Th e E c on om ics o f C r u i s in in g : Abstract Th i s ar ti cle offe offerr s a mi croeco croeconomi nomi c ana l ysi ysi s of the i n t er er n a t i on a l m a r k et f o r shor t ocean ocean cr ui ses, as th e maj or eleme element nt of global c r u i si n g a ct ct i v i t y. y. I t d r a w s at tenti on to some some specif pecif i c i ssues i n cr ui si ng e eco conomi nomi cs, cs, such as problems wi th u ni ts of of meas me asur ur eme ment nt an d th e multinationally footloose nat ur e of resour resour ce acqui si ti on for t he ind ustr y. The paper paper offerr s an ana l ysi offe ysi s of suppl suppl y considerations and discusses the mark et stru ctur e of the i ndu str y as a compe competi ti ti ve oli gopoly gopoly domi domi na ted ted by th r ee cru i se l i nes nes as suppl suppl i er s and th e Car i bbe bbean an a s th e mai n des desti nat i on cru ising r egion. Key var i abl es ar e shown to be economi conomi es of scal scal e, pr i ci ng a n d p r o d u ct ct d i f f er er en e n t i a t i on .
A n a p p l i c a t i on on t o t h e s h o r t o ce ce a n cr u ise m a r k e t
Ad r i a n O . B u l l
Introduction Since the 1960s, cru cru ising has develope developed d from being a su bstitut e off-season use for passenger liners normally engaged on line voyages to a subst an tial, an d often often footlo footloose, ose, sector of of tour ism activity. Ships have become destinations or floating resorts rather than primarily means of transpor t, a nd m arkets have been balkanised into many types. This paper proposes that one of these types - the market for short ocean cruises - can be defined in economic terms as a separate market. Glo Globally, bally, this market ha s perhaps the highest highest internat ional ional pr ofile in te rm s of cr u isin g, a nd dis pla ys cha ra ct er ist ics of intern at iona iona lisat lisat ion ion an d econo economic mic organisation which which ar e unique. The paper an alyses an d discusses th e ma in m icroec icroecono onomic mic issues involve involved, d, with particular reference to operat ing economic s and the market structure of the industry.
C a t e g o r i e s o f c r u i s i n g m a r k e t - a n e c o n o m i c p e r s p e c t iv iv e
Ad rian O. B ull is Prin cipal L e ct ct u r e r i n T o u r i s m a t t h e University of Lincolnshire and Hum bersi berside, de, England.
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In or der to i nvestigate t he economics of cruisin g, it is first n e c e s s a r y t o d e fi fi n e c r u i s i n g p r od od u c t s a n d m a r k e t p l a ce ce s . O n e approach (Hobson, 1993a) is to treat the whole of cruising as being a single, but segmen ted, ma r ket, wh ere produ cts ar e high ly diff different iated a ccording ccording to consumers’ consumers’ requiremen ts, but where t here is an assu mpt ion ion of overall overall competitio competition n an d substitu ta bility. bility. Hobson, Hobson, for example, suggests that there ar e four market segments: mass, middle, luxur luxur y an d specialty. specialty.
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With different iated pr oducts, th e n o t i on o f w h a t c on s t i t u t e s a n individual and specific market ma y be problema tical. Any two or mor e pr odu cts a re u su a lly con sid er ed t o b e of t h e sa me generic commodity class if there is a re a son a bly h igh leve l of s u b s t i t u t a b il it y b e t w e e n t h e m , wh ich m ay be mea su red by a positive cross-price ela st icity of d e m a n d . H o w e ve r , t h e r e i s n o clear definition of the degree of substitutability (or of a specific v a l u e o f c r o s s -p r i ce e l a s t i c i t y ) necessary to determ ine the c utoff poin t for pr odu ct s t o be c la s s i fi e d a s b e i n g w i t h i n t h e sa m e ma rk et . Th is la ck of definition results in considerable legal a rgument in ant itrust law cases (Wats on, 1977). The bound ar ies of a cr uising ma rke t ma y be ‘d e f in e d ’ qu a lit a t ive ly by r ecogn it ion amongst producers, and amongst c on s u m e r s , t h a t t h e p r o d u c t s traded are performing essentially t h e s a m e f u n c t i on , o r p o s s e s s som e ba sic hom ogen eou s char acter istics. This implies, for consumers, that there is some d e t e r m i n a t i o n o f in d i ff e r e n c e between products based on these chara cterist ics. In the long run this may lead to an identifiable pr ice ne xus a mon gst cru ise products, al though in the short ru n th e differ en tia tin g characteristics between products and the way they are marketed may produc e price and de mand v a r i a t i on s w h i ch s u g g es t t h a t p r o d u ct s a r e n o t r e a l l y i n t h e sam e ma rket at all (Dilley, 1992). Within any one market, the level of homogeneous characteristics sh ould be su ch a s t o crea te sub stit ut a bility on both th e su pp ly an d dem an d sides ( C a r l t o n & P e r l o ff , 1 9 9 0 ) . I n s u p p l y t e r m s t h i s i m p l i es t h a t both the production function and the cohesi veness of the market pla ce const ra in t he pr icin g of products. A market may be bounded within a geog r a ph ic a r ea (W a t son , 1977). As location theory shows, in terms of supply, production
c os t s a n d m e t h o d s m a y d i ff er greatly from one area to another, or transport costs may be so high as to const ra in su pp ly ar ea s (Isa rd , 195 6). In t er ms of d e m a n d , t r a n s a ct i on c os t s a n d p o o r e r c on s u m e r i n f o r m a t i o n a bou t m ore sp a t ia lly r em ote alternatives act as constraints. In addition, governments may impose trading r egulations wh ich bound ma rkets. Whilst it is evident that many cruise lines draw upon custom from around the whole world, owin g to the in h er en t ly int ern at ional na t ur e of m ost cruising pr oducts, th e above analysis s uggests that there a re in econom ic t er m s se ver a l cru ising ma rk ets , wh ich a re bounded both geographically and by limitations on substitutability in both supply an d deman d. This wou ld pr odu ce a r a n ge of markets whose operation would differ notably one from another. A schema of such markets might resemble those shown in Ta ble 1. The last of these markets, that
f or s h o r t o c e a n c r u i s e s , i s t h e la rg est a n d mos t h ea vily resear ched area of cruising. The remainder of this paper will use th is ma rk et as a n exem plar because of its importance, but tr a n sfer ab ilit y of find ing s t o other mar kets would be limite d by t h ose differe n ces ou t lin ed above. The short ocean cru ise market Th is m a rk et accoun ts for t he la rg est ar ea of act ivit y in cru isin g, wit h a ma jor contribution to specific regions of th e world’s tourism. There ar e differen t unit s of meas urement, su ch as cru ise pa sse nger numbers, berths available, and p a s s e n g e r d a y s . A fe a t u r e o f cr u is e in du st r y r ep or ti n g is disagreement over sta tistics.
Passenger nu mber s are cited as a m eas ur e of dem an d (Fells, 1995), although perhaps they are m or e a m ea su r e of con su m er numbers at market equilibri um. W or l d o ce a n c r u i s in g n u m b e r s
Table 1: Overview of Cruising Mark ets.
L o c a t io n /t y p e
Com m en t
S u p p ly / m a r k e t s
River, canal an d la k e cr u is es
Several mar kets a ccor d in g t o loca t ion
Sma ll, shallow-draft vessels, oft en d om es tic m a rk et s, cabotage-limited
Special inter est (such as sail, edu ca tion or ) explor a t ion
Worldwide ma rk ets, highly differentiated
Often pur pose-built vessels, specialist crews, a degree of m on opoly t h r ou gh differ en t ia tion
Long distance ocean cruises, including RTW cr u ises
Single world mar ket
Large vessels, often relying on ‘tr adition’ an d luxur y, r esou r ces a cqu ir ed in t er nationally
Extended ferry ‘min i-cru ises’
Usually domestic or J oint product with car ferr y betwe en coun tr y pa irs, ser vices (see Peisley, 1992a ) especially in W Eu rope
Short ocean cruises
World market, but heavily dominat ed by U.S. demand. Differentiat ed by location, dominat ed by the Car ibbean
Mostly large vessels, usually pur pose-built for ma ss mar ket cruising
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Ta ble 2: In ternat ional Cruise Capacity 1995, in Percentage of Berths.
J une
Ca r ibbea n Medit er r a n ea n Ala ska / West Coa st of Nor t h Am er ica Rest of t h e wor ld Ou t of ser vice Tot a l
Decem b er
25 20 17 30 8
50 2 0 30 18
100
100
Sour ce: Ada pt ed from CLIA (1996).
(over 99% of whom are short sea cruise passengers taking a cruise of les s th en 14 n igh ts ) a r e estimated at 6.3 million (Darnill, 1995), or 5.7 million (CLIA, 1 9 9 6 ) . G r o w t h o f 1 0 -1 2 % p e r ann um in t he decade to 1993 has been followed by static numbers since th en.
Berths available are a measure of supply, assuming constancy of s h i p op e r a t i o n . I n 1 9 9 5, s o m e 129,000 berths were available in ocean cruise ships (Fells, 1995; P e i s l e y , 1 9 9 5) , a l t h o u g h s o m e percentage of these are always o u t o f s e r v i ce , o w i n g t o r e f i t s , m a in t en a n ce or sh ip repositioning. The geogr aph ical allocati on of supply is stron gly or ient ed t o t he Ca r ibbea n, as shown in Ta ble 2. There is disagreement, h owever, over t h e n u m ber of ber t h s a vaila ble from in dividu a l suppliers, since there is crosschartering and shifting ownersh ip of sh ips an d lines . Th is issue will be further explored in the section on m arket structure.
Passenger days a r e t h e m a i n out pu t m ea s ur em en t of t h e indu str y worldwide. For 1994, th ey are estima ted a t 34.9 million (Blum, 1995) and 37.7 million ( F e l l s , 1 9 9 5 ) . B l u m es t i m a t e s t ha t a bou t on e-t hi r d of t he se ( 12 . 2 m ) a r e d a y s s p e n t i n t h e Ca ribb ea n. For 1995, C LIA estimates a usage of about 37 m i l l ion p a s s e n g e r d a y s w o r l d wide, related to a supply of some 46.3 mi llion p as sen ger ber th days, giving utilisation of 80%.
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This utilisation rate compares very unfavourably with those of th e pr evious t en year s which ra nged between 88% an d 98%. It is caused by a sharp increase in the supply of berths as new ships a r e l a u n c h e d , c ou p l e d w i t h a static or marginally declining dema nd. Although th ere is disagreement over precise statistics, most commentator s concur that there is a general trend towards oversu pply (Miller, 1996). S o u r c i n g fa c t o r i n p u t s Cruising provides an extremely good oppor tu ni ty for m ult inational operation in tourism, a c co m p a n i e d b y i n t e r n a t i o n a l a c q u i s i t i on a n d d e p l oy m e n t of factors of production where ver t here is t he highest m argina l productivity. Conventional investment theory
applied to international tourism su ggest s t ha t capit al will be sou r ced in te rn a ti ona lly from wh er eve r it ha s th e h igh est ma rg in al efficien cy over th e investment cost (Bull, 1995), and t h a t o t h e r fa c t or i n p u t s w i l l b e obta in ed us u ally from t he t ou r is m d es t in at ion cou n t r y, u n l e s s t h e r e a r e s i g n i f i ca n t savings or productivity benefits av a ilab le by a cqu iri ng th em elsewh er e a nd t he h ost g ov e r n m e n t i m p os e s n o i m p o r t cont rols on th ese factors. At th e ver y lea st , la n d a nd t our ism resour ces m ust norm ally b e sou rced fr om th e des t in a tion country. N o su ch lim it a t ion s a p pl y t o cru isin g. Cr u ise lin es can o p e r a t e a s a l m o s t p e r f e ct m u lt in a t ion a l cor por a t ion s, provided that they operate cruise sectors between ports of different coun tr ies. [If cruise lines opera te between ports of t he sa me country, then cabotage rules are likely to apply, which usually restri ct car riage to o perators of t h a t co u n t r y . T h e r e h a s b ee n considerabl e debate recently in t he U.S . Con gr ess a bout th e effect of cabotage. Oth er tha n American Ha wa ii Cru ises, a ll ocean cruises operating from the U.S. are foreign-operated, and escape cabotage rules by sailing to, or back from, non-U.S. ports.] Not even la n d a n d t our ism
Table 3: S ource of Inpu ts for Major Cruise Lines.
Company ownership:
USA, Israel, UK, Norway, Greece, Ukraine
Ca pit a l:
U SA, J apa n , Ger m a n y, UK
Ma r in e r egis tr a tion :
P a n a m a , L ib e r ia , B e r m u d a , C yp r u s , B a h a m a s (Hobson, 1993a )
Sh ips:
N or wa y, F in la nd, I ta ly, Ger ma ny (ya rd s su ch a s Meyer Werft, Fincantieri, Kvaerner, Bremer Vulkan and Alsthom Atlantique)
Officer s:
2 6 % I t a li a n , 2 2% G r ee k , 2 1% N or we gia n , 8 % British (adapted from Schwartzman, 1994)
Cr ew:
M os t ly i n t e r n a t ion a l , w i t h m a n y s ou t h er n Eur opeans and Filipinos
B un k er in g:
C he ap es t s ou r ce on cr u is e or r ep os it ion in g
THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96
resources need to be acquired f r o m a s p e ci fi c c ou n t r y . A s a result, cruise lines are relatively footloose businesses which source f a ct o r i n p u t s f r om a r a n g e o f coun tr ies. Table 3 shows wher e th e ma jor cru ise comp an ies acquire their major inputs. The footloose nature of cruising h as been an adva nt age to countries which otherwise would e a r n l it t l e fr o m t o u r i s m ( B u l l, 1995). For exa mple, CTC Lines, n ow Uk r ain ian -owned , wa s developed by the former Soviet Union to earn foreign exchange by oper at ing cru ise sh ips in var ious par ts of t he world (Peisley, 1992b) and supplying services to pass engers from all the main demand m arkets. Ocea n cru isin g th er efore is unusual in being a high-cap ital but footloose industry with wide oppor t u n it ies f or in te rnationalisation. O p e r a t i n g e c o n o m i cs In sh ipp ing, c os t s a re traditionally divided into capital costs, fixed running costs, and voyage costs. •
Capital costs include those of purchasing and depreciating vessels, together with interest pa ym en ts on in ves tm en t capital.
•
F i x e d r u n n i n g cos t s a r e a l l th ose which a re incurred when a vessel is put into service (not laid up), and include all areas of insurance and indemnity, cr ewin g wa ges , st or es, surveys, repairs and landside mana gement costs.
•
Voyage costs, which of cour se a re va ri ab le in r esp ect to voyages, include port charges, f u e l c os t s , v o y a g e - r e l a t e d st ores, age ncy an d oth er landside ha ndling costs.
In comparison with cargo vessel operation costs, those in crui se lines ar e pa rt icularly high in certain area s. Firstly, cruise
Costs
Total costs Variable costs Voyage costs Fixed costs
Output
0
Full ship capacity
Figure 1: Th e cost stru cture of cruise shop operation
ships are expensive capital items in com p a r is on w it h ca r g o v e s s e ls of sim ila r t on na ge . Typically, a container liner or dry bulk carrier of 50,000 - 100,000 t onn es ma y cost US $50-100 m (Apelbau m , 1994). Vessels for mass market short ocean cruises a re curr en tly bein g bu ilt , ty pica lly at a r oun d 70,0 00 tonnes, at a cost of US$300-350m ( C L I A , 1 9 9 6 ) . T h i s d i f fe r e n c e r e f l e ct s t h e c os t o f p a s s e n g e r a n d extra crew accomm odation, high quality public areas and amenitie s, and a generall y less ut ilita rian design. Depreciation a nd ins ur a nce c os t s ar e accordingly higher, together with expen sive pa ssen ger liab ility insurance. Secondly, wages costs are compa ra tively hi gh in cruis in g compa red with car go operat ion. Wher e a car go ship of 50,000 tonn es m ay need 20-30 crew (Apelbaum, 1994), cruise vessels of similar size have crews of 40060 0 (Sch wa r t zm a n , 19 94) of whom more than three- quarters will be ‘hotel staff’, catering staff a n d l ei s u r e /e n t e r t a i n m e n t p e r s o n n e l . V oy a g e - r e l a t e d s t o r e s costs, especially for food, beverages, linen and disposables, ar e similarly high. A cruise liner is in effect both a ship and a
resort, and therefore bears the costs of both. A tota l cost f unction for cruise ships is likely to resemble th at in Figure 1, and is similar to those f ou n d i n m a n y ca pa cityc on s t r a i n e d t o u r i s m s e r v i c e enterprises (Bull, 1995). Fixed costs, including the vessel and its depreciation, administrative costs and wages for those crew wh o a re per m a ne n t, r e p r e s e n t a h i gh p r o p or t i o n o f total costs. A vessel cannot be subdivided, so that there is no rea l flexibility in su pply. Voyagerelated costs are incurred when a p a r t i c u l a r cr u i s e i s o p e r a t e d , regar dless of t h e nu mber of passen gers. Variable costs ar e frequentl y compar atively small an d re la t e to t he dir ect provisioning, accommodation and h a n dl in g (b ot h a t se a a n d landside) of passengers. If all berths are sold at their full pr ice, t h en t ot a l r eve n u e increase s a s t h e line TR1 in Figu re 2, an d th e ma xim um p r o f it p o s i t i o n ( t o t a l r e v e n u e minus total costs) will be that of fu ll ca pa city a n d m a xim u m r eve n u e. P r ofit will be t h e amount r epresented by th e line AC in the figure.
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bunkering.
A TR 1
Costs
•
In t he longer t er m, ta king ad va n ta ge of in te r na l econom ies of sca le; th is is achieved by operat ing larger and more economic ships (for example, Carnival, Princess and Royal Caribbean Cruises operated 28 sh ips bet ween t hem in 1995 with a m ean ship size of 47,362 tons and 1 4 29 b e r t h s ( Sc h w a r t z m a n , 1994), but between 1995 and 1998 are commissioning 15 new ships with a mean ship size of 76,370 tons and 2013 bert hs (Fells, 1995)).
•
Making use of the investment in larger ships to expand and diversify t he sup ply of c om p l e m e n t a r y p r o d u c t s o n board, such as bars, boutiques and casinos (Kalosh, 1995); these are in a strong trading position effectively as m o n op o l y s u p p l i e r s t o o n board passengers.
C B Total costs TR 2
Output
0 Full ship capacity
Figure 2: Cru ise costs and revenu e
If th e ma rk et is not st r ong enough to sell all berths at f ull pr ice, t h e cru is e lin e ca nn ot eas ily r edu ce t h e nu mber of ber t hs a vaila ble (an d h ence p a s s e n g er d a y s ) w it h o u t t a k i n g a sh ip out of service. Doing th is would m ean t ha t alt h ough variable and voyage costs would be saved, the fi xed costs (as in Figure 1) would st ill be incurr ed, as would laying-up costs. It is t her efor e pr efer a ble to tr y t o maintain passenger numbers in a lm ost an y wa y pos sib le, th e m ost com m on of wh ich is discoun t in g (Belsky, 1994; Hobson, 1993b; Kalosh, 1995; M i l le r , 1 9 9 6 ). T h i s m a y m e a n t h a t t o t a l r e v en u e on l y r e a c h e s the line TR2 in Figure 2. Filling t he sh ip st ill resu lts in t he sm a llest poss ible loss on a cruise, represented by the line CB. As long as th is loss is less than inescapable fixed costs, it is pr efera ble to m ain t ain th e s u p p l y o f cr u i s e s . I t i s a l s o important to maintain ships in revenue-earning service for as m a ny da ys in t he yea r as possible, sin ce an y sh ip u n der going ma in te n an ce or sitting in port between cruises is a c os t l y was tin g as set ; turnaround times are minimised (Bull, 1995).
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T h u s , s h o r t a n d m e d i u m - t er m supply deci sion in crui sing are related to maintaining demand and revenue, and achieving cost reductions. Demand and revenue ma in t ena nce is r ela ted to pr oduct, pricing, an d othe r aspects of competitive m ar keting, w h i ch a r e c o n s i d e r e d i n t h e followin g se ct ion on m ar k et str uctur e. Cost reductions can be achieved in a nu mber of ways: •
Usin g flags of conven ience for marine registration enables cruise lines to source crews from low-wage labour m ark ets as well as avoiding operating t a x e s or t h e e n for c e m e n t o f c os t l y r e g u l a t i o n s (M e n t z e r , 1989).
•
Reducing crew numbers or onboa rd ser vice, alt h ough p a s s e n g e r - cr e w r a t i o s a n d service quality are important product di fferentiat ion items w h i ch c on t r i b u t e t o h i g h e r selling prices and less-elastic demand (Peisley, 1992b).
•
S a v i n g fu e l co st s b y s a i l i n g more slowly, spending time in ports-of-call where a ship acts as a floating resort hotel, and including in iti nera ries ports wit h che a p or low-ta x fu el
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A consequence of investment in larger units is concentration on m a s s m a r k e t c r u i s e t yp e s a n d locations. In order to main t ain high pa ssenger utili sation rate s with very large vessels, suppliers gather cruises into areas of high d e m a n d , s u c h a s t h e C a r i b be a n a l l ye a r r ou n d , a n d A la s k a a n d the Mediterranean in summer. These areas have good access to, an d sh ort flying ti me s from , generating markets, as well as popular and attractive cruising grounds, weather conditions a nd port s-of-ca ll. Lar ger vessel sizes als o m ea n th a t cr uis in g is physically concentrated to places wit h de ep wa t er acces s a n d ca n a l s or d o ck s w i t h a d e q u a t e width (some new vessels are too lar ge even for t he P an a ma Ca na l). Su ch m as s m a r ke t conce n t r a t ion in evi t a bly in flue n ces t h e n a t u r e of t h e industry and market structure. M a r k e t s tr u c t u r e If th ere is a positive, but not infinite, cross-price elast icity of demand between products in a
market place, then the structure of th at ma r ke t is one of m onop olis t ic comp et it ion or oligopoly. A mon opolist ically competitive market has many firms, a nd n o restriction on en try. Despite similarity in the basic characteristics or performance of pr oducts , e ach firm sells a version of the product which is differen tia ted from other s. Given the definition of the short ocean cruise market offered earlier in this paper, this is what suppliers are doing. However, f ull monopoli st ic com pe t it ion im pl ies c on t e s t a b i l i t y ( B a u m o l e t a l . , 1982) where it is possible for any nu m ber of firms to opera t e sustainably. Free entry to and exit from the market will allow the possibility of a large number of firm s being presen t. Barr iers to en tr y in to a ma rk et m ay includ e pa ten ts an d lega l restrictions, contrived barriers su ch a s h ea vy br a n din g an d advertising, and economies of scale wh ich caus e out pu t a t m in im u m a ve r a ge cos t t o be large rel ative to the size of the market. There are clear barriers to entry i n t h e m a r k e t f or s h o r t oc ea n cruises, in the forms of heavy capital requirements, registration a n d l ic en s i n g r e g u l a t i o n s , a n d the increasing economies of scale in operating vessels of larger size. Th e m ar ke t ha s t h er efor e developed an oligopolistic st ru ctu re, in wh ich a sma ll nu mber of suppliers dominat e the s u p p l y of s h o r t o c ea n c r u i s e s . Tab le 4 sh ows h ow s up ply is concentrated in the hands of a few firms . During the 1990s there has been relatively high turnover amongst suppliers, with some exits from t he ind u st ry , a nu m ber of mergers or t akeovers (which h ave led in part to the predominance of companies such as Carnival), a n d i n t e r - c om p a n y t r a d i n g o f vessels. Since a single large cruise ship can account for up to 1.5 - 2% of ma r k et ca pa city, trading in these mobile assets can qu ickly alter relative volumes
of sup ply an d t he level of concentration in the industry. Concentration has increas ed so that t he “big three” suppliers Carnival, Royal Caribbean and P & O / P r i n c e s s - a c c ou n t f o r alm ost ha lf of all cap acity. In a d d i t i on t h e s e c om p a n i e s a r e reputed to be the most profitable in the industry (Miller, 1996), and are predicted to grow at the expense of smaller, less-well capitalised suppliers (Kalosh, 1995). In relation to the broad choice of s t r a t e g y o p e n t o o l i g op o l i s t s , b e t w e e n c o m p e t i t i o n a n d c oopera tion , t h ere is r elat ively minor overt co-operation between suppliers, th rough the Cr uise Lines In tern at iona l As sociat ion (CLIA). Alth ough CLIA mem bers control 96% of berths offered to N ort h Ame r ican cons um er s (Murphy, 1996) which represents some two-thirds of the worldwide ma r ket, CLIA’s economic r ole is limited to cruise promotion and distribution activity. Individual su pp lier s oper a t e ma in ly as oligopolistic compet itors, usin g pr odu ct differen t iat ion an d p r o m o t i on a s m a j or s t r a t e g i c weapons (Hobson, 1993b; Mintel Int ern ationa l Group, 1993). For e xa m p l e, C a r n i va l C r u i se s a r e v e r t i c a l ly , o r q u a l i t y , d i ffe r e n tia te d a s ine xpen sive, t h e ‘Macdona lds of th e indu str y’ an d as ‘fun’ cruises (Trumfio, 1995), whilst Cu na rd vertica lly d i ff e r e n t i a t e s i t s p r o d u c t s a s prestigious and sophisticated in ord er t o ma in t a in a pr ice differential.
H orizon t al pr odu ct differ en tiation, that is, distinguishing p r o d u ct s b y o ff e r i n g d i f fe r e n t ch a ra cter ist ics ra t he r t ha n d i f fe r e n t q u a l i t y l e v e l s o f t h e sa m e cha r a ct er ist ics, a llows cruise su ppliers to segm ent mar kets and specialise. W hilst this may a pply to all supplier s, who may differentiate by offering different specifications of a key cruising product characteristic such as food (Marti, 1995), it is p a r t i c u l a r l y i m p o r t a n t f or s m a l l e r c om p a n i e s t o e n a b l e th em to crea te a mea su r e of monopoly in niche mark ets. For exa mp le, Walt Disn ey Corporat ion is ent ering th e cruise in du st r y wit h fa mi ly cru ises o ff e r e d a s a c o m p l e m e n t a r y product to theme park visitation in Flor ida (Zbar, 1995). At th e same time, cruise suppliers seek to differentiate their products from those of land-based resorts which in m any ways are substitutes. F or t h e t ype of oligopoly st r uct u re in dica t ed, pr icin g activity is very importan t. With differen tia t ed pr odu cts a nd ca pa city const r ai nt s, a t th e development and entry stage for a cruise line or for a new vessel, decision making is likely to be Cou rn ot-typ e, rep res ent in g competition to set output levels a n d i n s t a l l f i xe d p r o d u c t i v e ca pa city. He nce , t h er e is considerable competition to build new ships of the most ef ficient t ype a nd size (Darn ill, 1995). On ce cap a cit y exis ts , pr ices b e com e t h e s t r a t e g i c v a r i a b l e ,
Table 4: Major Su ppliers of S hort Ocean Cruises 1995 (number of berths available for short ocean cruises)
Op er a tor
Ber th s
Ca r n ival Cor por a t ion P &O Cr u ises (in c P r in cess Cr u ises) Roya l Ca r ibbea n Cr u ise Lin e Klost er (in c NCL an d RCL) Cu n a r d Lin e Tot a l
% of m a r k et
25800 16600 16300 10000 6000
20 13 13 8 5
129000
100
Source: Adapted from P eisley (1995) an d CLIA (1996).
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d e n o t i n g B e r t r a n d -E d g e w or t h type decision mak ing. This twostage a pproach is typical of sun kcost models (Schmalensee, 1992). The concentration on price as a strategic variable is enhanced since cruises are services which are non-storable and perishable, s o t h a t p r od u c er s m u s t a d ju s t prices to influence demand or be left with useless output (Carlton & P e r l o ff , 1 9 9 0 ) . A s a r e s u l t , cruise prices vary acc ording to su ch differ en t ia t in g ch ar a cteristics as th e crew-to-passen ger r a t io or th e a ge of t h e sh ip (Men t zer , 1 98 9), bu t for a n y similar package of cha racteristics prices are highly competitive. Table 4 shows daily rates char ged by a n um ber of ope r a t or s for similar cruise products in 1995. Table 4 indicates that, given the degree of differentiation between opera t ors, sh ips typ es an d ser vices, a nd differin g cru ise locations and lengths, there is still a h igh degree of homogeneity with in pr ices, su ggest ing a closely comp et iti ve oligopoly market structure. The econ omic outlook for s h o r t o c e a n c r u i si n g Most commenta tors agree that as a se ct or of t ou r is m , cru is in g d e m a n d d e m o n s t r a t e s c on siderable and continuing growth. Much of this growth involves the development of deman d from new sources, particularl y from Asia an d fr om E u r ope, an d t he extension of cruising groun ds int o
new ar eas. However, ther e are constra ints on the latter, in t erms o f c on s u m e r a c c e s s , t o u r i s t i c interest, climate, and a range of s u i t a b l e p o r t s - of - c a l l . S h o r t ocean cru ises are in ma ny cases a substitute product for land-based resorts, competition from which can strongly influence deman d.
Suppliers of cruises will continue The planned growth in th e supply to seek growth in revenue by the of berths for short ocean cruising sale of complementary goods and rema ins at a high level. Becau se s e r v i ce s s u ch a s a d d - on s h o r e of long construction times, new excu rs ion s, on -boar d cas in o i n v e s t m e n t i n s h i p s l o ck s i n gaming an d shopping. The latt er growth in sup ply up t o five years can be in an advantaged position a h ea d, as su mi ng th a t older through ha ving a captive market, vessels are not scrapped at the but will continue to bring about sam e ra te. The average size of (perha ps u nfair) competition with m a s s m a r k e t c r u i s e s h i p s i s s h o p s a n d s e r v i ce s i n p o r t s - ofincreasing, owing to economies of call, many of which rely on cruise scale, but this makes supply ever passengers for the bulk of their more ‘lumpy’ and will continue to trade. force operators to concentrate on d e m a n d m a n a g e m e n t s t r a t e gi es As a result of these actions, the t o ensu re h igh ut ilisation. short ocean cruise industry is Inevitably this means continuing likely to remain a competitive competiti ve downward pressure oligopoly, wit h h igh globa l on cruise prices for as long as con cen t r a t ion am ong m a s s t h er e is exces s su pp ly in market operators of large ships particular places or at particular accompanied by a larger number times. of smaller, specialist suppliers. S m a l le r o p e r a t o r s c on t i n u e t o modify and differentiate their pr oduct s t o sell in s pecialis t m a r ke t se gm en t s. Th is ma y necessitate the construction of s p e c ia l i s t s m a l l e r c r u i s e s h i p s , such as ‘explorer’ or sail-assisted vessels. With fewer economies of sca le in cons tr u ct ion a nd o p e r a t i on , t h e s e v e s s e l s o f t e n operate at higher average cost than larger liners, and operators
Ta ble 5: Per diem pr ices for short ocean cru ises, 1995 (Prices per berth in an outside twin / queen stateroom on a newer, m idsize, stand ard-class cruise vessel)
Op er a tor
Am er ica n H awa ii Ca r n iva l (lin er s) Celebr ity (lin er s) Comm odor e Cost a Cu n a r d (Cou n tess) H olla n d Am er ica
US$
251 228-252 240-293 232-246 199-299 268-310 213-286
Op er a tor
Nor wegia n Ca ribbea n P r em ier P rin cess (lin er ) Regen cy (n ewer sh ips) Roya l Ca r ibbea n (lin er s) Royal Su n Lin e
US$
261-335 224-302 230-300 2 12-240 218-361 228-355 217-274
Source: Adapted from Schwa rt zman (1994).
34
need to receive higher prices to rem ain profita ble. The option of u sin g older ves sels pr ovides s a v i n g s i n c a p i t a l c os t s , b u t u s u a l l y m ea n s h i gh e r r u n n i n g c os t s a s w e l l a s p r o b l e m s i n m eeting up gra ded ma rit ime health and safety regulations.
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