Cruise Line Industry

By: Daniel Novick, Spencer Roane,

Vinamra Laddha and Wazir Browne

Industry Background

Value of industryValue of industry

2012 Gross Revenue Forecast: $29 billion2012 Gross Revenue Forecast: $29 billion

Barriers to EntryBarriers to Entry

Capital IntensiveCapital Intensive

““Big Five” and OthersBig Five” and Others

Market ShareMarket Share

Growth/TrendsGrowth/Trends

Barriers to Entry

High cost of acquiring shipsHigh cost of acquiring ships

Necessity of place of portNecessity of place of port

Finding and hiring qualified crewFinding and hiring qualified crew

Captain, Chefs, etc.Captain, Chefs, etc.

Government regulations and international Government regulations and international tariffstariffs

High price of oil and energy to power shipHigh price of oil and energy to power ship

Legal Hurdles

Each cruise ship must be registered to a specific countryEach cruise ship must be registered to a specific country

Creates issues for staffing (union vs. non-union)Creates issues for staffing (union vs. non-union)

US law requires the ship to be built and staffed by US law requires the ship to be built and staffed by Americans for it to be “flagged” to the USAmericans for it to be “flagged” to the US

Ships are safety-inspected four times per yearShips are safety-inspected four times per year

Captain has ultimate authority to enforce laws and Captain has ultimate authority to enforce laws and policiespolicies

Flags of Convenience Flags of Convenience

High Fuel Usage

Cruise Ship Weight (tons)Passenger Capacity Feet/Gallon

Queen Mary II 148,528 2,620 40

MS Noordam 85,200 1,918 52

Queen Elizabeth 2 70,327 1,892 50

RC Mariner of the Seas 138,279 3,114 52

Disney Magic 83,000 2,400 57

Disney Wonder 83,000 2,400 57

Oasis of the Seas 225,282 5,400 19

Navigator of the Seas 138,279 3,114 51

RC Freedom of the Seas 154,407 3,634 34

Allure of the Seas 225,000 6,296 31

Fuel Usage by Capacity

Fuel Usage by Weight

Industry Functions

TransportationTransportation

Sleeping accommodationsSleeping accommodations

Dining accommodationsDining accommodations

AmenitiesAmenities

EntertainmentEntertainment

Off-ship excursionsOff-ship excursions

Major Players: “Big Five”What is the Big Five?What is the Big Five?

CarnivalCarnival

Royal CaribbeanRoyal Caribbean

NorwegianNorwegian

MSC CruisesMSC Cruises

DisneyDisney

Nights sold for each in 2007 (in millions):Nights sold for each in 2007 (in millions):

Carnival: 36.32Carnival: 36.32

Royal Caribbean: 19.66Royal Caribbean: 19.66

Norwegian: 8.44Norwegian: 8.44

Disney: 1.66Disney: 1.66

Company Profile: Carnival Corporation

Founded: 1972Founded: 1972

Based in: US and UKBased in: US and UK

Brands: Carnival Cruise, Costa Cruise, Cunard Line, Holland America, Princess Brands: Carnival Cruise, Costa Cruise, Cunard Line, Holland America, Princess Cruises, Seabourn CruiseCruises, Seabourn Cruise

Revenues: $15.8B in 2011Revenues: $15.8B in 2011

Employees: 10,200 employees & 75,000 crew Employees: 10,200 employees & 75,000 crew

Size of Fleet – 103 Cruise Ships (209,420 passengers)Size of Fleet – 103 Cruise Ships (209,420 passengers)

Key facts:Key facts:

Ticker symbol: CCLTicker symbol: CCL

1.4 times the fleet of closest competitor1.4 times the fleet of closest competitor

Company Profile: Royal Caribbean

Founded: 1968Founded: 1968

Based in: Florida, USBased in: Florida, US

Brands: Celebrity Cruise, Royal CaribbeanBrands: Celebrity Cruise, Royal Caribbean

Revenues: $5.21B in 2011Revenues: $5.21B in 2011

Employees: 5,700Employees: 5,700

Size of Fleet – 40 Cruise Ships (96,270 passengers)Size of Fleet – 40 Cruise Ships (96,270 passengers)

Key facts:Key facts:

Ticker symbol: RCLTicker symbol: RCL

Operates 40 cruise ships to 400 destinationsOperates 40 cruise ships to 400 destinations

Company Profile: MSC Cruises

Founded: 1987Founded: 1987

Based in: Geneva, SwitzerlandBased in: Geneva, Switzerland

Brands: NoneBrands: None

Revenues: $1.98B in 2011Revenues: $1.98B in 2011

Size of Fleet – 12 Cruise Ships (27,750 passengers)Size of Fleet – 12 Cruise Ships (27,750 passengers)

Key facts:Key facts:

Fleet of 12 cruise ships increasing to 14 by 2013Fleet of 12 cruise ships increasing to 14 by 2013

5.8% world market share5.8% world market share

Company Profile: Norwegian Cruise

Founded: 1966Founded: 1966

Based in: Florida, USBased in: Florida, US

Brands: NoneBrands: None

Revenues: $2.31B in 2011Revenues: $2.31B in 2011

Size of Fleet – 11 Cruise Ships (25,280 passengers)Size of Fleet – 11 Cruise Ships (25,280 passengers)

Key facts:Key facts:

Filed with SEC for up to $250M IPO in July, 2011Filed with SEC for up to $250M IPO in July, 2011

11 ships in current fleet, two more to join over ‘13-1411 ships in current fleet, two more to join over ‘13-14

Company Profile: Disney Cruise

Founded: 1998Founded: 1998

Based in: Florida, USBased in: Florida, US

Brands: NoneBrands: None

Revenues: Up 4% from 2010Revenues: Up 4% from 2010

Size of Fleet – 4 Cruise Ships(8,510 passengers)Size of Fleet – 4 Cruise Ships(8,510 passengers)

Key facts:Key facts:

Disney Cruise Line is considered a segment of Disney Parks Disney Cruise Line is considered a segment of Disney Parks and Resortsand Resorts

Fleet includes only four shipsFleet includes only four ships

Industry Competition – Solo Traveler

Fred OlsenFred Olsen

Spirit of AdventureSpirit of Adventure

P&O CruisesP&O Cruises

Hebridean Island CruisesHebridean Island Cruises

Costa CruisesCosta Cruises

Competition and Structure

We can study the HHI by combining We can study the HHI by combining subsidiaries or by looking at individual cruise subsidiaries or by looking at individual cruise lineslines

HHI with subsidiaries: 998HHI with subsidiaries: 998

HHI without subsidiaries: 3091HHI without subsidiaries: 3091

Market Share by Number of Passengers

Market Share by Total Revenue

Royal Caribbean

Carnival

2012 World Wide Market Share

Growth of Industry/Trends

Increase in Increase in number of number of passengers passengers

(in thousands)(in thousands)

Capacity of the Major Markets in 2011

Age Demographics of U.S. Passengers

Income Demographics of U.S. Passengers

Race Demographics of U.S. Passengers

Customer Employment Status

U.S. Market Psychographic

Pricey Inexpensive

Formal

Relaxed

Perceptual Map

Industry-wide price elasticity

Lerner Index = (1663 - 612)/1663 = .63199Lerner Index = (1663 - 612)/1663 = .63199

(1/.63199) = 1.58 = elasticity(1/.63199) = 1.58 = elasticity

Pricing Strategies

Temporal PricingTemporal Pricing

Time of PurchaseTime of Purchase

Seasonal PricingSeasonal Pricing

Third-Degree DiscriminationThird-Degree Discrimination

Second-Degree DiscriminationSecond-Degree Discrimination

OverbookingOverbooking

Loyalty ProgramsLoyalty Programs

Temporal Pricing

Inter-temporal PricingInter-temporal Pricing

Similar to airline IndustrySimilar to airline Industry

Last minute discountsLast minute discounts

Seasonal PricingSeasonal Pricing

Price spikes in summer months and DecemberPrice spikes in summer months and December

Temporal Pricing – Time of

PurchaseAs the sail date approaches the price of tickets As the sail date approaches the price of tickets increases due to the increase in demand at increases due to the increase in demand at the last momentthe last moment

However, within the last week it is possible to However, within the last week it is possible to get cruise ticket discounts because Cruise get cruise ticket discounts because Cruise Liners want to leave with full capacity and Liners want to leave with full capacity and minimize the fixed cost/personminimize the fixed cost/person

Third-Degree Price Discrimination

Different prices for ships Different prices for ships

Carnival Imagination 4 day trip 350Carnival Imagination 4 day trip 350

Carnival Victory 4 day trip 480Carnival Victory 4 day trip 480

Room prices Room prices

7 day trip to Caribbean from Miami 7 day trip to Caribbean from Miami

Interior 670Interior 670

Suite 1,679Suite 1,679

Early Saver plan Early Saver plan

Second-Degree Discrimination

Two-Part TariffTwo-Part Tariff

Ticket Price to get on the shipTicket Price to get on the ship

Shopping on the boatShopping on the boat

For exampleFor example

Carnival Cruise ExcursionsCarnival Cruise ExcursionsLobster Champaign and beach Excursion Lobster Champaign and beach Excursion

$120 $120

Island Safari 4x4 Adventure Island Safari 4x4 Adventure

$80$80

Overbooking Strategy

Better than Hotels? Why?Better than Hotels? Why?

Captive AudienceCaptive Audience

No business travelersNo business travelers

No holdovers or early departuresNo holdovers or early departures

Packed ship important to the cruise ambiencePacked ship important to the cruise ambience

Cruises have big-time repeat customersCruises have big-time repeat customers

Great package for less than $100 a dayGreat package for less than $100 a day

Great ties with travel agentsGreat ties with travel agents

Long booking periodsLong booking periods

Loyalty Programs

Many cruise lines have themMany cruise lines have them

However, they are not very publicizedHowever, they are not very publicized

Have very limited benefitsHave very limited benefits

Recommendations?

Differentiate based on brand and ship experienceDifferentiate based on brand and ship experience

Encourage citizens of all ports to tour the cruise Encourage citizens of all ports to tour the cruise ship ship

Improve loyalty programs and market them moreImprove loyalty programs and market them more

Allow passengers to stay at a destination and Allow passengers to stay at a destination and come back on another cruisecome back on another cruise

Works for cruise destinations that are visited Works for cruise destinations that are visited routinelyroutinely