The Future of the Cruise Industry

Designing cruise ships today to meet the
wants, needs, and desires of future generations

Having just returned from a holiday cruise on the Mexican Riviera, I became intrigued with the prospects for this behemoth industry, and the long-term implications of designing ships today that mesh well with the changing attitudes and fickle interests of traveling consumers many years in the future.

So for the past week I have immersed in researching the cruise industry and thinking through the current trends that will guide it into the future.

At the heart of this discussion is the 30-50 year economic life of a ship. With design and construction time for mega-ships taking five to ten years, it is already possible for them to be unveiled to the public noticeably out of date. And 5-10 years into their operational life, cruise lines run the risk of having to schedule a major rework to re-sync the functionality to match consumer expectations.

Some interesting parallels can be seen with shopping malls, where mall owners have seen stiff competition from Wal-Mart, Target, and Costco and are now filing a record number of bankruptcies, and jumbo jets with a similar usable life span but a rapidly increasing cost of operation during the later years.

Unlike shopping malls, cruise ships can easily be moved to better markets. And unlike jumbo jets, many repairs and upgrades can happen “on the fly.”

For the moment, the industry is sitting on top of the world with a growing consumer base and stellar earnings reports. It is precisely this time when the industry needs to spend considerable time reinventing itself. With this in mind, we begin this examination of future trends in the cruise industry.

Industry Overview

The cruise industry is the fastest growing segment of the travel industry – achieving more than 2,100 percent growth since 1970, when an estimated 500,000 people took a cruise.

• Roughly 14.3 million passengers traveled in 2010, a 6.3% increase over 2009.
• The cruise industry is the fastest-growing category in the leisure travel market. Since 1980, the industry has experienced an average annual passenger growth rate of 7.4% per annum.
• Since 1990, over 154 million passengers have taken a 2+ day cruise. Of this number, over 68% of the total passengers have been generated in the past 10 years and nearly 40% in the past 5 years.
• The average length of cruises is 7.2 days.

• The cruise product is diversified. Throughout its history the industry has responded to the vacation desires of its guests and embraced innovation to develop new destinations, new ship designs, new and diverse onboard amenities, facilities and services, plus wide-ranging shore side activities. Cruise lines have also offered their guests new cruise themes and voyage lengths to meet the changing vacation patterns of today’s travelers.
• The cruise industry now has over 30 North American embarkation ports placing cruise ships within driving distance of 75% of North American vacationers. With the added convenience of avoiding air travel, cruise lines have attracted a wider customer base.

• From a capacity standpoint, utilization is consistently over 100% (104% in 2009).
• The Caribbean is the number one destination, with an estimated 37% of the total in 2010.
• 26 new state-of-the-art new ships are contracted or planned to be added to the North American fleet through 2012, at a cost of nearly $15 billion US.
• Because only approximately 20 percent of U.S. adults, and far less of the world market, have ever taken a cruise vacation, there remains an enormous untapped market.
• Ninety percent of all cruise vacations are booked through travel agents.
• There are over 2,000 ports of call around our planet that cruise ships can visit.
• There are more than 300 cruise ships in the world today with a collective capacity to handle over 250,000 passengers.
• Three major cruise line groups (Carnival, Royal Caribbean and Star/NCL) control roughly two-thirds of world’s cruise passenger capacity.

Profitability

Ever wonder where the money goes? Based on market calculations provided by Cruise Market Watch, here is a breakdown of the estimated 2010 average cruise revenue and expense per passenger for all cruise lines worldwide.

INCOME (Per Passenger)

Ticket$1,155

On board spending

• • Casino & Bar206
  • Shore excursions (cruise line portion)75
  • Spa37
  • All other on board spending 56
  • Total on board spending375

Total Revenue$1,530

EXPENSES (Per Passenger)

• • Corporate operating costs$    525
  • Shipboard payroll169
  • Agent commission162
  • Depreciation & amortization153
  • Ship fuel costs107
  • Victualing (subsistence supplies)96
  • Interest expense76
  • Other ship expenses (port fees etc.,)69
  • Other on board operating costs67

Total Expenses$ 1,424

Profit before taxes$    157

For 2011, the average profit per passenger per day is projected to increase to $218.57, with $165.00 ticket price and $53.57 on board spending.

Signs of Trouble

To be sure, the industry is doing many things right, so to some of you, the problems I’m mentioning here may seem like minor blips on the radar screen of success. Indeed, the total worldwide cruise market is estimated at $29.4 billion, a full 9.5% increase between 2009 and 2010.

Yet for companies that pride themselves on offering luxury class service and amenities, there are some glaring omissions:

• Internet Connections – In virtually every other aspect of the travel industry, vacations have transitioned into working vacations, at least on some level. But with excessive connection fees and slow download speeds, doing work on-board a ship is painful at best. The average person in the U.S. spends 2 hrs and 35 minutes per day online, and as cruise lines attempt to recruit a larger share of the traveling public, they will be butting up against some natural barriers here until they are able to solve this issue.
• Cellphone Connections – While the rest of the world has shifted from place-to-place communications to person-to-person communications, the cruise industry remains woefully behind. Cell phones and other handheld devices are not usable without paying exorbitant connection fees. This also means that friends and family members on-board become increasingly difficult to coordinate plans with. Especially on the megaships of the future.
• Ship Time – With the proliferation of self-correcting watches, clocks, and timepieces, the notion of running a ship’s operation on “ship time” becomes more confusing. Most ships have very few clocks and passengers are left in a constant state of confusion as to whether their watch or handheld device has self-corrected to a different time zone. This becomes a critical issue when a passenger is off on an excursion and arrives too late for the departure.

• Smoking – On-board smoking issues will continue to plague the cruise industry for years to come as the anti-smoking zealots in the U.S. square off against the chain-smoking Asians who are beginning to wield far more clout as their market share increases. Smoking bars and smoking casinos become difficult environments to contain and since casinos are a high-revenue asset, and smoking gamblers spend far more than non-smoking gamblers, many cruise lines have positioned their casinos along critical must-walk-thru traffic lanes to maximize impulse gambling, but at the same time, force non-smokers to breathe the air.
• Business Environment Vs Vacation Environment – Cruise ships are a natural environment for networking, collaboration, and launching new ideas. Yet the current technological constraints provide a massive impediment for attracting the serious tech-related businesses crowds of the future. As an example, full-immersion events like Seedcamp, Startup Weekend, or BarCamp would work well with a ship’s self-contained live-together, work-together environment, but not without access to high bandwidth Internet connections.

Future Trends, Future Opportunities

For cruise lines it was important to first establish a durable industry, and they have done a remarkable job so far. But here is where it gets interesting. Each of the industry leaders are now well-positioned to leave their mark on the future, and they will be doing it by pushing the envelope, taking risks, and breaking rules.

Cruise lines, while still lagging on the digital frontier, will be entering an experimentation phase with each trying to establish themselves as a leading innovator.

Here are eight key trends that will begin driving this industry into the future:

1.) Global Load Shifting

Over the years the cruise industry has grown up with a majority of its passengers coming from North America. However, with the fluidity of global markets causing a constant shifting in the wealth of nations, the North American dominance of the industry is beginning to erode.

Cruise Lines International Association’s (CLIA) latest report shows that North American passenger numbers rose 1.0% to 10.1 million, while the global passenger count grew 3.3% to reach 13.4 million.

Leading travel expert, Arthur Frommer recently cited the shifting of capacity to European waters “the biggest development in cruising” noting “you’ll see far fewer cabins and berths in the Caribbean.”

At the same time, countries around the world who are interested in building their image are realizing that cruising is an important vehicle for sampling destination areas to which they may later return.

Over the coming years, the rapidly growing Asian market will cause a constant realignment of ships and cruise strategies with companies moving more of their ships into European and Asian ports. Already positioned as some of the most preferred destinations for travelers, look for strong growth in the Australian, New Zealand, and Singapore cruise industry.

2.) Branded Differentiation

When scanning through the current listings of cruise options, it’s easy to become overwhelmed by the uniformity. They all start looking the same. Yes, they originate from different ports and make a variety of stops at diverse ports along the way, but there is little to set them apart.

People today are more inclined to identify with a branded experience as opposed to a branded ship. With this trend we will begin to see cruise companies align themselves with corporate sponsors in an effort to make every 5, 7, or 14 day cruise a branded experience.

Here are a few examples:

• ELLE Fashion Week Cruise – Where top fashion designers and top fashion models from around the world meet to unveil their latest creations at this once a year event sponsored by ELLE Magazine
• The Petron Tequila Cruise – Tequila lovers, here’s the perfect getaway. Not only are all tequila dinks onboard half-price, and all passenger gifted with a one-of-a-kind free gift package from Petron, but people will have the opportunity to take an extended behind-the-scenes tour of the Petron factory in Jalisco, Mexico,  and meet some of the workers.
• The Letterman Cruise – Join David Letterman and his guests as the entire Letterman teams is assembled onboard to produce his nightly show. For this week, the ship has been temporarily renamed, the U.S.S. Letterman.
• X-Box Tournament Cruise – If you are into gaming you will love this cruise with six X-Box Tournaments happening simultaneously on virtually every level of the ship.
• Facebook Social Networking Cruise – Invite your friends to join you on this cruise and for every friend that signs up, you win prizes and credits good for future cruises. The top ten networkers will have their trips totaled paid for. Passengers will be joined by key executives at Facebook as they step you through what’s next for this social networking giant.
• The Amazon Shopping Cruise – No, this isn’t a trip into the Amazon. Rather, passengers will be treated to an ongoing series of product demonstrations of everything lining the online shelves on Amazon.com. As a major incentive, all passengers will receive a free Kindle Book Reader.
• The Zappos Shoe Cruise – People who take extended cruises know the value of having great shoes. Daily shoe fashion shows, lectures by shoe designers and fashion trend experts, and meet the Zappos team as they demonstrate how their company is being positioned to meet the footwear needs of future generations.
• NYSE Cruise – On this cruise, 25 traders from the New York Stock Exchange will be working live from a mini-trading floor on-board the ship with live data feeds providing real-time updates on stock prices.

3.) Growing Need for Office Staterooms

As the pace of business continues to climb, and the nature of employment continues to morph, few will be able to completely escape the demands of work for the duration of a cruise. For this reason, companies will begin to redesign their staterooms to include a functional work environment.

As an example, ceiling mounted flat screen televisions will enable one person to watch TV with headphones and not distract someone else who is working on a computer at a desk. Rolling office chairs, pull-out desk space, affordable in-room Internet & cellphone connections, projection screens, and large-screen computer monitors are just a few of the elements needed to give travelers the convenience of on-demand workspace whenever the need arises.

4.) Rapidly Evolving Shipboard Innovations

Smaller ships will tend to focus more on their own branded experience while larger ships will continue to push the limit of what’s possible at sea.

Below water viewing chambers, on-board observatories, electronic gaming tournament centers, pet spas, cook-your-own dinner-dining rooms, slash-casters, movies-under-the-stars outdoor theaters, graffiti walls, and cruise-for-a-cause walls of fame are just a few of the possibilities here.

In addition, onboard wireless networks will give rise to interactive game playing through personal cellphones. Ship-based photo competitions, audience voting, “complete this phrase” (text in an answer), unusual scavenger hunts, remote ship webcam monitoring, and invite-a-friend games can add entirely new dimensions to what is currently being offered.

Some ships may even begin to use flying drones for such things as extended view whale-watching, storm monitoring, cloud formation, and weather analysis. While near land, drones can be used to view the surrounding countryside and even witness city lights at night.

5.) Increases in Multi-generational Travel

The CLIA fleet carries over 1.6 million kids traveling each year and that number is increasing, in part due to the growth of multi-generational bookings.

One recent survey found that 46 percent of families have taken two to four cruises with children under the age of 18, and 15.2 percent have taken five to seven cruises, and 4.8 percent have taken more than ten.

As life expectancy grows, and 80-90 year olds become increasingly more active, cruise lines will find themselves needing an even broader selection of programming, with a range of offerings that appeal to even more age groups. Adding to the complexity of age-related programming will be the diverse, rapidly-changing interests of multi-cultural age groups.

6.) Shorter Lead Times

Businesses around the world are beginning to grapple with the fact that shorter lead times are getting shorter every year. Our rapidly accelerating communications networks are constantly raising the bar. The once radical notion that packages and letters could be delivered anywhere in the world overnight, is now stogy thinking, far too slow for today’s on-demand generation.

For cruise lines, representing an industry built around the leisurely pace of leisure, this creates a number of friction points, as well as several advantages.

Customers, who would have booked 6-12 months in advance in the past, now see little need to book more than 1-2 months in advance today. This last-minute thinking that causes heartburn from an operational standpoint also opens the door to last-minute promotional schemes that can insure a near-capacity turnout virtually every time.

While switching embarkation and destination points still needs advance planning, it requires far less than it did even a couple years ago. Customer notifications can happen quickly and last minute requests and changes are becoming much more manageable. Onboard staff and talent can be booked with little notice and

7.) Floating Cities and Floating Nation-States

The cruise industry has been quietly testing the limits of international law by asking the fundamental question, “What things can happen in international waters that are not permitted inside most countries?”

They are already claiming exemption from sales tax, gambling laws, HR requirements, minimum wage laws, and a multitude of other restrictions that land-based businesses have to deal with. But how far are they willing to push it? And how far is too far?

• Could a medical tourism ship be stationed in international waters to perform medical procedures that are still pending approval in other countries?
• Is it possible for a ship to serve as a shopping center for illicit merchandise such as counterfeit software, illegal arms, human organs, designer drugs, and more?
• Can they create and enforce their own laws, begin to incorporate businesses, develop their own currency, manage their own banking operations, and serve as a tax haven?
• In short, is it possible for a ship to become its own sovereign nation?

If this line of thinking sounds too extreme, consider the following:

1. Floating cities on the ocean have been receiving added attention due, in part, to concerns over climate changes.
2. A number of groups are already in the early development phases of floating and undersea cities of the future.
3. One floating city is already in operation. This super cruise ship off the coast of Florida is operated by Residensea. It has been designed for wealthy families who wish to live and work from a sea-based permanent home floating in international waters.
4. Seasteading Institute in California is based on the belief that “…current political systems are outdated and work poorly, for two reasons. One is the lack of a frontier – a place to go try out new forms of government (like the crazy new “democracy” which sprung up in far-off America). The other is the lack of mobility on land that happens because people are tied to buildings and buildings are fixed in place.”
5. SeaLand is a manmade structure 60 miles off the coast of England that has established itself as an autonomous country.

Below are photos of these early efforts:

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The Lillypad plan is moving from design to implementation stage, an indication that the development of floating cities may not be so distant.

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8.) Extreme Ship Designs

Cruise lines have proven that they are sitting on top of a very profitable industry and the more outrageous the ship, the more profitable it becomes. This line of thinking is paving the way for a new era of extreme ship designs and extreme operational strategies.

I should note that something only sounds extreme before it’s built and operating. After it becomes a successful, the label “extreme” gets traded in for “genius.”

Here are a few ideas that have been proposed:

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Waterstudios, Royal Haskoning, and Dutch Docklands have formed a consortium to have this Floating Cruise Terminal built at sea by 2014.

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Conceptualized by Gianluca Santosuosso, the MORPHotel is a unique project that intends to develop a new luxury hotel concept where the user can live inside a floating system that keeps moving around the world. The MORPHotel is able to adapt its shape to the weather conditions and the site morphology, thanks to the linear structure developed around the vertebral spine.

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Final Thoughts….

The cruise industry is in the enviable position of having demand build faster than capacity can be created. They can shift assets to match the markets and morph their offerings to match customer demands. And, being outside of most jurisdictional boundaries, they can literally write their own rules.

For this reason they have the ability to manage risks more efficiently than most other industries.

But cruise ships still have enormous challenges ahead. For one, the average person gains seven pounds onboard a seven day cruise. If they could figure out a way for the average person to lose seven pound while consuming the same food, then we’re talking.