CRUISE SECTOR FOCUSES ENERGY ON NEW FLEET EMERGENCE

Market Drives Development Of Next-Generation Vessels A combination of the aging world cruise fleet, increased government safety and environmental requirements under SOLAS and MARPOL, and consumer demands for bigger and better products created a triple stimulus for the cruise market explosion that occurred a few years ago. Today, some market analysts are forecasting warnings against further expansion in the cruise sector — citing failures of long-established cruise interests Regency Cruises and Royal Cruise Line, perceived declines in passenger bookings, and increased competition for outfit and repair contracts as signs of a shaky marketplace. However, selective cruise lines are continuing to maintain a high level of newbuild ordering activity. This ordering activity, along with the Disney corporation's decision to enter the market, suggests that the sector is not only poised to absorb further growth, but is in the process of consolidating its strengths in preparation for the new fleet of ships that will debut before the turn of the century. Through the implementation of targeted business strategies and R&D projects, emerging market players have designed the new fleet of cruise ships to attract specific passenger segments a strategy which could eventually lead to a diversification of the sector, with each major player appealing to a different clientele. With seven ships scheduled for delivery in 1996, seven more in 1997, and 106 five orders in place for 1998, cruise lines have demonstrated confidence in the future of the market by investing billions of dollars in newbuilding projects, which could translate into positive earnings for contract-hungry builders and suppliers.

Industry Gurus Address Market Royal Caribbean Cruise Line (RCCL), Carnival Cruise Lines and Princess Cruises are three cruise companies currently maneuvering for market presence, as illustrated by their high volume of new tonnage and newbuild ordering activity. Executives from these companies recently offered views of the current state of the cruise ship market.

Rod McLeod, RCCL's vice president of sales, marketing and passenger services, offered: "What is going on today which has been characterized by some as a serious problem is a midcourse correction related to the re-tooling of the industry. Those who say the market for cruising has matured, I think, are misinformed." He reported that while 1994 "was the best year in our history," the company has maintained yields since that time.

Vicki Freed, vice president of sales and marketing for Carnival Cruise Lines, expressed similar sentiments. "I would say overall that there is better health for some cruise lines than others. About eight cruise companies are very healthy, very strong." However, she predicted "major fallouts" of both major players and smaller companies in coming years, and added that SOLAS regulations will force ships out of service, since a lot of companies will not be able to afford the costs associated with outfitting ships for compliance.

Rick James, senior vice president of sales and corporate relations for Princess Cruises, said the market is currently in the midst of "an evolutionary period." The force behind that evolution is the market polarization Ms. Freed described. "Those lines with strong financial backing are continuing to invest in newer ships. This evolution is separating the bigger lines from the smaller lines," he continued. Notably, all three cruise executives volunteered the names of the two other cruises companies as emerging industry players, which suggests that intensified competition for business will be a driving force in the future of the market. As stated by Jim McCaul, president of IMA Associates, Inc., a Washington, D.C.-based consultancy firm which publishes reports on market outlooks for different maritime sectors, "There will continue to be orders simply because the industry is so competitive. In order to stay ahead of the pack, companies will have to invest in new equipment ... It's an industry driven by 'he who has the latest fad, the latest gimmick' — that's who will be attracting customers ... The market has brought about a separation of companies into those that are survivors and those that are going to get kicked off the ship." Formulating Strategies For Capturing Market Control While some cruise lines continue to produce large ships aimed at capturing all parts of the market, another strategy for locking into a profitable consumer base is to direct efforts towards attracting a particular segment of passengers. To maintain influence in the increasingly competitive market, RCCL plans to utilize such a strategy, specifically by focusing on attracting a greater segment of European vacationers. "We have seen international business grow (by) 35 percent. The result of our efforts has led us to understand the ability of U.S. cruise lines to develop cruise markets," said Mr. Mc- Leod. For RCCL in specific, that growth has been impressive. "We know we have five ships coming. Our company is growing — it will grow more than 60 percent in the coming three years. We don't have a tradition of ordering two ships every year." RCCL currently staffs international sales offices in Miami, London, Frankfurt and Oslo, and maintains 35 international representative offices worldwide. Carnival's overall approach for capturing a controlling market position will be to concentrate on encouraging new passenger segments to take to the water. "We're continuing to go after the customer that doesn't think about cruising ... We cater to 95 percent of the total vacation market, (including) those looking for land-based vacations in Orlando and Las Vegas," said Ms. Freed. According to the Carnival executive, the state of market will not affect Carnival's ordering activity. "We're going to order because of the success of our products," she said, adding: "I think families will continue to be a strong emphasis for us." Mr. James explained that Princess will concentrate on providing customers with a variety of choices, in areas such as accomodations, leisure activities, and dining facilities. He said that the company's goal is to "provide more choice to decrease regementation and expand (the) market." Accomplishing this goal provided part of the inspiration for the cruise line's newbuild program. "We already committed over a billion dollars to newbuilding. We're not interested in being the largest, we're interested in positioning ourselves as being in control of our sector." Market Influences Direction Of Newbuild Design With an eye towards creating clear business plans for ordering and marketing the next-generation fleet, cruise lines have begun implementing R&D and design projects focused on producing ships that will succeed in the current cruise ship market.

Princess Cruises'overall goal of increasing passenger choice will translate into the design of its newbuilds. According to Mr.

James, the line's new vessels will feature an increased concentration on interior design, in an effort to create more intimate settings and "decrease the effect of mass market." In dining facilities, for example, creative use of wall partitions and decorative structures will be employed in order to create the illusion of dining with 20 people as opposed to 300. In order to further intensify consumer appeal, multiple dining facilities as well as entertainment complexes will be incorporated into the design of the new fleet.

Royal Caribbean is currently involved in coordinating the efforts of its in-house newbuilding department of naval architects and engineers with a major yard interest in order to define its next generation of newbuilds. The project, known as Project Eagle, is aimed at emulating the success of the line's 1990 newbuild design project — Project Vision — whose ships are now entering the consumer market. As stated by Mr. McLeod, "We have an agreement with Mitsubishi to work with them in the development of this concept. This work is ongoing." Carnival Cruise Line, a company which prides itself on serving passengers "aged two through 92 years old — the young at heart," is designing its new fleet with a wide audience in mind, as evidenced by the variety of facilities that will be found onboard each ship, including children's playrooms, casinos and sports bars. Ms. Freed also stressed that the emergence of the large-sized ships would not eliminate the company's newbuild design efforts in the 70,000-ton range. "I think the 70,000-ton Fantasy ships will continue to be ordered because of the flexibility of being able to move in and out of port. It's not just the big ships that will be ordered, " said the Carnival executive. She added that Carnival will continue to design ships capable of traversing the Panama Canal, and fulfilling a variety of worldwide itineraries.

According to Mr. McCaul, newbuild orders "will be mostly in the middle range," consisting of "sleek, yacht-like ships," with smaller cabins and large table settings. It is his belief that owners will design newbuilds based on 90 percent of what a customer would get from a luxury ship, without spending the extra 10 percent in cash. He pointed to the failure of Kloster's Royal Cruise Line as an example of the trouble that can result from building ships solely suited to serving a smaller, high-end market.

"100,000-gt ships will probably generate more demand. People seem to like the idea of being on bigger ships," said Mr. McCaul. Consolidating Sector Marked By Arrival Of New Market Player To some extent, the competitive «• market is expected to force the consolidation of owning lines. "We've reached the point where older vessels, particularly (those) in the hands of smaller companies, are going to begin to struggle in the consolidating industry," said Mr. McLeod. But as pointed out by Mr. James, a synergistic merger can produce positive results, including significant cost savings and increased commercial strength, both of which often follow the consolidation of two interests, with the need to merchandize two brand names reduced to marketing efforts for a single company.

To some, the arrival of a new industry market player may seem untimely, with a number of failed business ventures and forced consolidations spreading across the market. However, the emergence of Disney Cruise Lines in 1998 will highlight the fact that the future of the cruise industry lies in the hands of high-profile players. As pointed out by Ms. Freed, the January 1998 arrival of the 85,000-ton, 2,400-passenger, Fincantieri- built Disney Magic is a much-anticipated event for the emerging cruise market players. "I think Disney is going to do a tremendous amount of good for the industry. We will benefit from the marketing and advertising the company will do. I think Disney will pull first-time cruisers into the market," said the Carnival executive.