Cruise Lines Go Overboard

By John Greenwald

Not since the Titanic set sail has the sea seemed so alluring or the cruise industry looked so unsinkable as it does today. With 5 million customers booking passage last year--a 10-fold increase from two decades ago--major carriers such as Carnival and Royal Caribbean have steamed to record sales and profits. They have turned a once snooty form of travel into mass-market vacations for people like Ken and Sherry Nunn and daughter Ashley, an Indiana family that recently spent three nights aboard Royal Caribbean's cozy 2,250-passenger Sovereign of the Seas. "Everything's right there, and you don't have to run yourself crazy looking for something to do," says Sherry, who sampled the lavish feedings and reveled in the duty-free shopping. "If I could afford to take a cruise every year, I would gladly do it."

Even that film about a seagoing catastrophe has piqued consumer interest. But the danger in the future may not be icebergs on the high seas as much as traffic. Flush with cash, cruise lines have ordered an astonishing $10 billion worth of floating pleasure palaces, some of which will be the largest passenger ships ever built. The new vessels, to be delivered through 2002, will increase the number of berths a whopping 50%. Among them: the $450 million, 2,600-passenger Grand Princess, flagship of the Princess line. At a record-breaking 109,353 tons (the Titanic displaced, temporarily, 46,328 tons), Grand Princess will have 15 decks, three show lounges and the world's largest floating casino when it sails this month from Istanbul.

The Walt Disney Co. is also taking to sea, a move that both scares and encourages this $7.5 billion industry. Disney is launching a pair of $370 million ships that will each carry 1,760 passengers when the vessels arrive later this year. (Construction snafus have delayed delivery of the first, the Disney Magic, from March to July.) Backed by a $130 million marketing budget, these floating Mouse traps will offer three- and four-day excursions as part of Disney World vacations. The good news is that Disney's money will sell the industry to a new generation of travelers. The bad news is that Disney (sales: $22.5 billion) dwarfs the other companies, it hangs on to customers the way pirates do treasure, and its kid-friendly packages will be tough to match.

For public consumption, the cruise captains have been shouting, "Welcome aboard!" They contend, as they always have, that the seafaring market is still largely untapped, with just 8% of North Americans having taken a cruise. That leaves plenty of room for bookings to continue to grow a robust 9% to 10% a year. "Our philosophy is, 'If you build the ship, they will come,'" says Rich Steck, a spokesman for Royal Caribbean, which is spending more than $2.8 billion to add seven new liners to its 16-ship fleet by 2002. "We're banking on that heavily."

So is Wall Street. "It looks to me like the industry is just starting to live up to its potential," says analyst Scott Barry, who follows the fleet for Raymond James & Associates. "We think it's only in its infancy." The stock of industry leader Carnival has climbed from $36 a share a year ago to $69.94 last week.

The prospect of all those new prows nosing over the horizon has already caused a couple of companies to run up the white flag. The five-ship Celebrity Cruise Lines, 51% owned by London's Chandris Group, sold out to Royal Caribbean (sales: $1.9 billion) for $1.3 billion. The purchase buoyed Royal Caribbean, which reported last week that its first-quarter profits doubled, to a record $77 million. Carnival ($2.4 billion), which had also craved Celebrity, salved its wounds last month by heading a group that paid $500 million for Cunard, the legendary rival to Titanic's White Star Line, whose five vessels include the Queen Elizabeth 2.

Cunard, like a threadbare British estate, was long on heritage but short on cash. Indeed, the money-losing company was most recently owned by Kvaerner, a Norwegian shipbuilder that bought Cunard's parent company. Last month's deal will expand Carnival's armada to 42 ships and seven separate lines, which provide everything from three-day jaunts out of Miami to 98-day luxury cruises that can cost up to $137,000 a passenger. "We have a portfolio of brands that cover all parts of the product mix," says Carnival chairman Micky Arison, 49, whose father founded the company in 1972 with a secondhand vessel that ran aground off Miami on its maiden voyage.

The recent consolidation has created a two-tiered industry: in the first tier, the three dominant lines; in the second, everybody else. The Big Three--Carnival, Royal Caribbean and Princess--hold a 73% share of the North American market. Their main theater of operation is the Caribbean, which accounted for 50% of all U.S. passenger bookings last year.

The three combatants are locked in perhaps the world's costliest game of "Can you top this?" in which the bragging rights to the world's largest passenger ship change from week to week. Carnival's Destiny, the current titleholder at 101,353 tons, is about to be overtaken by the Grand Princess. Both are too wide to fit through the Panama Canal. Both will also be overshadowed next year when Royal Caribbean's new, 136,000-ton flagship hits the water, with berths for 3,840 passengers and 1,181 crew members. By comparison, an aircraft carrier weighs in at about 100,000 tons, with a crew of more than 5,000.

The superliners offer everything from towering atriums to nightclubs to conference centers, gymnasiums and rock-climbing walls designed to keep passengers from ever having to contemplate the ocean. "It's such a fantasy world," gushes Patty Cromie, a New Jersey mother of three who recently cruised on Carnival's new, $330 million Elation. "The spa, the shows, the lounges and boutiques, not to mention being waited on hand and foot. I hardly dared go to sleep." Neither did Jim and Betty Brown when their travel agent suggested the Grand Princess. Jim Brown, a retired union official who lives near Sacramento, Calif., coughed up $10,200 for the 12-day maiden cruise. "It's going to be something to see," he says. "I've never been on a brand-new-spanking ship."

In their quest for synthetic perfection, the cruise lines have created their own ports of call. Disney's Castaway Cay in the Bahamas features three beaches and a 12-acre snorkeling lagoon. At Coco Cay, Royal Caribbean's 140-acre island, aquamarine waters lap at the white sand beach, while snorkelers explore a 16th century sailing ship and a small plane that the company submerged to give divers a sense of adventure. Alas, what Royal Caribbean calls a controlled shore experience some others have labeled a limited amusement experience. "There's nothing here but some palm trees," complained LaDonne Herring, a nurse who cruised to Coco Cay on the Sovereign of the Seas. "I'm going back to the ship and watch a movie."

The new features are designed to lure middle-class travelers who are younger and more active but have less time to spend at sea than the retired blue bloods who once dominated the passenger lists. The big lines offer services including playrooms, golf courses and virtual-reality games. Such touches have lowered the average age of Royal Caribbean customers to the low 40s from the 60s and 70s not long ago.

Although the accoutrements are new, the economics of cruising aren't changing much. The idea is to attract customers with low daily rates and give them every opportunity to spend freely in the bars, shops and casino while onboard. According to the Cruise Lines International Association, the average daily rate for the industry is about $200 a day, which includes food and entertainment. Canny passengers can swing discounts by booking at the last minute, when some companies may be desperate to fill empty berths.

To make money at bargain prices, Carnival counts heavily on economies of scale. For a one-week Caribbean cruise, Carnival's Elation stocks some 10,000 lbs. of meat along with 10,080 bananas, 41,660 eggs and more than 4,000 quarts of booze. By squeezing such costs, Arison says, Carnival can break even with its ships filled to around 60% of capacity. Yet with vessels like Destiny often packed to the gunwales, Carnival has been able to trim operating expenses to 54% of revenues. That contributes to a net profit margin of 27%, first class by any measure.

Of course, some passengers prefer pure luxury. Retired California businessman Roy Black and his wife have spent $30,000 for the penthouse of Crystal Cruises' 940-passenger ship Harmony during a 30-day world tour. The Blacks are so fond of Crystal, a privately owned company, that they've taken 18 Harmony cruises. "It's the ultimate in comfort and spaciousness and decor," Black says of the 950-sq.-ft. penthouse, which comes with a Jacuzzi and private butler service, among other creature comforts. "It's always been our home away from home."

Knut Kloster Jr., the former chairman of the Norwegian Cruise and Royal Viking lines, plans to top even that by launching a ship that will be a permanent home for its passengers. The globe-trotting vessel, called World of ResidenSea, will have 286 condominiums when completed in early 2001. Kloster has so far sold 65 units, which go for as much as $6.6 million. And for those who can't get enough Titanic, a U.S.-Swiss partnership plans to build a $500 million replica that will take its maiden voyage on the 90th anniversary of the Titanic's, in 2002. Two thousand passengers may enjoy the same kind of Gilded Age service as the original, and with enough lifeboats for everyone.

But even a new Titanic may not be much of a match for the fleets of gigantic new ships. Then again, the sheer number of ships may be no match for the next economic downturn. Right now, that doesn't worry the industry. It's confident it can continue to increase the number of people willing to pay for their sea legs. And if worse ever comes to worst, sailing to the poorhouse will never be so luxe.

--Reported by Patrick E. Cole/Los Angeles, Tammerlin Drummond/Miami and Jane Van Tassel/New York

With reporting by Patrick E. Cole/Los Angeles, Tammerlin Drummond/Miami and Jane Van Tassel/New York