• Monique Giese, Partner |

Until recently, cruises were the fastest growing sector of the travel industry. In the past five years, the demand has increased by 20.5 percent. Statistics show that in 2017 around 26.7 million people chose to go on a cruise, followed by 28.5 million in 2018 and an estimated 32 million in 20201. In 2018, it was estimated that the world cruise industry is worth approximately $150 billion.2

In the global cruise market, there are over 50 cruise lines and more than 270 ships, however, just around 75 percent of the market is controlled by three main players. These leading companies oversee an empire of subsidiary cruise lines, collectively bringing in $34.2 billion in revenue in 2018.3  The value per share relating to the industry’s largest three entities at the beginning of this year was $134.55, $58.79 and $51.35.4

As many countries across the globe have closed their borders in response to COVID-19, thousands of passengers were kept at sea, while vessels sought a port to dock. In mid-March, Canada banned all ships with more than 500 people from docking in their ports. Australia, New Zealand and the United States banned all ships arriving from foreign ports and directed all foreign flagged ships to leave the country. As an impact of this, passengers were quarantined on board for almost a month before being repatriated. There were numerous other examples, and while almost all of these cruise passengers are now disembarked, many crew members are still on vessels across the world, either quarantining or manning the ship until the industry resumes operations. Many cruise liners have and are attempting really hard to repatriate shipboard employees, but due to the stern regulations imposed by the US Centers for Disease Control and Prevention, repatriation is delayed.

The current COVID-19 environment has created a high degree of concern amongst the public surrounding the maintenance of health and safety onboard cruise ships. Ships will now require robust screening and monitoring protocols, implementation of comprehensive sanitation practices with regular inspections, expanded onboard medical facilities and increased medical staff. Also, cruise liners will be expected to work more closely with public health authorities worldwide and CLIA (Cruise Lines International Association) to enforce health requirements. 

There are two main revenue channels for cruise ships: ticket sales, which account for 62 percent of total revenue, and on board purchases, such as alcoholic drinks, casino gambling, spa treatments, art auctions, and shore excursions, which make up the remaining 38 percent.5  In the first quarter of 2019, the largest three cruise organizations reported revenues of $4.7, $2.4 and $1.4 billion with net income of $336, $257 and $118 million.6

In the wake of the COVID-19, there will likely be a significant financial impact on revenue for all cruise operators, which could make it difficult for many cruise liners to attract customers and result in closures. Shares for the largest three cruise organizations were $30.30, $10.50 and $12.60 respectively on 1 April 2020, approximately 70 – 80 percent lower than the beginning of this year. Marginally doing better at the end of June 2020, values were $50.30, $16.43 and $16.42.

As of February 2020, the largest COVID-19 outbreak outside mainland China was on a cruise ship, which has resulted in reputational damage to the cruise industry and falling share values. Cruise lines have also paid a substantial amount of money in refunds for cancellations, incurred costs associated with docking ships at ports where ships are quarantined. Most cruise ships around the world are temporarily withdrawn from service, but utilizing their engines to provide power to maintain onboard services, air conditioning, desalination and propulsion – to maintain vessels in good shape, incurring the cost of maintenance even when not sailing.

Many small island nations heavily rely on cruise lines, which in turn have a positive effect on their economy. Each year 2 billion USD are contributed to the Caribbean, 5.9 percent of entire GDP to some nations.7  Cruise passengers are willing to spend more on activities such as beach tours, off-road/scenic tours or in duty-free shopping on many island nations. Additionally, many food suppliers are dependent on the cruise industry, for which they provide seafood, meat and vegetables. Disturbance to the cruise industry is heavily impacting those who rely on tourism for their livelihood and also the vendors in the various supply chains.

To keep future business intact, many cruise lines are offering bonus credits (110-125 percent of booking amount) instead of cash refunds as an option to passengers whose trips have been cancelled due to the pandemic. These credits can be used for future bookings to provide flexibility. As per the UBS bank report released on 31 March 2020, around 76 percent of the passengers whose cruises were cancelled due to pandemic have opted for a credit for future trips instead of a refund. Based on a recent survey from CLIA, 82 percent of cruisers are likely to book a cruise for their next vacation. Despite multiple outbreaks of COVID-19 and uncertainty over when sailing will reconvene, multiple report says that there has been increase in the booking for 2021 in comparison to 2019. This shows people are still looking forward to future travel on cruises, however, it may be harder to convince first-time cruisers. The poll conducted by CruiseCritic.com shows 75 percent of 4600 cruise passengers are interested in cruising after COVID-19 ends.

As countries continue to address the increasing number of challenges arising from COVID-19, the impacts on business may change a number of industries for the foreseeable future. There is no clear timeline for cruise operations to start again. The biggest fixed cost for cruise lines is fuel, and as a result of the oil collapse during this downturn, cruise lines may benefit from these lower costs. In an effort to gain customer support after travel restrictions are lifted, companies will likely want to consider advertising campaigns and reducing their prices in order to compete and draw demand back to the industry. Cruise liners have already started to advertise huge discounts on the packages for 2021 in their websites. Additionally, the industry will need to commit to new safety protocols that can dramatically reduce the risk of disease.