Cruise tragedy puts industry bookings in question

The grounding of the luxury cruise ship Costa Concordia off Italy's west coast is raising questions about how sales — and prices — will be affected during the industry's peak booking period.

Media focus on the tragedy grew even more intense Tuesday as rescue workers discovered five more bodies in the wreckage, raising the death toll to 11.

"Unfortunately, the timing for the industry couldn't be much worse given that this is the prime time for booking cruises," ITG Investment Research analyst Matthew Jacob told CBC News.

This is the period the industry refers to as the wave season, the busiest time for bookings. Typically, operators will book about a third of their annual sailings from January through March.

But how much the cruise lines will have to discount is an open question.

Jacob said the industry's safety record has been solid, and major accidents have been rare.

Based on data from the last few years, incidents resulting in a few injuries can cause a slight fall off in bookings, he said, that lasts "several days or a week or two, and then pretty quickly the bookings seem to resume to normal."

'This is the prime time for booking cruises.' — Matthew Jacob, analyst, ITG Investment Research

But the Costa Concordia tragedy, because it is more serious and has been heavily covered by the international media, "could be something we see impacting booking levels and potentially pricing over the next several weeks or even months."

Cruise lines try to price their cruises to sell every cabin on the ship, he said.

"They're not willing to give up occupancy, Jacob said. "So if, in fact, bookings do slow to levels where they're in danger of not filling ships, you will see discounting occur."

Financial markets were already pricing in the possibility. Shares in Carnival, whose subsidiary operated the Costa Concordia, lost 16 per cent in two days of trading after the tragedy.

Even rival Royal Caribbean's stock fell seven per cent.

But these shocks to demand can prove temporary, unlike a drop-off caused by a general slowing in the economy, so the industry tends tries not to discount too much, too fast, Jacob said.  

"I think it will be more gradual, over the next week or two, if, in fact, demand does drop off and continues to be lower," he said.

Ross Klein, a cruise industry expert at the Memorial University of Newfoundland, predicted any drop in demand would be short lived.

Potential customers who weren't sure about taking a cruise might change their minds, he said, but regular clients will continue booking.

Profits come from onboard spending

"As far as they're concerned, this is just one of those anomalies that doesn't really measure up to being a level of concern," Klein said.

"Probably after a period of six weeks or so, this is going to be forgotten, and things will be back to normal."

And even extensive discounting on fares may have few effects on the earnings of a highly profitable industry.

That's because the industry's profit doesn't come from fares, Ross said, as much as it does from onboard revenue, "from what people spend on going on tours, from onboard the ship at the bars, the casinos, the shops and so on."

"A cruise ship is earning in profit per passenger per day more than $50 just for onboard spending," Ross said.

Those profits have spurred a massive growth in the cruise line industry. The Italian tourism think tank Risposte Turismo estimated the number of cruise passengers globally has grown from half a million in the 1970s to 19 million in 2010.

Another unknown is how any drop-off in the tourism industry, an important foreign exchange earner, could affect the already struggling Mediterranean economies, especially Italy, Spain, Portugal and Greece.

According to the European Cruise Council, 25.2 million passengers visited a European port in 2010, with the almost 200 cruise ships operating in Europe generating 35.2 billion euros ($45 billion Cdn) in goods and services and providing almost 300,000 jobs.

Tourism of all types generated 61 billion euros in direct spending for Italy's economy in 2010, or 3.9 per cent of its GDP, according to a study commissioned by the World Travel and Tourism Council.

If the larger spinoffs are measured, it said, the industry likely was responsible for 9.4 per cent. Its estimates for the contribution to the GDP of smaller Mediterranean economies was even greater: 15.5 per cent for Greece, 15.3 per cent for Spain and 14.4 per cent for Portugal.

"We may see the biggest impact in the cruise industry in that area [of Tuscany]," Jacob said. "It's an Italian-oriented cruise brand."

In the aftermath of the Costa Concordia grounding, some media commentary has suggested operators might be forced to reconsider their move toward larger and larger ships, which can be challenges to evacuate in an emergency.

The world's largest cruise ship, Royal Caribbean's Allure of the Seas, began service in 2010.

It can carry 6,300 passengers and has a crew of 2,400.

Jacob doubts that the trend toward bigger ships will change, given the lower costs per passenger and the popularity with clients.

"Cruise-goers like to sail on these big megaships with all the amenities they offer," he said. "We'll see if those tastes change."