Cruising to nowhere

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The cruise industry rode the economic high tide in the late 1990s and continued to make its overall fleet as expansive as an on-board buffet. But now, with the economy foundering, the industry may not find enough people to line up for those buffets.

"We're definitely weathering a very challenging period right now," said Jennifer de la Cruz, a spokeswoman for industry leader Carnival Corp.

The major cruise lines-Carnival, Royal Caribbean Cruises and Princess Cruises-have seen some recovery in bookings since Sept. 11, but that has come at a price-literally. The companies have sharply discounted their fares and are using low prices as their principal pitch to fill berths.

Bob Sharak, VP-marketing at industry trade group Cruise Lines International Association, estimated pricing has dropped 30% to 40% over a year ago. A frustrated Carnival Chairman Micky Arison cited prices up to 50% less than a year ago with a $149 three-day offer floating around. "It seems that price overcomes fear," Mr. Arison quipped to analysts.

Peter McMullin, an analyst with Ryan, Beck & Co., said the prices are the lowest he remembers since the late 1980s. And that is causing profits to sink, since just filling a berth at a low price can cut into the bottom line. Much of the fate of the over $8.5 billion industry will be determined starting in January as it enters its annual "wave period," where a bulk of its capacity for the year ahead is booked.

"It's one of the most difficult wave periods for the cruise industry in recent memory for sure," said Thomas Graves, an equity analyst at Standard & Poor's.

However, industry executives have some reasons to be optimistic. In an ironic twist, two cruise lines, Renaissance and American Classic Voyages, recently filed for bankruptcy, thus reducing available capacity by about 3.5% for the industry. One person familiar with industry data said both Carnival and Royal Caribbean have picked up customers since the other two companies capsized.

All three industry leaders are running newspaper ads using a theme that consumers can drive to ports of departure-thus avoiding flying. (And cruise companies are redeploying ships from Europe to ports such as New Orleans and Galveston, Texas.) The ads run in Florida and California and neighboring areas within reasonable driving distances. Mr. McMullin estimated cruise lines depend on airlines to deliver them up to 60% of their passengers. "People are obviously interested in doing more close to home vacations, more drive-type vacations, more U.S.-based vacations," said Denise Seomin, a Princess spokeswoman.

pricing over branding

Print ads also highlight the favorable pricing. The economic rough waters have largely shelved branding messages. "It's caused us to really make sure that we're being very tactical in our messaging now," said an ad agency executive who works on a major cruise account. "Pushing the brand has taken more of a back seat than it ever has in terms of newspaper ads." Carnival recently tagged a TV spot in its "Real People" brand campaign with a price message.

Cooper & Hayes, Coral Gables, Fla., represents Carnival, while Royal Caribbean is handled by Havas Advertising's Arnold Worldwide, Boston, and Princess by Interpublic Group of Cos.' Suissa Miller, Los Angeles.

The industry has proved resilient before, surviving the Persian Gulf War, which began in January 1991, just as that year's wave period launched. CLIA figures show passenger growth grew 9% from 1990 to 1991.

"There was a dip when the war started, but it came back very rapidly and the revenue came back so rapidly that it didn't affect the annual numbers," said Ric Cooper, president-CEO of Cooper & Hayes. But the Gulf War's impact was mainly on overseas travel, not flying. And the industry's capacity was about half what it is today.

BERTHING BOOM

The industry has never had this many berths to fill-berths have gone from some 84,000 in 1990 to an estimated 174,000 currently-and it would be hard to find a worse time to try, since new ships soon will be launched. Carnival has a glitzy liner scheduled to set sail as early as January; Princess has two more set to leave port in 2002; and Royal Caribbean has five set to be christened by 2004.

"Even before Sept. 11, there were concerns about at least near-term overbuilding, that supply was getting ahead of demand," said Standard & Poor's Mr. Graves, "but the long-term demographics for the cruise industry remain quite favorable with baby boomers likely to become a growing part of the customer mix."

Industry executives pick up part of Mr. Graves' argument and assert that they have not over-built and their increasing revenues and load levels reflect that. Last year, occupancy exceeded 90% industry-wide, according to CLIA. Looking ahead, CLIA's Mr. Sharak said Sept 12 brought virtually no bookings, but since then the industry's booking levels are at 80%-85% of what they were prior to the attacks.

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