Sunday, May 17, 2020

A Very Hateable Business: Cruise Industry Economics

From The Hustle, March 15:

The economics of cruise ships
 In the wake of coronavirus and tanking stocks, cruise companies have sought assistance from the US government. But for decades, the industry has done everything in its power to avoid paying into the system.
Cruise ships are often called “monsters” of the sea.
If you’ve ever seen one in action, you’ll understand why: A vessel like Royal Caribbean’s Symphony of the Seas is longer than 12 blue whales. At 228k gross tons, it is 5x the size of the once-formidable Titanic. It can hold 6,680 passengers and 2,200 crewmembers, the population of a small American town.
In 2018, 28.5m passengers — the bulk of them from America — spent more than $46B on cruises globally. The biggest players see annual profits in the billions.
But cruise companies have done more to earn the “monster” moniker than churning out huge ships and market gains.

For decades, these companies have utilized century-old loopholes to avoid paying corporate taxes. They’ve gone to great lengths to bypass US employment laws, hiring foreign workers for less than $2/hour. They’ve sheltered themselves as foreign entities while simultaneously benefitting from US taxpayer-funded agencies and resources.

Now, in the wake of a coronavirus crisis that has sunk cruise stocks by double digits, these companies are lobbying for federal assistance.

To better understand the dynamics of this wild industry, we spoke with maritime lawyers, legislators, and cruise experts in 3 countries.

The cruise industry at large
Before we get into how cruise companies circumvent US taxes and regulations, let’s take a quick look at the major players, the money they make, and how they make it.
The global market comprises dozens of cruise lines and more than 250 ships. But 3 players — Carnival Corporation & PLC, Royal Caribbean Cruises LTD, and Norweigan Cruise Line HLD — control roughly 75% of the market.
Zachary Crockett / The Hustle
These companies, which preside over an empire of subsidiary cruise lines, collectively raked in $34.2B in revenue in 2018.

Cruise ships make this money through two channels: Ticket sales and onboard purchases (e.g., alcoholic drinks, casino gambling, spa treatments, art auctions, and shore excursions), which passengers pay for with pre-loaded cruise cards and chip-equipped wristbands.
On average, tickets account for 62% of total revenue and onboard purchases make up the remaining 38%.

Though tickets represent a majority of revenue, onboard purchases account for the lion’s share of the profit, according to several experts.

As a high fixed-cost business, a cruise ship relies on getting as many passengers as possible on the ship — even at fire-sale rates. The major cruise lines will often fill each ship to 105%-110% capacity, then upsell its captive consumers on additional services.

“They have mastered the ability to get their hands into people’s pockets and to take out every last dollar,” says Ross A. Klein, a professor at Memorial University of Newfoundland, who has closely studied the cruise ship industry. “They can almost give a cabin away for free and still make a profit.”
Despite sizeable overhead costs — which include travel agent commissions, fuel, marketing, and payroll — these large crowds yield handsome profits. Industry-wide, cruise lines enjoy net margins of 17%, nearly double the average of some comparably large hotel chains:
  • Carnival: $3.2B net profit (17% margin)
  • Royal Caribbean: $1.8B net profit (19% margin)
  • Norwegian: $955m net profit (16% margin)
To make these figures a bit more relatable, here’s what this works out to on a per-passenger level for a 7-day cruise:...