The cruise business, post-financial meltdown

Lavish cruise ships continue to be built, despite the fact that US consumer bankruptcies totaled more than 136,000 in May, 9 percent more than a year ago.

Ted S. Warren/AP Photo/File
The MS Amsterdam cruise ship, operated by Holland America Line, sits docked on April 26 in Seattle in this file photo. Luxury cruise ships are still being built, despite the fact that Americans have less money to spend on lavish vacations.

Just what is the ultimate symbol of excess that signals the peak in a market? The point when hubris takes over. When, as Christopher Wood writes about boom-time Japan in The Bubble Economy, "a collective self-confidence that too often bordered on arrogance" manifests.

When the buildings reach too high and the ships become too big, the boom has begun to unravel.

Optimism had already turned sour in capitalism's newest outpost in the Middle East when the 162-floor Burj Dubai tower was completed on January 4 of this year, becoming the world's tallest building — and this in the wake of the fact that Dubai's debt woes had just come to light the previous Thanksgiving weekend. Just one more example explained by Mark Thornton's prescient 2005 article "Skyscrapers and Business Cycles."

As Thornton points out, the skyscraper index's predictive power began with the Panic of 1907, which was presaged by the building of the Singer Building and Metropolitan Life Building. Meanwhile, the modern cruise industry wasn't born until the 1960s, and it only really captured the imagination of the American public when they began watching the weekly antics of Gopher, Doc, and Captain Stubing on The Love Boat TV series, which ran from 1977 until 1986.

In the early days, cruisers were mostly the "newly wed or the nearly dead." But in the 1980s the industry really set sail with a number of giant ships capable of carrying over 2,000 people with the message of "luxury for the masses." And the masses were ready to splurge — after all, the credit-card industry was newly born. "If, in the early decades of the century, it was impossible for a working man or woman to secure a loan from a legitimate lender, in the 1980s he or she could hardly refuse one," writes James Grant. "The descendents of the clientele of loan sharks became the valued credit-card 'members' of leading banks. In the 1980s the home-equity loan proliferated, and personal bankruptcy lost its stigma."

It's been spend, spend, spend ever since. And as credit lines increased, so did the size of the ships. In 2003, the Mariner of the Seas was launched by Royal Caribbean International as one of the largest cruise ships afloat at 138,000 tons, with a capacity of just over 3,100 passengers and nearly 1,200 crewmembers.

From 1980 to the end of 2008 the average annualized growth of the North American cruise industry was 7.4 percent, according to Cruise Lines International Association (CLIA). The CLIA estimated that 13.2 million travelers cruised in 2008, up from 12.56 million the previous year. Back in 2000, CLIA member-line passenger volumes were 7.2 million, so annual passenger volume increased nearly 80 percent from 2000 to 2008.

Despite the recession, through the second quarter of 2009, passenger nights were 1.5 percent ahead of the pace of 2008, according to the United States Department of Transportation Maritime Administration. But to fill the ships, average fares were down 10.7 percent.

Since then, more capacity has come online. Ships like the Mariner aren't big anymore. The world's largest cruise ship set sail late last year as the finishing touches were being completed at the Burj Dubai tower. The Oasis of the Seas is the talk of the industry. At over 225,000 tons and capable of accommodating nearly 6,300 passengers, serviced by 2,165 crewmembers, the Oasis is the size of five Titanics. The Oasis was ordered in February 2006 with the US economy going full bore and the personal savings rate in America at negative one percent.

But at the same time the Federal Reserve was dousing the overheated economy with a higher federal-funds rate that would reach 5.25 percent that summer after being as low as 1 percent in 2003 and 2004. Total household debt would reach $13.7 trillion the next year at the same time the bubble in home prices peaked.

At the same time it ordered the Oasis, Royal Caribbean had STX Europe start work on the Allure of the Seas, the sister ship to the Oasis. The Allure cost a little less to build at $1.2 billion and made its maiden voyage about the same time as the Oasis.

The Oasis and Allure are raising the bar for cruise entertainment. Hairspray made its oceanic debut aboard the Oasis, and the Allure is set to feature the Tony-winning revival of Chicago: The Musical, in the ship's 1,380-seat Amber Theater.

Both of these behemoths sail from South Florida, contributing significantly to what Cruise Industry News calls the first major capacity increase in years. As the US Department of Transportation Maritime Administration points out, "Capacity is based on two passengers per stateroom. A stateroom with two passengers is considered 100 percent occupied. Since many double staterooms can accommodate three to four people, occupancy rates are generally above 100 percent." And the Oasis and Allure are booked solid until next year.

If the cruise lines had it their way, their full passenger load would be fully loaded for the entire trip. Once on board, cruisers instinctively head straight to the buffet. But standing in their way are crewmembers offering alcohol to "get the trip/party started right!" Of course, the staff aren't offering to ply the just embarked with a neat ounce or two of 16-year-old Lagavulin in a clean rocks glass. No, they thrust a tall hurricane tumbler in your direction, containing some fruity concocted nonsense adorned with a cherry and tiny umbrella.

For cruise ships to make money they must leave the port full, because, as CNBC reports, a quarter of all revenue from passengers is spent after they are on board. Booze, Botox, jewelry, spa treatments, acupuncture, gambling, and high-priced art are for sale at all hours. Not to mention shore excursions to shop, snorkel, make salsa, or zip-line across canyons and rappel down waterfalls in the Sierra Madres. "Shore excursions are our number one gross revenue producer," says Paul Goodwin, senior vice president of onboard revenue and tours at Holland America. And for the ports, as Julio Galindo, minister of tourism for the Bay of Honduras, told CNBC, "Every time a ship comes in, it's like Christmas."

The food (with some exceptions), entertainment, sun, and great service are all provided with the cost of the cabin. Everything else, including soda pop, is for sale. Unlike the Love Boat, you won't find many Americans working on cruise ships. The ships are registered in places like Nassau, Panama, or Liberia so US employment regulations don't get in the way of serving customers. So, you might see your assistant waiter from dinner busing tables during the breakfast buffet rush. Most of the crew work 6 to 12 months at a stretch, 12 hours or more a day, with one day a week off at most. Most of them are supporting families in places like India, Turkey, and Jamaica.

Despite the long hours, these employees are amazingly cheerful and accommodating, many speaking perfect English despite it being a second language. These folks are quick to remember names and what their customers like. At the last dinner seating of a cruise there are hugs, handshakes, and plenty of tearful goodbyes between waitstaff and passengers.

During dinner service on my recent cruise aboard The Mariner of the Sea, the 200+ serving staff were from 37 different countries. They performed a rousing rendition of "O Sole Mio" although no Italians were waiting tables. There were 10,000 meals a day served on the Mariner as we cruised the Mexican Riviera, stopping at Cabo, Mazatlán, and Puerto Vallarta.

High-rise condos overlooking the Pacific are prominently for sale in all three port cities, but business is reported to be slow. Even after prices were slashed 30–35 percent for units in Puerto Vallarta last year, one local real-estate agent laments, "From my perspective the buyers are still few and far between." Mexico is said to be a haven for American expats and our exuberant and energetic guide in Mazatlán, Alejandro, told us 10,000 expats resided there. Tourism clearly drives these economies, but, unfortunately, there is "declining demand for the Mexican Riviera, attributed to media coverage of drug wars," reports CIN. We saw no evidence of the drug wars, but were told the Mariner will be moved from Los Angeles to Houston soon, ceasing its Riviera runs. Christmas will be coming less often to the western ports of Mexico.

Despite headwinds like a weak economy, the proposed Emission Control Area (ECA) for North America, the heavy-fuel ban in Antarctica, and the $50 head tax in Alaska, the cruise industry is upbeat. Cruising is only five percent of the vacation market, they claim, and only 17 percent of Americans have taken the plunge.

However, the cruise industry is tied to the financial health of the American consumer. According to, 80 percent of cruisers are from North America. The industry loves Americans. One head waiter on a cruise last year told me that he wished all passengers were Americans "because they spend money." He fondly remembered the free-spending boom-time Americans and couldn't wait for them to return, displacing the tightwad Europeans that dominated that particular post-financial-meltdown voyage.

But now Americans (and their creditors) are paying the price for living it up. US consumer bankruptcies totaled more than 136,000 in May, nine percent more than May of 2009. Close to 390,000 people filed bankruptcy in the first quarter, so personal bankruptcies could reach 1.6 million for 2010. The official unemployment rate still hovers near 10 percent, but, more telling, chronic joblessness is the highest it has been since 1948, when the Labor Department started keeping track.

Our waiter was a delightful man with a family back in India he hadn't seen in months but that he tries to call at least once a week. We asked him if he was going to try and work on one of the new big ships, the Oasis or the Allure. "They can't even fill this boat," he said pointing to the empty seats in his station, "why would I want to work on a ship that, after the newness wears off, will have even more empty dinner seats?"

The ships are getting bigger, but Americans are getting poorer.

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