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The Cruise Industry's Arms Race — Transcript

by Wendover Productions · 3,339 words · 540 segments · language en · Watch on YouTube

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0:00If one headline could summarize the mood
0:02surrounding the cruise industry in 2008,
0:04[music] it's this: Go buy the trip and
0:07short the stock. The advice was
0:09declarative. A year into the Great
0:10Recession, it made sense. If ever there
0:13was going to be a screaming deal on a
0:14vacation, it'd be now. And if ever there
0:16was a time to bet against companies
0:18built around discretionary spending,
0:20it'd be now. If anything, the advice was
0:22a little late. Carnival Cruise [music]
0:24Lines, the biggest in the industry, was
0:27already trading at $16, roughly half of
0:30where it was a year prior. While Royal
0:31Caribbean, trading in the mid-30s in
0:332007, had fallen to a measly $7 a share.
0:37But both could and would drop lower as
0:40travel businesses reliant on 90 to 100%
0:42occupancy rates to keep the lights on
0:44just didn't engender much investor
0:46confidence in the century's [music]
0:47biggest economic downturn. For their
0:49part, though, the cruise companies got
0:51creative. Addressing what industry
0:53publications euphemistically called a
0:55challenging sales environment, they
0:56slashed room rates, they offered $200
0:58onboard credits, [music] and they
1:00included two for one airfare to get
1:02there. A sign of the times, Norwegian
1:04Cruise Lines, the third of the
1:05industry's big three, offered full
1:07refunds to those who booked a trip but
1:09could prove they had lost their job
1:10before embarkation. Wobbling, the
1:13aggressive maneuvering kept occupancy
1:14rates high enough to keep the companies
1:16upright. But doubts remained. Extreme
1:19discounting and last-minute deals could
1:21create difficult precedents should the
1:22economy bounce back. Cruising and
1:24leisure travel could take longer than
1:26other industries to bounce back, too.
1:28And then the big one. How would these
1:30companies, emboldened by their past two
1:32decades of success and growth but now
1:34struggling to find customers of any
1:36sort, fill the massive boats about to be
1:38delivered and activated in the next
1:40couple years? [music]
1:41The industry's big three saw the moment
1:43a bit differently. Certainly, recession
1:45wasn't something they expected, and each
1:47readily admitted that the global
1:48downturn hard rocked their respective
1:50boats. It was in the first line in
1:52Carnival's annual report. It was the
1:54theme of the first paragraph of Royal
1:56Caribbean's. and it was responsible for
1:58the reported losses at Norwegian.
2:01But, while each recognized things were
2:02rocky for the moment, they didn't share
2:04the belief that the industry had run
2:06headlong into an existential problem, or
2:08that [music] they had outkicked their
2:09own coverage. Rather, they saw
2:11revolution on the horizon.
2:14Royal Caribbean pointed to its brand new
2:16class of ships that they were betting
2:17their future on. Carnival had its own
2:19promising new boats on order, and
2:20Norwegian had just revamped its fleet to
2:22reflect an overhaul in its cruising
2:24style. If they could get through the
2:26downturn, they figured that the future
2:27of cruising, which [music] they
2:29themselves were introducing, was bright.
2:32They had reason to project confidence.
2:33[music]
2:34Until this point, the past two decades
2:36for the maturing industry had been red
2:38hot. Since 1990, total passengers had
2:41tripled, really hitting its stride in
2:42the 2000s. And as the Cruise Line
2:44International Association's 2009 slide
2:47deck acknowledged, even when obstacles
2:49arose, the graph still went up and to
2:52the right. What this graph, with its
2:54[music] upward trajectory and
2:55recognition of passenger resilience
2:57showed, was that the industry in the
2:58last two decades had zeroed in on its
3:01principal advantages.
3:02>> [music]
3:03>> For a majority American customer base,
3:05cruising was the cheapest, most
3:06hassle-free means of taking a vacation.
3:09Compared to researching a place, finding
3:11a hotel, booking airfare, then ground
3:13transportation, figuring out dinner
3:14every night, one could [music] just call
3:16a travel agent, put down a credit card
3:18for a single flat fee, and go on a trip,
3:20even leave the country, without having
3:22to do as much as renew a passport. A
3:25cruise, with package airfare, meals
3:27accounted for, destinations vetted, and
3:29excursions already configured, offered
3:31both the budget-focused and travel-weary
3:33a way to get out to good weather, or to
3:35see a corner of the world in a more
3:37comfortable way. Customers said as much.
3:39As these 2008 figures showed, multiple
3:41stops were important, but so too was the
3:43value, and especially the ease of it
3:45all, which surveyed as far more
3:47important to cruise vacationers than
3:48non-cruise vacationers. The problem was,
3:51this strategy [music] had a cap.
3:53Leaning into easy and convenient,
3:55cruises had established a reputation.
3:57They were for the newly wed and nearly
3:59dead. They lacked sophistication. They
4:02weren't cool, [music] and especially for
4:03kids, they were just out and out boring.
4:06But with their mid-recession era fleet
4:07expansion, Royal Caribbean was confident
4:09that it may have just bucked the trend,
4:11that it may have come across a concept
4:13to making cruising [music] cool. Their
4:16answer was this boat. When it launched
4:19in 2009, Oasis of the Seas was the
4:21largest passenger ship ever. But what's
4:24more important than sheer size was what
4:26it fit [music] inside. The ship was
4:28split into seven distinct zones that
4:29Royal Caribbean called neighborhoods.
4:31The youth zone programmed crayon classes
4:33for little ones to teen-only events for
4:35older kids. Entertainment Place hosted
4:37music and housed nightclubs. The pool
4:39and sports zone hosted everything from
4:41basketball courts to zip lines. The
4:42Vitality at Sea Spa provided 29
4:44treatment rooms and relaxation options.
4:46While Central Park, the Boardwalk, and
4:48the Royal Promenade collectively pulled
4:50together a simulation of a streetscape.
4:52The ship, by design, had something for
4:54everyone, or more accurately, some
4:56things for everyone. Rather than just
4:58drinking and eating and reading a book
5:00under the sun, every member of a
5:02three-generation family had a place on
5:04the boat that drew them in. The concept
5:06changed the trajectory of cruising. Two
5:09press releases from Royal Caribbean best
5:11encapsulate the industry's pivot. First,
5:13the announcement that the boat was on
5:14its way from Finland to Florida. [music]
5:16The release gets to the boat's many
5:17features early and then never leaves the
5:19subject. While it mentions how one can
5:21book a trip on the boat, there's never
5:23any mention as to where the boat is
5:25actually bound to sail. As for the
5:27announcement as to where the new pride
5:29of the Royal Caribbean was to visit in
5:30its first year of operation, well, that
5:32too is opened with a paragraph on
5:33amenities before getting to the part
5:35that's been overlooked, that the boat
5:37actually goes places. Of course, the
5:39principal culprit in this destination
5:41overlooking had been Royal Caribbean
5:42themselves. A tacit recognition that the
5:45business strategy was changing. The boat
5:47itself was becoming the destination.
5:50The destination-ification of the boat
5:52addressed another major challenge
5:54servicing the industry. In 2008, Royal
5:56Caribbean quietly altered this Northeast
5:59itinerary serviced by the Explorer of
6:00the Seas. It would cut stops [music] in
6:02Charlottetown, Sydney, and Quebec City.
6:05The trip would still last 9 days, it
6:07make up for the cuts with new domestic
6:09stops, but it wouldn't quite offer the
6:11same Eastern Canadian experience. It
6:14wasn't due to a lack of interest. It
6:15certainly wasn't due to the communities
6:17not wanting the business or the
6:18travelers not wanting to stop. It was
6:20down to Royal Caribbean not wanting to
6:22burn the fuel. In this industry, fuel is
6:25measured not in gallons or liters, but
6:27in metric tons. And in recent years,
6:30fuel cost has accounted for about 10%
6:31[music]
6:32of total operating expenses at Royal
6:34Caribbean, nearly matching the cost of
6:35payroll. Even though some companies will
6:37use hedging strategies to lock in future
6:39fuel at a given rate, the industry is
6:41uniquely vulnerable to fuel price
6:43variability, and it was no different in
6:442008 when the cost of crude more than
6:47doubled in the course of a year. The
6:49short-term fix, given that 60% of all
6:51fuel used on a cruise goes towards
6:52physical propulsion, was to cut stops,
6:55shorten routings, and slow the boats, or
6:57just add fuel surcharges. Neither goes
6:59over particularly well with the
7:00clientele. As a customer at the time
7:02pointed out, [music] for those that are
7:03invested in the destination itself, such
7:06changes in itineraries basically ruin an
7:08entire trip. But the long-term solution
7:10to better adjust for things they
7:12couldn't control was to focus on what
7:14they could. For Royal Caribbean and the
7:15rest, it was to alter the emphasis on
7:17the cruise experience. Make the trip
7:19about what they could guarantee, the
7:21boat and the experience it provides,
7:23rather than the stops the boat makes or
7:25doesn't.
7:26In the decade that followed, the
7:28innovation of strategy compelled
7:29innovation in design. Spearheaded by
7:31Royal Caribbean and the launch of the
7:33Oasis of the Seas, the industry entered
7:35a big boat bonanza. [music]
7:38Royal Caribbean's fleet boomed from this
7:40to this, adding an entirely new class of
7:43ships while doubling its offering in the
7:44Oasis class with two new additions. From
7:47'09 to '19, both Norwegian and Carnival
7:50added two new classes of their own and
7:52seven new boats each. Justifying the
7:54expansion of each was the increased
7:56investment into each brand's developing
7:58niche. Carnival was, as they put it,
8:00fun. They were the easiest as a family,
8:02running itineraries out of accessible
8:04and drivable ports. They were affordable
8:06and unpretentious. Norwegian, with an
8:08emphasis on its freestyle concept,
8:10essentially dining, recreating, doing
8:12anything really on your own schedule,
8:14was sleek and comparatively refined,
8:16welcoming to young professionals,
8:18adults, couples. While Royal Caribbean,
8:20as they put it, was increasingly amped,
8:23stuffing their ships with as many
8:24groundbreaking firsts as they could
8:26possibly imagine. There was something
8:28for everyone in the family, but it cost
8:29a bit more. All maintained their brand
8:31messaging and values through their ever
8:33bigger boats.
8:36Bigger boats didn't sink the industry
8:37like some had feared, they broke the
8:39industry into a new [music] strata. 18
8:42million global passengers in 2009
8:44reached nearly 30 million by 2019.
8:46>> [music]
8:46>> And more than ever, the diversity of the
8:48destination of these guests had
8:50flattened out, with over a third
8:51choosing the Caribbean. For Royal
8:53Caribbean, annual itineraries used to
8:55look like this. A lot of West Coast
8:57options, a lot of East [music] Coast
8:58ports of departure, a lot of variety. By
9:012019, it looked like this. A lot of
9:03Caribbean with a lot of the Caribbean
9:05cruises being serviced from US ports
9:07near and near to [music] the Caribbean.
9:10By 2024, it looked like this. Even more
9:12Caribbean and a new wrinkle, shorter
9:14average trips. Some of this is explained
9:17by simple physical limitations. Cruising
9:19in Alaska or Canada or Europe is only
9:22feasible during the summer, while the
9:23Caribbean is year-round. Or the fact
9:25that Oasis class boats carrying the most
9:27customers just can't access ports like
9:29Baltimore's because they're too big to
9:31clear under the Chesapeake Bay Bridge
9:32safely. It's also recognition that
9:35diversity of destination is also just
9:36less central to the considerations of
9:38the traveler as the boats themselves
9:40have become a more central attraction.
9:42And this, in turn, helps the company.
9:44First, the fuel savings. [music] Simply,
9:46the distance is fractional for Caribbean
9:48routing than a California to Mexico
9:50routing, which not only saves mileage,
9:52but if it's a cruise drawn out across 7
9:54days, the boat can go slower.
9:56Then there's the fact that Royal
9:57Caribbean has its own private resource
9:59within the islands, [music] as does
10:00Carnival, as does Norwegian. Now, rather
10:03than passengers spending money in port
10:04of call communities, that money's being
10:06spent in their extended experience.
10:09Beyond the company islands and the
10:10comparative fuel savings, there's also
10:12the image work. Because its itineraries
10:14are plotting and pretty limited, it can
10:16present fuel savings as a win in the
10:18ever contentious environmental impact
10:19assessment of these boats, that they're
10:21being more fuel efficient than ever. By
10:24rightly maneuvering to adjust for
10:25consumer taste, big cruise has a won,
10:28and they've kept winning. Through a
10:30global pandemic that, again, certainly
10:32seemed like the end of the industry, the
10:33boats have only gotten bigger, and
10:35cruising, now offering shorter and
10:37shorter routings for PTO-crunched
10:39millennials, has only gotten more
10:41mainstream. But the industry is
10:42innovating again. This time, not through
10:44extreme size, but increasingly extreme
10:46experiences.
10:48There's a prevailing thought shared
10:49across the industry that no cruise
10:51company is competing with or even
10:53thinking about the other cruise
10:55companies. They're competing with a
10:56land-based travel. So now, land-based
11:00travel is fighting back. You won't find
11:02Ritz-Carlton referring to its growing
11:04fleet of commercial superyachts as
11:05cruise ships.
11:06>> [music]
11:06>> In an industry where 1,000 guests
11:08qualifies a ship as small or boutique,
11:11the Ritz's first passenger ship, the
11:12Evrima, holds only 298 guests. Perhaps
11:16not a cruise ship, the Evrima does
11:18commercially cruise, booking out [music]
11:207-day itineraries on plotting
11:21Mediterranean routes in the summer and
11:23Caribbean routes in the winter. And the
11:25offering is meant to fill a niche within
11:26the industry. It was positioned to fill
11:28the ultra-luxury cruising void with a
11:30purpose-built boat that blended elements
11:32of cruises and super yachts. Providing
11:34the requisite confidence to invest
11:36[music] in a $300 million project like
11:37this was the fact that cruising is
11:39pretty in line with the company's core
11:41competencies. The Ritz relies on loyalty
11:43in the luxury hotel sector. Whether in
11:45Aspen or New York, all their properties
11:47have a similar warm yet refined look and
11:49feel. They have staff trained to
11:51remember names and to go [music] the
11:52extra mile to help a guest. They have
11:54restaurants run by empowered and
11:56long-serving chefs. All these are things
11:58that keep customers coming back even
11:59strong customers to visit far-flung
12:01vacation destinations because they have
12:03so much faith in the hotel. All these
12:05aspects are easily transferable over to
12:07a super yacht. The boat, with its ample
12:09exposed wood grain, looks like a Ritz
12:11while the dining experience was designed
12:13by the head chef at the Ritz-Carlton in
12:15Wolfsburg. As for customer service, it's
12:17the same as the hotels, too. Staff smile
12:20and make eye contact with passing guests
12:22[music] at 10 ft and greet them at 5
12:24just like they're trained to do on land.
12:26They're also empowered to spend up to
12:27$2,000 to resolve an issue that a guest
12:29runs into without management
12:31green-lighting it. On water, the Ritz
12:33believed it could provide what it does
12:34on land and its customers trusted it as
12:36much. In the first year of service, the
12:38Evrima welcomed guests that half the
12:40time had never ever taken a cruise
12:42before.
12:43>> [music]
12:43>> While the Ritz-Carlton may have been the
12:44first, the rest are coming. The first of
12:46the Four Seasons and Orient Expresses
12:48respective forays into the space are set
12:50to hit the water in 2026, while Aman's
12:52will hit the water in 2027.
12:55Leaning into loyalty and brand trust is
12:57not a strategy reserved just for the
12:59ultra luxury yacht. Disney has taken a
13:01similar approach with their own niche. A
13:03relatively small player in the industry
13:04beginning in the early 2000s, Disney,
13:07too, saw opportunity in pivoting to a
13:08more exciting and experiential cruising
13:10model toward the end of the decade. With
13:12new ships on the water in the early
13:142010s and new ships on order by
13:16mid-decade, the company invested in the
13:18sector with confidence because
13:19leadership saw it as an intuitive
13:21extension of the brand and its services
13:23rather than an expansion into a a space.
13:26It's reflected in corporate structure.
13:28Rather than a component that's
13:29outsourced or siloed, Disney Cruises
13:31exists within Disney Experiences, the
13:34same division that runs the famed parks.
13:36All this means that the cruise line is
13:38designed by, led by, informed by
13:40strategy and best practices honed from
13:42running parks and hotels since the
13:441950s. Similar to Ritz-Carlton, they
13:47stay busy and bring back repeat
13:49customers because they employ what works
13:51on land. The thematic style of the boats
13:54works for kids, costume staff members
13:56charm parents by accommodating food
13:58allergies and replacing a dropped ice
14:00cream. The entertainment, from shows to
14:02rides, broadly works for just about
14:04everyone, regardless of generation.
14:06While the company intersperses some
14:08pretty unique itineraries within its
14:09heavy dosing of Caribbean routings that
14:11usually pass through Disney's Castaway
14:13or Lookout Keys, it's most often the
14:15on-boat experience that guests talk
14:17about. Up to a 2.2% market share,
14:21Disney's introduced a new boat in 2025,
14:23expecting another in 2026, and another
14:26in 2027, all of which from their largest
14:29line, the Wish class. All major
14:31investments, but investments justified
14:33by a confidence that it can deliver at
14:35sea what it does on land. Disney Cruises
14:38is growing fast, but in an industry
14:41that's not seeming to slow, it's not
14:43setting the pace, it's just keeping up
14:44with the rest. In a conversation with
14:46Royal Caribbean leadership reflecting on
14:48strategy during the Great Recession,
14:50company leadership expressed one regret,
14:53that they slowed future ship orders for
14:55the following decade to quietly hedge
14:57for some slowdown. When cruising bounced
14:59back remarkably fast, when their new
15:01boats are ready delivered were leading
15:03the way, they were momentarily behind
15:05again. It was a lesson that they and the
15:07rest carried into COVID. The industry
15:10would obviously slow, but not forever,
15:12and they'd be ready when travel
15:14returned.
15:15Perhaps counterintuitively, what the big
15:17boat bonanza of the last two decades
15:18reflects is an industry increasingly
15:21aware of its own advantageous
15:23flexibility. With foundational cost and
15:25convenience advantage, cruising simply
15:27outcompetes the rest of the vacation
15:29sector in its nimbleness. A hotel can
15:31renovate, certainly, but a cruise can
15:33reinvent its ship from the ground up.
15:36And more importantly, a ship moves. If
15:39fuel prices are up, a ship can move
15:41less. If a destination grows dull or too
15:44expensive or politically unstable, an
15:46itinerary can simply change. If consumer
15:49preference asks for shorter routing so a
15:51younger clientele can save some PTO, the
15:53cruise industry can accommodate. While
15:55the reputation of a lack of
15:57sophistication may linger, a sense that
15:59cruises can be boring or weird or
16:01sketchy still exists, the industry
16:03doesn't just persist, it thrives. 50
16:07separate new builds are set to hit the
16:08water from 2026 to 2030. Some big enough
16:11for 5 to 6,000 guests, and about half
16:14with 1,000 plus guest occupancies. The
16:17race for more and bigger boats just
16:20won't stop.
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