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Outlook for the European Cruise Market

Conference speech presented at the Seatrade Mediterranean Cruise and Ferry Convention (Genoa, 17-20 September 1996)

By Pamela C. Conover (Carnival Corporation) (15/10/96)

Good afternoon ladies and gentlemen.
As most of you are probably aware, Carnival Corporation has for some years considered the European cruise market to have significant potential. Some of you may be aware that i played a key role in out company's early involvement in the European marketplace - somewhat of an experiment as it turned out, but one that yelded a great deal of data allowing us to gain at least an elementary understanding of a market with which we had essentially no previous experience.
As our exposure to and experience in the market has increased, we have become more aware of the opportunities and challenges presented by this market.

We believe there is tremendous opportunity for growth of the cruise industry in Europe.
As we've studied the European market place, we have found a number of parallels that can be drawn with the development of the North American Cruise Industry.
I'd say that it most closely resembles that industry in the mid-to-late 1970's when it was carrying less than a million passengers primarily on older tonnage - converted transatlantic vessels transformed into warm water cruise ships.

The similarities are the tremendous growth potential for the European market which currently carries less than a million cruisers a year - an extremely low penetration rate of the overall vacation market.
The growth in the market has accelerated as new products, such as Airtours' Sun Cruises, have been positioned for the mass market.
This focus on the mass market should clearly continue if we want to maximize market development as this is, by definition, the largest segment of the market.
The question is "How to grow this market".
We believe that the key is to change peoples perception of cruising to realize that it is a desirable and affordable vacation alternative - a challenge our companies continue to face in the North American market.

But here in Europe, it may be an even more formidable task given the more traditional view of cruising which pervades.
Accomplishing that task here is much more difficult that in North America where you are dealing with a certain level of a homogeneous population that shares the same language, much of the same foods, culture and entertainment interests.
In Europe, the languages and cultural nuances of the different countries presents a unique marketing and operational challange.
We already have ample evidence of the success Airtours has had with their Sun Cruises product in broadening the UK market.
The ships are full, the customers are satisfield and they are coming back for More !!!!
The question is - can this be duplicated in other markets ???? We believe it can.

Firstly, the product has to be desirable - people have to want to go on a cruise.
The introduction of new, modern ships with all the amenities will help this process. It already has.
We can all see the strong market position Costa has developed by introducing new ships into their markets.
It is not just that the ships are brand new, it is also that the experience on the new ships is different - more public space, more activities and more entertainment options.
To achieve this versatility necessitates size, i.e. lager ships.
I know that there is a strong body of opinion which favours smaller vessels for the European market, however, today's economics and market dynamics do not support this view for a broad market based product.
It is hard to achieve acceptable levels of profitability with small, and in particular older vessels.

Assuming new, larger ships are indtroduced, then an efficient distribution system becomes a requirement to create a consistent volume of passengers to fill the ships.
Only with this certainty, can a company price the cruise at an affordable level.

There has ben much debate as to whether the cruise product in Europe should be positioned against a single national or broader multi-national market. There is no easy answer.
Clearly, today we see companies positioned successfully against national markets.
Additionally, there are cruise companies positioned against a more international clientele.
Our only thought is that if you are positioned against one national market, you are, de facto, constrained by the growth dynamics of that specific national market.
If, as we believe, the broadest market positioning is "The Most" desirable, the opportunity to create a pan European product appealing across national lines is at least worthy of some consideration.

The large North American based companies such as Princess, Royal Caribbean Cruise Lines, Holland America Lines and Celebrity are committing increased capacity to the European market.
Today, these companies are focusing their efforts on North American Passengers but, this will inevitably change and indeed has already begun to change, as they broaden their reach to the European marketplace.

The world is becoming more global and people are becoming more international in their tastes.
We can see successful global tracks records in other industries, whether they be in manufacturing, retail or service. The key is to have the capital to be able to invest, to create a product or brand with multinational appeal and the resources to create a multi-national distribution network.

This brings me to another challenge facing European cruise companies and that is capital.
To be a major player of the future, investment in modern tonnage is a must. Given newbuilding prices in the 300mm USD plus range, this entails a significant amount of capital investment.
We can all count on one hand the European-based cruise companies today who can make this level of commitment.

Yet even this investment is not enough - one then has to develop the distribution network to create the volume of traffic to generate sufficient returns.

In the market today, we still have not seen the creation of strong pan European distribution. However, it is starting at least on a regional basis.
We believe distribution will be a key factor in creating a leadership position in this market.

This does not mean that others will not be able to carve out very successful niches for themselves - some already have.
However, I would respectfully suggest that they ally themselves with some form of distribution outlet as the market for the international cruiser is becoming more competitive.

Economies of scale are a major factor and profit driver for the cruise business. This is as true in Europe as elsewhere.
The key to successfully achieving economies of scale while operating in Europe in our view is to "think global, act global".
By thinking globally, we mean take advantage of purchasing power for food, fuel, supplies and even the ships themselves.
These economies apply largely to the expense side of the equation and apply across market lines.

However, to successfully attract customers in several different markets, we have to think locally in each market and act accordingly.

Ladies and gentlemen, we do not have all the answer. The cruise business in Europe, whether it be for Europeans or North Americans, continues to evolve.
Carnival Corporation continues to see the European market as a tremendous potential opportunity and we look forward to continuing to participate in it's future developments.

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