Case study 1. what global forces have contributed to the growth of

Carnival Cruise Lines: Exploiting a Sea of Global Opportunity I must go down to the seas again, for the call of the running tide Is a wild call and a clear call that may not be denied –– John Masefield, The Seekers In recent years, the call of the sea has spurred the cruise business. 67 Sea voyages, of course, have had an aura of mystique for centuries, but only in recent decades has the experience of the open sea and exotic ports of call been available to a mass market. Historically, the recreational sea voyage was an essentially elitist endeavor. Certainly, members of the lower classes occasionally found themselves on the open sea, but usually as displaced job seekers or crew members aboard ships. In recent years, however, the cruise industry has undergone a sea of change of sorts, and the demographic groups it now targets include the working middle class as well as the idle rich. What’s a Cruise, and What Happened to the Cruise Industry? A “ cruise” is a sea voyage taken for pleasure ( as opposed to, say, passage on a whaling ship, an assignment in the navy, or a ferry ride to get you from point A to point B). Typically, passen-gers enjoy cabin accommodations for the duration of a fixed itinerary that brings them back to their original point of embarkation. There was a time when ships ( called passenger liners) transported people across oceans and seas for business or pleasure, but the advent of transoceanic air service after World War II offered a speedier and less expensive alternative, and airlines captured passengers from ocean liners. The competitive balance tipped decisively in the 1960s, when advances in jet technology made air travel a viable option for a growing mass market of budget- minded international travelers. Converting more shipboard space to low- priced accommodations, shipping lines countered with the reminder that “ getting there is half the fun,” but one by one, they retired the great luxury liners that had plied the seas for decades. The Contemporary Cruise Industry Today, the cruise industry is dominated by three companies— Carnival, Royal Caribbean, and Star— which command a combined 91 percent of the market. By far, the largest of the three is Carnival Corporation, which operates a number of lines that it calls brands. Map 1.2 shows the headquarters of these brands. Carnival offers cruises to every continent on the globe, including Antarctica. Carnival Corporation was born when Ted Arison, a former partner in Norwegian Cruise Lines, saw an opportunity to expand mass- market sea travel by promoting the idea of the “ Fun Ship” vacation— an excursion on a pleasure craft designed to be a little less formal and luxurious than the traditional ocean liner. The timing was right. Sea travel still projected a cer-tain aura, and Arison found that he could buy a retired liner at a good price. Moreover, there were more people in the world who could afford an ocean- borne vacation. On top of every-thing else, a lot of these vacationers gravitated to holidays— group tours, theme- park visits, and sojourns in Las Vegas— that were compatible with the Fun Ship concept. Arison bought a secondhand ship, refurbished it in bright colors, rigged it with bright lights, and installed discos and casinos. On its maiden voyage from Miami in 1972, the Mardi Gras ran aground with 300 journalists on board, but, fortunately, neither the ship nor Arison’s business concept was severely damaged. Embarking from Miami to such destinations as Jamaica, Puerto Rico, and the U. S. Virgin Islands, the Mardi Gras soon became successful. Over time, Arison added not only ships but also whole cruise lines to his fleet. Today, each brand operates primarily in a designated area of the world and is differentiated from other Carnival brands in two ways: ( 1) in terms of geographically pertinent themes ( based in Italy, for instance, Costa boasts a Mediterranean flavor); and ( 2) in terms of cost per cruise (the cost per night on Cunard and Seabourne cruises is much higher than that on Carnival cruises). Doing Business in International Waters Given the nature of its business, it should come as no surprise that Carnival— indeed, the whole cruise- line industry— is international in scope. Take the nationality of competitors. Companies can obtain so- called flags of convenience from about 30 different countries. Here’s how the process works. By registering as, say, a Liberian legal entity, a company can take advantage of lower taxes and less stringent employment rules. Legally, Carnival is a Panamanian company, even though it’s listed on the New York Stock Exchange, has operating headquarters in Miami, and caters mainly to passengers who set sail from the United States. Although cruise- line revenue is subject to neither Panamanian nor U. S. income taxes, Carnival does have to pay substantial “ port fees” wherever its ships drop anchor. Only a few cruise- line offerings— such as excursions along the Mississippi River, around the Hawaiian Islands, or among the Galapagos Islands— can be characterized as purely domestic. Even trips from the U. S. West Coast to Alaska are “ international” because they stop in Canada. By far the most popular destination for cruise passengers is the Caribbean/ Bahamas, largely because the area boasts balmy weather year round. During summer months, Carnival shifts some of its ships from Caribbean/ Bahamas to Alaskan and Mediterranean routes. Obviously, cruise ships go only where there are seaports, but Carnival cooperates with ( and owns some) tour operators who provide almost 2,000 different onshore excursions ( for additional fees). Carnival estimates that half its passengers to the Caribbean take shore excur-sions to such sightseeing attractions as the Mayan ruins in Belize. Passengers on Carnival’s Princess Lines, which serves Alaska, can helicopter to a glacier for a little dogsledding. What It Takes to Operate a Cruise Line Ship Shopping Not surprisingly, ships constitute the biggest investment for cruise lines. Shipyards in several countries— including Finland, France, Germany, Italy, Japan, and South Korea— are capable of building ships that meet cruise- industry needs. To add to its global fleet, Carnival secures bids from all over the world. Because shipbuilding employs so many people and uses so much locally produced steel, governments often subsidize the industry— a practice that works to the benefit of the cruise- line industry by offering less expensive prices for ships. For instance, the Italian government awarded the shipyard Fincantieri about $ 50 million in subsidies to build five ships sold to Carnival for $ 2.5 billion for a 2010 and 2011 delivery. Where to Find Able- Bodied Seamen Shipping companies— including cargo and cruise lines— scour the world for crew members who not only can perform specialized tasks but who are properly certified ( by international agreement, a registered crew member can enter virtually any port in the world). Cruise lines, of course, have special staffing needs— notably, crew who can interact with passengers. About a third of all the world’s ship crews are from the Philippines, not only because of reasonable labor costs but because Filipinos are generally fluent in English. On a typical Carnival ship, crew members hail from over 100 countries, and Carnival maintains a range of employee- training programs, including instruction in English as a foreign language. Casinos and Other Amenities Although Carnival has thrived with the concept of informal cruises for a mass market, each of its cruises offers one or two formal nights per week; theme- based dinners centering on national cuisines; a variety of musical entertainment, games and contests; and spas and athletic facili-ties. Because cruises operate outside the jurisdiction of any national authority, they’re not sub-ject to any national laws restricting gambling. Casinos, therefore, are onboard fixtures. Passengers can also shop for merchandise from all over the world. Indeed, art deal-ers occasionally hold shipboard auctions and seminars, and one dealer sells about 300,000 pieces of art per year on cruise ships. As you might expect, the pricier the cruise, the pricier the average objet d’art. The Overseas Environment Because Carnival operates around the world, it has the advantage of treating the whole world as a source of both customers and supplies. In addition, because its chief assets are ocean borne, Carnival can ship capital and other assets to places where they can best serve the com-pany’s needs. However, it’s also vulnerable to a wide range of environmental disturbances. Let’s take a look at a few of these. Political Issues After terrorists seized a cruise ship in the Mediterranean in 1985, the major cruise lines insti-tuted a policy of strict security checks for boarding passengers. Even before 9/ 11, then, the cruise- line industry has had in place a security protocol that the airline industry didn’t estab-lish until afterward. In the wake of 9/ 11, when cancellations started to exceed bookings, Carnival increased the number of U. S. ports from which its ships embarked so that passengers with a height-ened fear of flying could reach points of departure by land. Carnival also redeploys cruises to avoid areas in which passengers might face danger from political upheaval or crime, such as suspending cruises to St. Croix in the U. S. Virgin Islands because of its high crime rate. Further, Carnival does not stop in Cuba, a popular tourist destination, because the U. S. gov-ernment limits travel there by U. S. citizens. Health Issues In 2006, almost 700 people on a Carnival transatlantic cruise were stricken with a virus that caused diarrhea and vomiting, a type of outbreak that had occurred sporadically in the past. Cruise operators have found these outbreaks hard to control because of the close contact among people on board a ship. More than once, Carnival has had to take an infected ship out of service to eradicate all traces of the virus; the process involves sanitizing every object on board, down to the poker chips. When the H1N1 flu ( swine flu) hit Mexico in 2009, Carnival modified itineraries temporarily to avoid Mexican ports. Economic Issues Buying a cruise is generally considered discretionary rather than priority spending. During recessions, people are more apt to take shorter cruises and to embark from nearby ports rather than flying to faraway points of departure. Interestingly, however, in comparison with other segments of the tourist industry, cruise lines have fared well during economic down-turns. Why? This is due in part to their all- inclusive per diem prices that are often bargains when compared with the cost of travel to major cities and popular resorts. In addition, fixed cruise- line prices spare passengers the added risk of encountering unforeseen unfavorable exchange rates. Nevertheless, in 2009, Carnival offered discounts because of the global recession, which attracted more passengers but lower profits. But there is some concern in the industry over uncertain gasoline prices and mortgage interest rates, which might leave more households with too little discretionary income for tak-ing cruises. In addition, oil price increases have upped Carnival’s fuel costs at a time when many potential passengers want lower prices. The Weather Whenever there are hurricanes, Carnival may have to cancel trips, switch embarkation points ( e. g., from Galveston to Houston for six weeks in 2008 because of Hurricane Ike), or change destinations. Typically, passengers on canceled trips received full refunds and those on short-ened cruises partial refunds. Concluding Remarks Overall, the outlook for Carnival and the cruise- line industry is sunny. With prospects for grow-ing incomes ( despite a global recession) in many countries ( such as China), more people will have discretionary income to spend on tourism. Only 16 percent of the U. S. population has yet to take a cruise— a potential two- edged sword. On the one hand, this number indicates growth potential. On the other hand, people who have taken a cruise continue to be repeat customers, and the percentage of first- time customers is in fact declining. On the downside, then, industry observers worry that experienced cruisers will tire of visiting one port that’s pretty much like another and that noncruisers will still prefer such destinations as resorts to ports of call.

QUESTIONS

 1. What global forces have contributed to the growth of the cruise- line industry?