No more strife on the ocean wave? Cruise companies bet on bounceback

With 18 decks, space for 7,000 passengers, two surf machines and a 10-storey zip wire, the world’s biggest cruise ship, Wonder of the Seas, set sail for the first time last month.

Cruise company Royal Caribbean launched another mega ship this week, Celebrity Beyond, which has a capacity of 3,950 passengers.

Two years after Covid-19 spread through cruise ships, causing hundreds of deaths and uncomfortable on-board quarantines, cruise executives are feeling newly buoyant.

Carnival Cruise Line, a subsidiary of Carnival Corporation, said the week to April 3 was the busiest for bookings in its 50-year history. Next month the final ship in its 23-strong fleet will return to service for the first time since Covid put the entire industry on pause.

“Cruising is getting ready for the bounceback! You need to be part of it! I want you to embrace it!” Catriona Parsons, head of cruise at the UK travel agent Hays Travel, told a conference of the group’s franchisees last month.

Beneath the optimism, there are plenty of worries. Fuel costs are on the up, there is a shortage of labour and Covid cases are rising again.

The spread of the Omicron coronavirus variant hit bookings during the crucial January “wave” season — typically the most popular time of year for customers to book a cruise — but the industry is forecasting a rapid recovery as confidence builds.

Cruise companies have poured money into medical facilities. MSC Cruises, the biggest European operator, said it now had up to three doctors and seven nurses on board each cruise and had earmarked isolation zones with double height balcony rooms for guests who test positive.

Carnival said it made improvements across “the full clinical spectrum”, from extra oxygen to more intensive care equipment.

Testing requirements vary by company, region and the vaccination status of guests, but, in general, customers have been expected to take at least two antigen tests before boarding and another before disembarking. Some companies have also mandated mid-cruise tests and will test anyone showing symptoms.

The Cruise Lines International Association said the “cruise industry’s measures go beyond prevention and include great emphasis on identifying and quickly isolating potential cases, contact tracing, providing medical care, and a plethora of additional response”.

Several executives argue it is now safer to go on a cruise than to holiday on shore despite warnings from health authorities such as the US Centers for Disease Control and Prevention, which dropped its advice to avoid cruise travel last week but has maintained a coloured tiering system that indicates the level of Covid precautions on individual ships.

By and large, nervous passengers are no longer an existential concern for the industry. The CLIA, which represents all ocean-going cruise companies, said 7.5mn passengers had sailed since July 2020 and that, according to its surveys, the proportion of people who had not been on a cruise before but were interested in going had increased on 2019 levels to 69 per cent, in spite of numerous negative headlines over the past two years.

“We are projecting that we will meet, and of course hopefully exceed, pre-pandemic passenger volumes by the end of 2023,” it said.

“Those are just awfully positive signs with lots of momentum . . . record booking days, which we need,” said Arnold Donald, Carnival Corp’s chief executive.

Royal Caribbean has said it expects numbers on board to return to historic levels by the third quarter, while Carnival Corporation said it hopes all of its ships will return to service by the end of the year — subject to the availability of dry docks that allow it to make renovations to vessels that have not sailed since the crisis.

Norwegian, the third-largest cruise group, said it would reach “a critical inflection” this quarter as net cash from operations turned positive and its full fleet came back to service.

Despite lower occupancies on board, operators have benefited from pent-up demand and a surge in on-board revenues driving prices that have allowed them to maintain their margins.

Carnival said revenue per passenger cruise day — which measures sales relative to each day a passenger is on board — was up 7.5 per cent in the fourth quarter of last year compared to “a strong 2019” thanks to pent-up demand for dining, entertainment and spa treatments. Royal Caribbean said its revenue per passenger cruise day rose 10 per cent in the same period “driven by strong onboard revenue performance”.

However, Russia’s invasion of Ukraine has exacerbated a spike in the fuel price that makes up roughly 9 to 12 per cent of a typical ship’s cost base, food costs are spiralling and upward pressure on wages is forcing companies to increase pay for staff.

Executives have noted a particular shortage of a lack of shoreside staff and medical crew for ships’ expanded health facilities, as labour markets adjust following the pandemic.

David Katz, an analyst at Jefferies, warned pent-up spending can only go so far. As inflation bites, big-ticket items such as holidays could easily be hit, he said.

“We believe that the cruise customer is inherently a value purchaser and as a result it is incrementally more difficult for the likes of Carnival to push price up in this environment,” Katz said.

US travel agents surveyed by analysts at Morgan Stanley were “more cautious” than cruise companies and thought it would take “years rather than months” for customer numbers to recover.

To mitigate the steeply rising costs, cruise companies are looking to cut fuel consumption by tweaking itineraries, lowering ship speeds and accelerating investment in more energy-efficient ships, retiring older vessels as they do.

Lindsey Keeble, a managing partner at the law firm Watson Farley & Williams, said: “Shipping is actually ahead when it comes to cleaning up fuel . . . ahead of aviation, which is often a surprise.”

But she warned that a drive to build ships fuelled by liquefied natural gas, the cleanest-burning fossil fuel, would not help in the short term as demand for LNG had spiked because of the war in Ukraine.

Inside the Royal Caribbean cruise ship Celebrity Beyond
The Royal Caribbean’s newly launched mega ship Celebrity Beyond. Cruise companies plan to cut fuel costs by changing itineraries and lowering ship speeds © Loic Venance/AFP/Getty Images

Cruise ships typically take more than five years to build so companies are scrambling to future-proof new vessels and, despite stretched balance sheets, invest in new technologies such as bio fuels and battery storage systems.

Royal Caribbean, which in February said it had hedged 54 per cent of its fuel costs for 2022, added that bunker pricing — the amount a shipping company pays to compensate for volatile fuel costs — would increase 12 per cent quarter-on-quarter to $615 per metric ton net of its hedging cost.

Carnival, the only large cruise company that does not hedge fuel costs because its management believes it is a false economy, said it has no plans to introduce a fuel surcharge but if “prices persist” would consider an additional fee.

The company has focused instead on reducing fuel consumption — cutting it by nearly 30 per cent since 2007 — and is targeting a further 10 per cent reduction this year compared with 2019.

But Carnival’s Donald said inevitably cruise prices would have to go up. “Psychologically [inflation] conditions people to be prepared to spend more because they see it everywhere . . . we should be able to raise our prices and enjoy some of the returns from that.”

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