Big cruise merger comes at rocky time for industry
| • | Economic void left in cruise line's demise |
| • | A cruise line's sail into bankruptcy |
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Amid a deep industry slump and an oversupply of ships, P&O Princess Cruises PLC and Royal Caribbean Cruises Ltd. last week agreed to a $2.89 billion merger to become the world's largest cruise line company.
The merger would produce a company with 41 ships, about 40,000 employees and more than $5 billion in annual revenue, making it larger than longtime market leader Carnival Corp. of Miami. Company officials said significant job cuts are not expected.
Offering what it says is the most modern fleet of the major cruise companies, the group will have a combined 36.7 percent share of the U.S. cruise market, compared to a 31.7 percent share for Carnival Corp. and 8.8 percent for Norwegian Cruise Line, according to Travel Trade Publications.
The group will have a strong presence in the Caribbean cruise market, and in Alaska, the Mediterranean, the Baltic and the Panama Canal. It will also have a tour operation in Alaska, including five wilderness lodges, and three private ports of call in the Caribbean islands.
"When you combine the assets we both have, you get what has the potential to be the leading cruise company in the world," said Peter Ratcliffe, chief executive of P&O Princess, whose roots date back to the 1820s and is considered the pioneer of modern cruising.
But the deal comes during a painful time for the cruise industry. Cruise lines have cut prices to lure passengers wary of traveling, at the same time new ships are hitting the seas. Two South Florida companies, Renaissance Cruises and American Classic Voyages, filed for Chapter 11 bankruptcy protection this fall. Renaissance shut down; American Classic Voyages ceased operations runs one of its seven ships.
Meanwhile, the newly combined company said it plans to increase its capacity by more than a third — to 105,000 berths by 2005. Royal Caribbean cruise lines Royal Caribbean International and Celebrity Cruises, which have 23 ships in service, have six on order; P&O's Princess Cruises, P&O Cruises and other European brands have 18 ships in service and eight on order.
"Being the biggest matters in this industry," said Jim Godsman, Cruise Line International Association president. "By merging, they're going to reduce costs, which will put them in a much better position when the economy improves. It'll be impossible to ignore their presence."
Although the merger will create a cruise powerhouse with 75,000 berths, analysts said the combination wasn't likely to bring any immediate big changes for consumers or the industry, which has been roiled by the events of Sept. 11. Occupancy on many ships fell roughly 50 percent in the immediate aftermath of the attacks, largely because cruise travel often requires flights.
Royal Caribbean Chairman Richard Fain said Royal Caribbean lost more than $20 million in the week following Sept. 11. Business at Royal and other cruise lines has improved since then, but the companies have been forced to reroute ships and sharply reduce fares to entice wary travelers.
"There won't be any immediate reduction in industry supply or any big price improvement," said Jason Ader, a Bear Stearns & Co. analyst. "But what the (merger) does is creates a powerful entity that will be ready to take advantage of an improved environment once we get there."
Analysts said the biggest problem facing cruise lines since Sept. 11 is how they will handle growing inventory in a continued slump.
Among the speculation is that further mergers among cruise operators — including the industry titan Carnival — could occur. In fact, Carnival has fared poorly in takeover wars in the past. Last year it lost a long battle to acquire Norwegian Cruise Line, which spurned Carnival's offer in favor of one from Star, based in Hong Kong.
"It has led to tons of speculation that there will be further consolidation," said Mike Driscoll, editor of Cruise Week, an industry newsletter, of last week's merger.
Whatever the outcome, the uncertainty reflects a fundamental shake-up in an industry that, not so long ago, seemed to offer boundless upward potential.
Balance sheets for survivors will come under more stress as the industry takes delivery of fleets of new ships just as passenger counts are dropping.
Reflecting the sluggish demand, weeklong cruises start as low as $399 per person. Three-day cruises have hit $149.
"Pricing has hit rock bottom," said Scott Barry, an equity analyst at Credit Suisse First Boston.
If there's cause for optimism, some experts feel it's that conditions will ultimately lead to a leaner, more efficient industry.
"I think this is good for the industry, because this will clearly help broaden the market, and help us in our crusade to help us expand our penetration in the vacation market," said Fain, of Royal Caribbean, who will be chief executive of the combined group. "I actually think, although this is humongous for us, I think this is good for all the players in the cruise business, and I would hope all the other cruise players would look at it with that conclusion."
