Uncharted Waters: The Impact of COVID-19 on the Cruise Industry Mar 4

The cruise industry has seen immense setbacks since even before many of the passengers and crew on board the Diamond Princess became infected with COVID-19 in February. On March 8, the Centers for Disease Control and Prevention (CDC) advised people to avoid long flights and cruises.

To understand the industry’s situation better, Lotta Nygren of GLG’s consumer team in London spoke with Charles Funk, CEO of Pacesetter Tours, a full-service travel agency in Nashville, Tennessee. In the industry since 1988, Funk is also a nationally known author and instructor in cruise agency operations and profitability improvement, and he’s been a columnist for Travel Weekly. He previously served on the travel agent advisory board for Vacation.com as well as Norwegian Cruise Line and Premier Cruises. The Q&A below, which took place on March 4, has been edited for length and clarity.

GLG: Which cruise lines are experiencing the most impact from COVID-19?

Charles: In terms of cancellations, it’s uniform across the spectrum, but particularly Holland America and Princess because they had a significant presence in the Far East. From a deployment and redeployment standpoint, the least impacted is Norwegian Cruise Line Holdings.

GLG: To what extent are you expecting cancellations in Europe? How likely do you think it is that Asia bookings could return in the second half of the year?

Charles: I don’t think you’re going to see Asia bookings return in the second half of the year. We’re in the middle of the train wreck, and until it’s over, it’s impossible to put a point on a calendar and say we should start seeing things from here. We’re probably looking at seven to eight months after it is definitively stated that the coronavirus threat is in the rearview mirror before we begin seeing pent-up demand take over on bookings.

Unlike a hotel that can perhaps draw clientele and guests from closer in, the cruise ships have a very serious issue if the ship sails and there’s nobody in the bed – it’s not making money. And around 30 years ago, it was not unheard of that if sales were off, a ship would be laid up. There have been times in the last 25 years that a certain cruise line shut down entire decks on the ship because of low occupancy. The problem we have is that in the case of some of the cruise lines, they have such a high debt service obligation that they must earn something.

GLG: How will cruise lines counter this decrease in demand? How effective do you think those measures are likely to be?

Charles: We’re going to see pricing get even more aggressive than it has been in the last two weeks, wherein we see a race to the bottom in some respects for certain itineraries to fill the ships. We have seven-night cruises in the Caribbean for $249. Now, granted, that’s an inside room that does not include taxes or gratuities and that sort of thing. Another cruise line is running new promotion selling balcony staterooms at the rate of an inside state room, and they’re selling seven-night cruises from $249 per person and they’re offering a $99 reduced deposit. These examples highlight the fact that cruise lines will do whatever they have to do to put people on ships. Pricing can drive people to take a cruise, and they will measure the risk-benefit ratio of doing so and act accordingly.

GLG: What’s the minimum capacity at which ships can operate before it becomes too unprofitable to do so?

Charles: This is speculation on my part, but if it slips below 85% occupancy, then it becomes problematic. The mass-market cruise industry, served by Carnival Cruise Lines, Norwegian Cruise Lines, Royal Caribbean, and others, is not about selling a ticket to get on the ship. One need only look at a typical cruise line’s 10K report to see that, absent onboard spend, the corporation would have lost money. People spend money when they get on the ship. Absent onboard spend, Carnival Corporation would have lost money because the profit from onboard spend exceeds its pre-tax profit.

The catch-22 in this is that dropping the price of a cruise to $299 or $499 from $1,200 attracts people who are stretching the rubber band to spend $400 for a cruise. That’s important because once they get on the ship, they don’t spend money.

GLG: What cancellation policies are cruise lines using? Are they changing at all with that decreasing demand situation now?

Charles: The short answer is that cancellation policies are fluid. The policies for some cruise lines have changed three times in the last two weeks. Suffice it to say that some cruise lines are more generous and are allowing people to shift their upcoming cruise to a later sailing date with no penalty for cancellation. The airlines are cooperating. Delta, for example, has abandoned the Milan, Italy, market out of the United States, and they are offering rather generous change policies for airline tickets. Cruise lines, however, are not offering wholesale cancellations. They must balance the operational realities of their companies against the forward-looking goodwill that they can destroy with the stroke of a pen by being too draconian with the policies they implement.

GLG: Can you talk a little bit about the impact of coronavirus on original equipment manufacturers (OEMs)? How severely do you think new builds could be impacted, particularly if demand continues to decrease?

Charles: It is reasonable to believe that we may see some of the many new builds coming between now and 2026 delayed. It’s safe to say that we may see delays or postponements in putting ships in the water or stretching out construction. That said, I’ll tell you that, in the short term, I don’t know where this ends. Don’t expect that all the new hulls currently under construction will come into the water at the times they were originally planned.

On the other hand, I will tell you with confidence that the cruise industry is extremely robust. It is not perhaps the bottomless well that some cruise line executives want us to believe it is in terms of new prospects because the reality is there are people who will never take a cruise. But in the long term, I still see it as a growth industry and one that’s worth the investment.

GLG: What are cruise lines doing to avoid another Diamond Princess?

Charles: They have implemented extremely strict pre-checks and intensive questioning as to where someone has been or not been in the last 14-30 days. If someone presenting to board a ship has been to Japan, Korea, China, Macau, Hong Kong, Iran, they’re not getting on the ship, period. Health screenings to ask about whether someone has had a cough, a temperature, a fever, whatever, in the last 14-30 days have escalated. It’s very common that non-contact temperature sensors are used on people trying to board a ship. If that temperature is above 100.4 Fahrenheit, they’re not getting on the ship. It’s that simple.

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About Charles Funk

Charles Funk has been the CEO of Pacesetter Tours, a full-service travel agency in Nashville, Tennessee, since January 1988. He is a nationally known author and instructor in the field of cruise agency operations and profitability improvement. Charles is a columnist for Travel Weekly, a premiere travel industry periodical; the co-author of three books on travel agency management; and a former member of the travel agent advisory board for Cruise Lines International Association.

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This article is adapted from the GLG Teleconference, “Cruise Industry – Coronavirus Implications.” If you would like access to this teleconference or would like to speak with Charles Funk, or any of our more than 700,000 experts, contact us.

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