Asia is the next big market for cruise ship operators
Cruise ship operators' strategy to pounce on consumers in Asia seems like a solid one, thanks to an anticipated surge in the number of Chinese citizens eager to travel abroad in the coming years and new high-speed rail links that promise to make traveling to port cities easier for residents outside the wealthy coastal areas. But trying to break into the Chinese market, in particular, poses plenty of challenges. "It's the 64,000-US-dollar question that they've been trying to solve," Credit Suisse analyst Joel Simkins said.
"They all see a very significant opportunity in the long run, but this is a much more complicated process than opening up a Starbucks." Simkins expects the number of cruise passengers in the Asia Pacific region could shoot up to 5.5 million by 2020 from just 2 million in 2010, assuming the Asian market grows as quickly as the European market did between 2000 and 2010, writes Ashley Kindergan for Credit Suisse.
There are about 3.3 cruise passengers for every 100 people in North America and 1.1 in Europe. Asia, on the other hand, has only 0.2 cruise passengers per 100 people. Getting consumers to think of a cruise as a family-friendly vacation option, or a high-end indulgence, is a critical part of growing the luxury cruise market. "You have to really develop a marketing awareness. This is a completely foreign concept to the consumer in China," Simkins said.
Two of the biggest cruise companies, Carnival Corp., parent company of Carnival Cruise Lines, and Royal Caribbean International, first began stepping up their presence in Asia in 2006. Carnival plans to open a Singapore office soon, while Royal Caribbean opened an Asia Pacific headquarters in Shanghai in 2007 and quickly followed with outposts in Beijing and Guangzhou in 2008.
But so far, the Asian market does not seem to be a key driver of either company's profits. Simkins called China a "break-even proposition" for Royal Caribbean, and company executives said only that Carnival Cruise's new larger ship would likely break even last year. One obstacle facing cruise companies is that Chinese customers are often used to paying far less on land to obtain the types of on-board services, that are so critical to the profitability of a cruise operation.
Still, for now, major cruise operators are focused on trying to get their names established and work through regulatory challenges in China. Profits have not been enticing enough to build a new ship specifically for the Chinese market. "They're taking American-style, Western-style product and putting it in that market," Simkins said. "We're in the very early innings... It doesn't make economic sense to develop something specifically for China yet."
But there are signs the calculus could change. For one thing, high-speed rail links to port cities promise to make accessing cruise departure points easier for Chinese customers than their American and European counterparts. Port terminals are also adding capacity to serve a growing market. But perhaps most importantly, the number of Chinese tourists heading overseas for vacations has skyrocketed in recent years. ■