COVID-19: a sea change for cruises

With cruise ships stranded at sea, and the media reporting on high-profile cases of passengers stricken with COVID-19 on boats, it’s clear this industry will face significant challenges – both immediately and in the longer term. Cruise lines are being hit on multiple fronts, from present travel restrictions to losing out on booking windows for future sailings, while current events could heighten people’s fears of being stuck on board. To understand more about how the situation is unfolding now, and the steps to an eventual recovery, Third Bridge Forum has conducted numerous Interviews with experts working in this sector to determine the impact of COVID-19 on cruise ships.

One of the immediate effects has been cancellations, which have been “astronomical” in one specialist’s words. Companies have adjusted their cancellation policies to be more flexible, which hasn’t been seen before in this industry, and even offering credit for future trips. However, as another specialist noted, “there’s been some noise from Washington that, ‘Just giving you credit for a future cruise isn’t enough. They should be giving them cash’.” Despite this, cruises are already making money-retention moves, offering incentives like on-board vouchers and upgrades in return for 100% credit. The specialist added, “I think the cruise lines are going to try very hard to keep those individuals booked”, both to keep the cash on hand and ensure future bookings.

What to do with boats that are unable to sail is another issue. There are multiple fixed costs, and “generally speaking, they’re pretty handcuffed in terms of what they can do, even in the short run.” One of the major outlays is labour. But there is a lot of competition for skilled workers in the cruise industry, and once operations resume companies would need to rehire. With staff hired internationally, “it’s not very easy to say, ‘We’re going to release all you guys and we’ll call you later if we need you’.” Another unavoidable expense is port fees, but this differs by location. “You’re talking about anywhere from tens of thousands to USD 100,000-200,000 per day. Again, it varies by port, it varies by the size of the ship, it varies by the light, the gross tonnage.” Another expert thinks cruise operators can leverage their relationships in order to negotiate.

Cutting costs will be essential and an example of the direct impact the COVID-19 pandemic
has had on the cruise industry, amongst others globally. Alongside reducing CAPEX, which is being undertaken by Royal Caribbean, OPEX is another area that can be reeled in. One way to cut down on staff expenses without layoffs that was pointed out in an Interview is by reducing pay and hours temporarily. Lowering marketing spending is another strategy, although in one Interview it was noted that “it wouldn’t surprise me to see a greater investment across all of the players in terms of marketing, just to win back public sentiment and get back into the good graces of the public.” 

What happens to the cruise industry during and after the COVID-19 pandemic will have knock-on effects in other areas. Shipbuilding is one of these. There is an “immense” number of orders and a limited number of these shipyards, according to one Interview. As a result of the strong relationships they tend to have with the cruise line operators, “there’s a lot more flexibility than you would think there is”. However, cruises aren’t the only industry suffering, so “if there’s a mutually beneficial decision that will help them push something out, now obviously the yards also need cash flow, and that’s where the negotiation comes in.” One potential consequence highlighted in an Interview is that “if the ship is delayed, then payments are delayed, and if those payments aren’t being made to the shipyard, that’s extra liquidity that the cruise lines have.”

Another major consequence lies with the tourism industry in the major sailing regions. “I would say that the two regions that are probably most reliant on tourism and [cruises] are the Caribbean and Alaska.” This specialist says that these regions, respectively, take in USD 2bn-3bn and USD 2bn from cruises each year. Companies on islands are particularly susceptible to dips in visitors, as “these are not businesses that are well-capitalised. These are not businesses that can sustain long periods of not having business or for suspended operations.”

With such extensive damage caused by the COVID-19 outbreak on the cruise industry, thinking about recovery already might seem premature – but there is some cause for optimism. Two of the specialists we’ve interviewed on this topic have highlighted the industry’s resilience in the face of other crises, as well as a loyal base of customers. “Cruising has a very loyal, large base of individuals who will continue to cruise, irrespective of what the issue is. The question is, what will it take to get those people back into the fold.” However, another specialist is more sceptical: “I think the cruise industry could end up being different forever because a lot of people have really suffered.” He pointed out that the target market is generally older, and “old people don’t want to be stuck on a ship in these [kinds] of circumstances.”

Another important question is how long will it take for this industry to recover, and what will need to happen first. This will include more positive media coverage and executives then reaching a certain comfort level that they can fill the cruises. For the timeframe, one specialist uses previous crises as a guide, noting that, after a sharp dip in demand and pricing, there tends to be a “pretty quick recovery” after the situation is resolved. “Usually, within 12-14 months you’ll see a sharp recovery, but pricing will be pretty significantly depressed, anywhere from 18% to 16% to 10%… depending on the event.” In addition, airlines are essential for many cruises. While the rates vary depending on the operator and the destination, as a “blanket statement” approximately 70-80% of bookings require air travel, according to one of our specialists. He also notes that the first cruises to start back up will probably be those customers can drive to after the COVID-19 pandemic subsides. 

Pricing could also take a hit, but there are likely to be different strategies. While dropping the cost could attract more bookings, this can lead to unintended consequences. For instance, this can change people’s expectations for future bookings, or even end up “alienating your loyal guests” who have previously paid premium prices. Another “school of thought” brought up by this specialist is that it’s human nature to spend extra if you have been given credit. “You end up spending just as much as you would have anyway because you think of that as just free money, and you have a budget that you’re willing to spend once you’re on vacation anyway.”

With extensive disruption shaking up the cruise industry, this is “brand new terrain, in terms of how cruise lines are reacting, and the measures and the steps that they’re taking”. And although pricing and demand might take some time to reach business-as-normal levels, next year’s sailings are already seeing bookings. In the face of so much uncertainty in light of the COVID-19 pandemic, people’s desire to travel, it seems, remains a constant.