US$50 billion waters await cruise market

PUBLISHED : Thursday, 20 May, 2010, 12:00am
UPDATED : Thursday, 20 May, 2010, 12:00am

Three years after assuming the post of president of Star Cruises, David Chua Ming Huat can confidently say he does not really care anymore what people say about the world's third-largest cruise company.

'I don't need people coming to tell me what to do, what not to do, and challenging me because I couldn't believe the things that I had to do for the past 18 months, or the last three years,' he said.

Faced with an uncertain outlook and mounting losses at Star Cruises when he came on board in May 2007, Chua immediately froze salaries, slashed the headcount and sold off ships.

Things went from bad to worse that summer when a bank that was supposed to underwrite US$1 billion of debt pulled out at the last minute just as a deal was being signed for American private equity firm Apollo Management to acquire one-half of Norwegian Cruise Line from Star Cruises for US$1 billion. Then the global recession hit.

'We got shook up because whatever we were doing in 2007 had not really kicked in yet,' Chua said. 'There are still challenges here and there but it's not something that I lose sleep over, especially after what we went through in the last 18 months.

'Things have been quite good for us for the last six, seven months. It means, by the second half of last year, we already turned.'

Star Cruises recently renamed the listed company Genting Hong Kong, reflecting its expansion into land-based attractions. It has four ships in the region in Singapore, Hong Kong, Penang, Malaysia, and Taiwan. From Singapore, the SuperStar Virgo has itineraries to Thailand, Malaysia and Vietnam.

The SuperStar Aquarius departs daily from Hong Kong for international waters, essentially what many consider a gambling ship and the Star Pisces has a daily overnight international waters cruise out of Penang. From Taipei, the SuperStar Libra offers Japan and Taiwan cruises.

Star Cruises has an estimated 10 per cent share of the North American market through Norwegian Cruise Line.

This compares with 55 per cent for market leader Carnival Cruise Lines and Royal Caribbean International's 27 per cent, according to cruise industry data. For the rest of the world, the market shares are similar with Carnival having 52 per cent, Royal Caribbean 22 per cent and 5 per cent for Star Cruises.

For Asia, Chua said the cruise industry could potentially bloom into a US$50 billion business, compared with a rough estimate of US$1 billion now. This would overtake the American market, Chua said.

However, Asia lacked a market leader to spearhead growth.

'Given the size of China and India, this can be a US$50 billion business,' Chua said.

'But with this US$50 billion business, someone has to be a big brother. You think the US$30 billion business that is generated out of the US through the Bahamas and the Caribbean islands is dependent on the Bahamas putting up a cruise terminal? No, it's that guy sitting in Miami saying I'm going to be a big brother, I'm going to build this, I'm going to have the throughput, I'm going to push,' Chua said.

'I think what we lack in terms of the development of the cruise industry in Asia is a big brother - a leader who is going to say I'm going to take this on.'

Despite an increasingly wealthy and travel-savvy mainland populace and an unprecedented pace of cruise terminal development in the region, only a handful of passenger liners have plied Asia's waters so far.

At the moment, there are basically seven ships serving the region, including four from Star Cruises, two from Costa Crociere and one from Royal Caribbean.

Few in the capital-intensive cruise industry appear willing to invest heavily in a promising but largely untested market like Asia, even though the number of Asian cruise passengers is projected to jump 40 per cent to more than 1.5 million this year.

The cruise industry is based on ships that are capital and labour intensive.

There is a several-year lead time from a ship order to delivery. Moreover, earnings are affected by swings in the economic cycle and customer tastes for the latest in leisure travel.

Many operators are building modern mega liners to compete for business in the established US and European cruise markets while deploying older and smaller ships in their fleets to Asia.

This summer, Norwegian Cruise Line is launching the Norwegian Epic, a massive 4,200-passenger ship that will offer Miami cruises to the Caribbean before switching to Mediterranean sailings from May next year.

The Norwegian Epic boasts a number of firsts and exclusives, including the first ice bar - a bar made entirely of ice - at sea and Blue Man Group, a wildly popular live show designed to attract a younger crowd. Last year, Royal Caribbean's 6,300-passenger Oasis of the Seas set sail as the world's largest cruise ship.

And like most leisure travel, cruise vacations are discretionary purchases, meaning they are usually only enjoyed when customers have income available after taking care of daily necessities.

Over the years, cruise companies were attracted to the relatively high discretionary incomes in North America and Europe even though the recent global recession was a miserable time for the industry.

North America and Europe are together projected to account for 12.2 million of the 14.42 million passengers worldwide this year, according to Cruise Market Watch estimates.

Chua believes the mainland and India are the only markets with the critical mass necessary to drive cruise throughput in Asia. But he says no one really knows how to grow the Asian cruise business over the long term despite what he calls much 'chest beating' about the mainland market's potential.

With a population topping 1.3 billion, the mainland only saw about 20,000 passengers arrive or depart from Shanghai in 2003, three years after international cruise ships started visiting the city.

By 2006, 59 ships and nearly 100,000 local and foreign cruise passengers passed through Shanghai. The World Expo from May to October is expected to attract more ships to Shanghai, where a new international cruise terminal is opening.

The Indian cruise market is booming but progress remains slow despite the country's 7,500-kilometre stretch of coastline.

'We are making money,' Chua said. 'But how are we going to make more money? We can't make more money because we can't build more ships.

'We can't build more ships because we're not sure where the demand is coming from. Everyone knows and wants the throughput but how are you going to use this throughput and develop and build it bigger? No one is talking about it.'

Chua's fear is that the initial euphoria surrounding the mainland will soon give way to a prolonged lull as international cruise companies realise all is not smooth sailing yet.

Cruise operators face a high degree of seasonality that concentrates mainland, and to a certain extent, Asian, leisure travel around three annual 'golden weeks' in January or February, May and October. This is a problem for an industry that relies on year-round business.

Cruise operators also need diverse ports-of-call to sell as lucrative shore excursions to passengers. But there appears to be increasingly less diversity to distinguish Hong Kong from other Asian destinations that have the necessary cruise terminal infrastructure.

Visas are another issue because mainland visa procedures are not uniform and may require Chinese travellers to return to their home towns to apply for one.

Last year, when mainland tour groups were cleared to board cruises to Taiwan from Hong Kong, Star Cruises was hit by visa problems that prevented hundreds of mainlanders from joining a Taiwan cruise in August.

Then in February this year, passengers on a Costa cruise to Taiwan became seasick after the ship hit rough waters.

Dario Rustico, sales and marketing director of Costa's Pacific Asia operations, described the incident as unfortunate but unavoidable, given the weather.

But cruise operators generally know not to sail to Taiwan in February because of rough seas and Chua said the incident would leave affected passengers with the wrong first impression of what a cruise holiday was and hurt the market.

Costa is expected to at least break even in Hong Kong by 2011, six summer seasons after entering the market. This is two seasons longer than usual and 'tens of millions of US dollars' of investment more than expected.

Chua is a former Merrill Lynch investment banker sent to the mainland in the early 1990s to try to launch initial public offerings. He said there were similar growing pains that resulted in the Chinese capital market going to sleep for years after the initial run of investment bankers. Although he is not saying the cruise market will suffer a similar fate, he is seeing things that remind him of his earlier experiences.

Slow progress

Only a handful of passenger liners cruise the seas in Asia

At the moment, the number of ships serving the region, including four from Star Cruises, is: 7