in Alaska than when they operate elsewhere.) The state is currently trying to increase the standards which will eventually require additional major investment in new equipment by the cruise lines.

These costs have all risen dramatically.

The other side of the equation is the income, which has been going down.

When the citizens' initiative was passed by voters in 2006, it carried a provision of $50 in taxes and fees which will be assessed on each passenger. Depending who
you are, you either look at this as increasing the price or increasing the cost.

The cruise lines look at it as increasing their cost because they think that at any given moment they are selling their cabins, including all the taxes and fees,
for as much as the consumer is willing to pay. So they look at this as $50 taken out of their price and given to state, and if that tax hadn't been there it would have
been part of the price the cruise line could have kept for itself.

Consumers, on the other hand, tend to look at the $50 tax as pushing their price up by $50 they would not have to pay if they cruised elsewhere. For the person going to Alaska once in his lifetime, it's probably not an issue. But the majority of people cruising in Alaska, especially in the southeastern part of the state, are cruising there because it's convenient and the price is right. That market compares cruising to Alaska against cruising elsewhere or other types of vacations.

Coincidence or not, in 2007 the market for Alaska cruises stopped growing for the first time in history.

The country is also in a recession, and it's hard to get people to travel. The way cruise lines stimulate sales is by decreasing prices until they get to a point where
they fill all their inventory. They are fortunate in that they are the one segment of the travel industry where consumers absolutely respond to these price cuts and fill the inventory; hotels can slash prices to the bone and still not fill all their rooms.

Whether it be the recession or the $50 tax, cruises are selling at all-time lows to fill all the cruise ships in Alaska this summer. Balance that against the rising costs of operating in Alaska, and the profit margin narrows or disappears.

So the cruise lines either want to increase prices or reduce the extra operating expenses they have in Alaska.

They can't do much about the operating expenses. That's up to Alaskans if they want to ease that side of the equation, and so far the cruise lines' requests have
fallen on deaf ears in the Forty-Ninth State.

That leaves the alternative of increasing prices. If the lines do that arbitrarily, not as many consumers will buy, and they will be sailing with empty cabins. So to boost prices without having empty cabins, the cruise lines are turning to the law of supply and demand. They are reducing the supply of cabins (taking ships out of the market to reduce inventory) in 2010 to match the number of consumers who are willing to pay more for them.

Giving more incentive to follow this course is the fact that while prices for cruises are down somewhat in most of the world, the costs of operating elsewhere aren't constantly increasing. There is growing consumer demand for the ships elsewhere, while consumers seem to be demanding Alaska less.

There's still a lot of growth to be done in Europe, although their rapidly expanding market has cooled a little with their recession. There are also newly emerging markets which are experiencing explosive growth such as Australia, South America and Asia.

The cuts in the Alaskan fleet are set for 2010. There's nothing that can be done about those changes now. It will be interesting to see how consumers and Alaska responds, because Carnival's chairman Micky Arison has very clearly said that if the 2010 cuts don't improve the yields to where they want them, there will be more reductions in their brands' capacity in 2011. It's only logical that other companies will follow suit.

No one expects the entire Alaskan fleet to be removed, but there are other markets which will absorb any excess capacity there. The important question now is what toll it will take on Alaska's economy.

Princess Adds Sailings

Princess Cruises added two short pre-holiday cruises in December from Ft. Lauderdale. The two 3-night cruises aboard Ruby Princess depart on December 14 & 17. Both sailings feature a call at the line's private Bahamian island, Princess Cays, and a sea day.

Thursday, April 2, 2009

Celebrity Sets US Preview for Celebrity Equinox

Celebrity Equinox will debut in the US with a special 4-night preview cruise from Ft. Lauderdale on November 19 (2009). The itinerary will have one port of call at Cozumel, and is now open for sale.

The new Solstice-class vessel will enter service with a summer season of European cruises from Southampton beginning July 31.

Conversion Begins from Celebrity Galaxy to Mein Schiff

This video from TUI Cruises shows the arrival of Celebrity Galaxy at the Lloyd Werft yard in Bremerhaven (Germany) last week for conversion to Mein Schiff (My Ship) and some of the extensive construction going on during the drydock. Even if you don't speak German, the video should prove interesting because you see what a ship looks like inside during a typical drydock. It isn't pretty.

TUI Cruises is the premium cruise brand jointly owned by German travel giant TUI and Royal Caribbean Cruises Ltd. It will be marketed in German-speaking countries in Europe.

Mein Schiff will be the line's first vessel, and will enter service May 15 after extensive renovation at the Lloyd yard.

Tuesday, March 31, 2009

If you can't go on a cruise yourself ...

The man in this video says he was always fascinated by cruise ships, but he never had the money to go on one. He therefore started to build an AIDA cruise ship out of Lego bricks. What he ended up with was quite elaborate (even an interior), but it's not really to scale. The ironic part is that in the end, he says it cost him about three times what the price of cruise would have been.