Cruise liner growth 'set to continue'

Modern cruise ships' enormous size helps reduce the cost per head and so the price each passenger pays

Following the deadly capsizing of Costa Concordia off the coast of Italy, the value of shares in parent company Carnival Cruise Lines fell some 20%.

It might be tempting to think that the fall reflects how much investors think Carnival will have to fork out to cover costs such as refunds and compensation payments to passengers, legal expenses, the rescue and repair bill, or loss of earnings while the ship is out of action.

Indeed, in a filing with the US stockmarket regulator SEC, the company refers to how it is partly self-insured: "We are not protected against all risks, which could result in unexpected increases in our expenses in the event of an incident."

But given the extent of its cover, it seems reasonable to expect that Carnival's costs will be largely covered by insurance, according to a broker quoted by Italian newspaper Il Sole 24 Ore.

The broker says the ship itself is covered to the tune of 450m euros, with liability costs to passengers and crew covered up to some $3bn (£1.95bn; 2.3bn euros).

A so-called loss-of-use claim could reach about $90m, according to one estimate, though it is not clear who would cover this.

Industry-wide problem

Against such uncertainty about the costs Carnival will incur, investors are looking at the group's role as a reliable bellwether in the industry.

Carnival not only owns the sinking ship, but also 11 cruise line brands, such as P&O Cruises, Princess Cruises and Holland America Line, which means it controls about half the global cruise market.

The fall in Carnival's share prices could therefore also be seen as a rough indication of how hard the £34bn cruise liner industry will be hit by widespread customer desertion.

"Any time you have something like this happen, there is worry that it will have an impact on how the public views the safety of the industry in general," says Sharon Zackfia, a research analyst with global investment services company William Blair & Co.

Bad timing

In other words, the cruise liners are worried that frightened customers will stay away - with bookings for the summer season, when the industry makes the bulk of its income, expected to see the greatest fall-off.

"There is the potential that this event could weigh on booking trends across other cruise brands," the credit ratings agency Standard & Poor's (S&P) observes in a report published by London Stock Exchange.

On-board activities have come a long way since the early days of cruising

"The timing of this event could weaken 2012 booking trends, given the fact that it occurred early in the wave season, the two-to-three month period in which a substantial portion of cruise business is booked."

A slowdown in bookings is expected to be met with reduced prices, which in turn will reduce total earnings - even from loyal customers.

Coming at a time when demand was already weak, this is the last thing the industry needs.

"This adds insult to injury, with struggling economic markets in Europe and all the unrest you've seen in the Middle East," says Morningstar equity analyst Jaime Katz.

Indeed, even "prior to this event, our outlook for the cruise sector in 2012 was for minimal growth in net revenue yields and a slight decline in operating costs, including fuel", according to S&P.

Massive cruise ships

Few industry observers expect the capsizing to have any major long-term impact on the cruise industry, however.

During recent decades, the cruise industry has emerged as a robust, albeit not always profitable, sector with notable growth both in the number of cruise ship and in the size of those ships.

These days, many of the vast ships are kitted out with extensive arrays of entertainment facilities such as cinemas, nightclubs, restaurants and sports facilities such as swimming pools and tennis courts.

These larger ships have helped cruise liners cut prices, so during the past two decades the industry has experienced annual growth in passenger numbers of some 7.4%, as cruises have become a holiday of choice for ordinary people as opposed to being a pursuit only the wealthy could afford.

Each of them brings in revenue for the cruise liners of about $240 per day, according to Cruise Market Watch.

In addition, passengers and crew spend some $15.5bn at all cruise ports around the world, it says.

Further growth

As the customer base has both broadened and expanded, there has been a tenfold rise in overall passenger numbers from some 500,000 in the early 1970s to about five million in 1990 and about 19 million in 2010, according to Risposte Tourismo, an Italian tourism think tank.

"The cruise industry as a whole is pretty healthy, and it's growing," observes maritime lawyer Jack Hickey.

New cruise ships, such as Disney Fantasy with its playful interior, could help attract new customers

Several enormous new ships - including Disney Fantasy, Carnival Breeze and MSA Divina, are scheduled to enter service during 2012, adding some 10,000 berths to the industry's overall carrying capacity, according to Cruise Market Watch.

"These ships will generate another $2.3bn in annual revenue for the cruise industry," according to the industry analysts.

"The more people who have cruised, the more who will tell others, the more who will want to cruise too.

"By 2015, 22.3 million cruise passengers are expected to be carried worldwide."

In other words, the cruise industry behaves like a massive ship at sea. It might slow down from time to time, but it takes a lot to bring it to a standstill.