At an annual gathering of cruise industry executives last month, CEOs from the largest operators in the world offered cautiously upbeat words about China, a market that had earned runaway optimism in earlier years:
“It’s probably going to be the largest cruise market in the world sometime in the future,” Carnival Corp. CEO Arnold Donald said.
“I think that China has got great potential, of course,” said Pierfranceso Vago, executive chairman of MSC Cruises, speaking with the others on a panel about the state of the industry at the Seatrade Cruise Global event.
“China’s stable; it’s still a work in progress in many ways,” said Norwegian Cruise Line Holdings CEO Frank Del Rio. “I think we all see it as a long-term investment; we’re all willing to be patient.”
Moderator Peter Greenberg, the travel editor for CBS News, interrupted.
“When someone says it’s stable, it’s a work in progress, it means the patient is still in the hospital,” he pointed out.
Is the cruise industry in the hospital in China? Or has it just popped into urgent care for a quick visit?
Capacity is expected to dip in 2018 after years of rapid growth followed last year by somewhat more measured growth. About 6 percent of the industry’s capacity will be deployed in China this year.
The number of passengers grew explosively from 2012, when 216,700 Chinese passengers took a cruise, through 2016, when 2.1 million cruised, according to figures from the Cruise Lines International Association. The majority of those passengers cruised from the region. The number of Chinese passengers last year is estimated at 2.6 million, and is expected to slide this year to roughly 2.4 million, the Financial Times reported. Around the world, an estimated 25.8 million people took a cruise in 2017.
As the number of ships increased — mostly from North American operators determined to capture a growing middle class — cruise operators struggled to capture the same high fares they had commanded when supply was more limited.
“Capacity goes up, yields go down,” said Zinan Liu, president of China and North Asia Pacific region for Royal Caribbean International, at a Seatrade discussion on the region. “China cannot redefine economics.”
And then, a year ago, tensions flared between China and South Korea over a missile defense system, leaving South Korean destinations off limits to ships leaving China. That left cruise lines with less-popular options to visit in Japan, and prices again suffered.
Amid that turmoil, an experimental joint venture by Royal Caribbean Cruises and Ctrip was underway: SkySea Cruises was operating a cruise line with one older 1,800-passenger ship redesigned entirely for the local market. Last month, Royal Caribbean and Ctrip announced the line would stop operating by the end of the year.
“SkySea did a lot of things right, and we’re proud of their work,” Rob Zeiger, global chief communications officer for Royal Caribbean Cruises, said in an email. “But it was hard for the brand to break through and build broad awareness at a time when a lot of global names were entering the China market.”
A joint venture between Carnival Corp. and China State Shipbuilding Corporation, to build new ships that will sail in China starting in 2023, is still moving forward. Carnival Corp. will operate and manage the ships. And new vessels are still entering the market, albeit at a slower pace.
“To paraphrase Mark Twain, the reports of the demise of the China cruise industry are greatly exaggerated,” said Harry Sommer, executive vice president of international business development at Norwegian Cruise Line, which introduced a new ship in China last year. “What we’ve seen, perhaps, is a natural correction in the supply and demand.”
Based on interviews, discussions at Seatrade, and earnings calls, here are three of the puzzles that cruise lines are still trying to figure out in China.
China’s Cruise Market Doesn’t Act Like Other Markets Yet
In established markets, cruisers often become brand loyalists, choosing the “fun ship” atmosphere of Carnival Cruise Line, modern upscale atmosphere on Celebrity Cruises, inclusive luxury on Regent Seven Seas Cruises, or more than a dozen other options.
But in China, brands are less important than specific ships — and the celebrities attached to those ships, said SkySea CEO Ken Muskat. Travel agents also have a huge pull on which cruises guests choose, he said.
“The market continues to desire the ‘newest’ and the ‘biggest’ and this has been the greatest contributor to the significant growth in capacity and awareness in the market,” Muskat said in an email to Skift. “While newest and biggest is a main driver and will continue to be for the foreseeable future, as the consumer becomes more educated and experienced on cruising, they are also beginning to focus on destination, value for money, food quality, comfort and family atmosphere.”
Benefitting from that “newest and biggest” enthusiasm is Norwegian Cruise Line, which sent a 3,883-passenger ship to China last year. Del Rio said Norwegian Joy is the highest rated ship in the fleet and has the highest load factor; the company was profitable its first year in the market and expects to be more profitable there this year.
“She’s sitll not achieving optimum results, we’re all working hard to do that, figuring out what the Chinese consumer wants,” he said. “We’ve conquered other markets, we’re pretty sure we’re going to conquer this one.”
Royal Caribbean International is also capitalizing on the desire for newness, sending a new vessel next year to replace another fairly new ship. Spectrum of the Seas, arriving in 2019, will include amenities that the cruise line has learned resonate with the audience, including private karaoke studios and a wider variety of Chinese cuisine options.
The vast majority of Chinese passengers — 99 percent — sail on contemporary or premium cruise lines, showing that the market has not yet reached a point where there are options at every price point or for every type of traveler. Luxury, upscale, or expedition cruising made up less than one percent of the trips passengers took in 2016, according to the industry’s trade group.
Cruising has also not become a habit for travelers in China yet, unlike in North America.
Liu, who oversees China for Royal Caribbean International, said about 70-80 percent of cruisers in the U.S. have been on a cruise before. But in China, that number is closer to 15 percent.
“In the U.S., people take a cruise every two years and it becomes their lifestyle,” he said. “In China, this is not a lifestyle. This is something new people want to taste.”
Passengers in China also don’t spend as long on a ship, cruising for an average of five nights. That’s compared to about a week for North Americans and nearly nine days for Europeans, according to Cruise Lines International Association data.
Itineraries Could Use Some Sizzle — And Stability
Because long cruises aren’t the norm in China, ships can only go so far. And with one of the favorite short-trip port options — South Korea — off limits since early 2017, some destination doldrums have set in. Trips are limited in large part to Japan, which is not as popular.
“The itinerary does become homogeneous and simplified,” Liu said.
The unforeseen nature of the change in relations with South Korea was also not good for the industry, Sommer said.
“We like areas where there’s no change,” he said. “We like predictability, we like stability, we like to know what’s happening in the future. We can take good news, we can take bad news, what we don’t like is unexpected news.”
Vago, the MSC Cruises executive chairman, said he would love to see China lift restrictions on foreign-flagged ships going from port to port within the country. He said he thought Chinese passengers would embrace the opportunity to sail to multiple destinations in China and that would lead to a “much bigger boom.”
“If you could actually go along the coast, I think it would be an incredible potential, incredible opportunity for enormous growth in China in a much more important way,” he said.
Wang Hong, party Secretary General of Shanghai Municipal People’s Government, Baoshan District, said during the Seatrade panel that the Chinese government is evaluating the possibility of lifting those restrictions to allow for more diversified itineraries within the country.
The Way Cruises Are Sold Is Slow To Evolve
Cruise lines have sold a large chunk of their rooms through full-ship charters, which travel agents then sell to individual travelers or groups. But operators are keen to change that model, especially as wholesalers have tried to renegotiate prices or ask for credits if they can’t fill ships at the prices they want.
Carnival Corp. announced during an earnings call in March that it has been changing its distribution methods from a high concentration of charters to more group sales. That means the ships won’t be booked as early, but they should fetch higher prices.
“We believe it reduces risks and optimizes yields,” said Arnold Donald, the Carnival Corp. CEO.
Muskat said that while charters are still the prevalent model, the number of independent travelers and group bookings is starting to tick up.
“This is driving an opportunity for more smaller retail agencies to get involved in working directly with the cruise lines versus only through the wholesalers. In return, the cruise lines are starting to get more ‘real-time’ booking information which helps revenue manage the sailings,” he said. “The distribution is also beginning to understand the benefits of targeting [meeting, incentive, and conference] clients or like-minded groups for theme cruises which makes for an easier sell through marketing, slightly expanded booking window and higher profitability.”
Sommer, of Norwegian Cruise Line, said the distribution system will adapt as demand grows — but cruise lines need to do more to stimulate that demand so more travel agencies will want to sell the product.
“There clearly is a mature and developed travel agency distribution system in China,” he said. “It’s just not as mature and developed for the cruise industry.”
Liu said that while free independent travel — called FIT — is slow to grow, he believes that is the most promising model for cruising int he future.
“Until FIT becomes a significant portion, the China market will remain to be a problem,” he said. “We need to change the nature from group market to FIT. But it’s an ecosystem changing, it takes time.”