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Cruise control

Industry heavyweights Carnival and Royal Caribbean each want to buy Princess, which would give them control of much of the market. Opinions differ on what it would mean for consumers, but either combination could mean major changes for the industry.

By STEVE HUETTEL, Times Staff Writer
© St. Petersburg Times
published April 7, 2002


Suppose the two biggest airlines, American and United, combined, then swallowed up a midsize carrier such as US Airways.

That kind of dominance -- nearly half of the market -- is how much Carnival Corp. would command in North America if it succeeds in a hostile bid for P&O Princess, owner of Princess Cruises.

If Carnival fails, archrival Royal Caribbean Cruises Ltd. may win control of Princess (a.k.a. The Love Boat) and claim nearly as large a share. Either way, the two would control about 80 percent of the North American market and 60 percent of the world's cruise business.

"Any time you see the 800-pound gorilla become a 1,600-pound gorilla, it makes you a little nervous," said Mark Conroy, chief executive of Radisson Seven Seas Cruises and chairman of the trade organization Cruise Lines International Association.

The rival bids for Princess, and the consolidation of the cruise business they represent, are under scrutiny from antitrust regulators in the United States and Europe. Some travel agents warn that putting that much of the business in the hands of two giants would give customers fewer choices and result in higher cruise prices.

But the companies, cruise experts and analysts say consumers would be the group least affected by the latest acquisition in a business that has been consolidating for years.

Prices will be kept under control, they say, by competition from resort destinations such as Las Vegas and Orlando, continued expansion of cruise fleets and the need to fill ships to near capacity in order to turn a profit.

Either cruise line combination, however, could mean major changes for the industry.

A stronger Carnival or Royal Caribbean might try to nibble away at commissions they pay travel agents, whose livelihood already is endangered by the elimination of commissions paid by major airlines and a similar trend that seems to be appearing among car rental companies.

Some experts say the cruise companies could try to sell only through select agents, just as automobile manufacturers use dedicated dealerships.

Controlling a bigger piece of the cruise business also could provide extra leverage to squeeze suppliers for price breaks on thousands of purchases, from steaks and liquor to contracted health spas and photography services.

Royal Caribbean and P&O Princess, which announced their proposed deal in November, estimated a combined company could cut $100-million in annual costs.

Since the announcement and Carnival's subsequent unsolicited offers, the industry has been abuzz with speculation about what such a big consolidation might mean.

"It's hard to predict," said Mike Driscoll, editor of the newsletter Cruise Week. "There's never been anything like this in our business."

Big fish gobbling up smaller fry is nothing new in the cruise industry. Carnival has been the hungriest of all.

Even as it aggressively built new ships, the company grew beyond its biggest product, Carnival Cruise Lines, through a string of acquisitions: Cunard Line, Holland America Line, Seabourn Cruises, Windstar Cruises and Costa Cruises. Carnival Corp. has a fleet of 43 ships and more than 60,000 berths.

Royal Caribbean also beefed up through an acquisition, buying Celebrity Cruises in 1997. The company trails Carnival, with 22 ships and 45,800 berths. Its two lines are about the same size as Carnival's competing mass market lines, Carnival and Holland America.

Carnival boasts a stronger balance sheet and overall finances. Carnival posted net income of $926.2-million on revenues of $4.64-billion last year, compared with Royal's net income of $254.5-million on revenues of $3.1-billion.

Carnival Corp. is the dominant player at the Port of Tampa, with the only two cruise ships that stay all year. Royal Caribbean gained a toehold this year, with two ships sailing winter schedules. About 300,000 passengers board cruise ships annually at the port.

The two companies, both headquartered in Miami, have a long and often unfriendly rivalry.

Carnival executives complain that Royal Caribbean crews used to call Carnival ships the "Kmart of the Caribbean" in humorous announcements to passengers over onboard public address systems.

Royal Caribbean is still sore over the unsolicited counterbid Carnival made for Celebrity.

None of the cruise lines' past deals match the scale of the current battle. Carnival was rebuffed in its first attempt to buy Princess in 1999. And Carnival vice chairman Howard Frank was rebuffed by Princess' chief executive last September when he called to begin acquisition talks.

It turns out that P&O Princess and Royal Caribbean already were talking. On Nov. 20, they announced a $3.64-billion merger that would keep the Princess headquarters in England and the two companies' shares listed separately in London and New York.

Carnival countered with a buyout valued at $5.33-billion. Chairman Mickey Arison personally campaigned for Princess shareholders to reject the advice of company management and wait for U.S. and European regulators to rule on the proposals before voting for either one.

A majority did just that in February. Regulators are expected to weigh in by summer or fall.

Carnival and Royal executives hope regulators don't look solely at how much of cruise markets the combined companies would control.

Their counterargument: The antitrust czars should recognize that cruises make up just 2.5 percent of all vacations in a market dominated by land-based resorts. Carnival Cruise Lines president Bob Dickinson made that pitch at an industry convention in Miami last month.

Regulators might not buy the argument. But competition from tourist destinations on land will continue to keep cruise prices from getting too high even if Carnival or Royal Caribbean win Princess and become more dominant players, Radisson Seven Seas CEO Conroy said.

"If it gets to the point where cruises are too expensive, customers will look at going to Disney World or Las Vegas or Colonial Williamsburg," he said. "With so many travel options, it's fairly difficult for anyone to control rates."

But one fewer player would further limit the ability of travel agents to play one against another for the lowest price, said Philip Davidoff, owner of Bellair Travel & Cruises in Bowie, Md., and former national president of the American Society of Travel Agents.

"Any time the number of competitors goes down, there's a chance the result will be higher prices and fewer choices," he said. "I don't want to see any reduction in the number of players out there."

That depends on which company wins and how it runs its business, said Jim Sweat, managing director of travel agency services for AAA Auto Club South in Tampa, which has 66 agencies in Florida, Georgia and Tennessee.

Carnival Corp. lets its subsidiary cruise lines keep their products distinct and market them separately, he said.

When demand nose-dived for the whole industry after Sept. 11, Sweat said, Holland America undercut Carnival on some competing routes although it is considered a more upscale brand that usually gets higher prices.

Carnival doesn't see the Princess acquisition as a way to raise fares, said Frank, the company's vice chairman.

A big part of cruise ship costs are fixed, such as crew salaries, fuel and port charges. Most vessels must be about 98 percent full to start making a profit, he said. Cruise lines will discount, sometimes heavily, to make sure ships don't leave with empty rooms.

"We price, as do Royal Caribbean and P&O, to fill our ships -- whatever it takes to get people on board," Frank said. "If you want to maintain (a certain) price and run at 90 percent, you're just hurting yourself."

Carnival expects to make money on the acquisition, he said, by doing what the company is famous for: cutting costs to the bone.

That's largely how Carnival has produced fat margins. Last year, the company made 20 cents of net income for every $1 of revenue compared with 8 cents for Royal. Making Princess run leaner will make it more profitable, Frank said.

"There's got to be an opportunity to get their costs closer to ours," he said.

Neither Carnival nor Royal has spelled out where it would pare costs. Eliminating overlap among employees or contractors that buy supplies and provision ships would be an obvious place to start, said Joseph Hovorka, cruise analyst for Raymond James & Associates.

Either company likely could negotiate volume discounts from food suppliers, shipyards and an army of other Princess vendors, said Driscoll, the newsletter editor. Ports where Carnival or Royal control most of the visiting ships also could get squeezed, he said.

Then there are the beleaguered travel agents.

Some worry that market-dominating companies could follow the lead of airlines and cut costs by paring back their commissions. Cruises provide crucial revenue for many agencies. The typical agent selling a $1,000 Carnival cruise, not including taxes and fees, earns about $150.

That dwarfs the $20 most major airlines were paying per domestic ticket before they dropped commissions as part of their post-Sept. 11 cost-cutting.

Travel agents sell about 95 percent of all cruises, and cruise companies say they're happy with that distribution system. Still, Carnival president Dickinson points out that about a quarter of agents sell 85 percent of all cruises.

Some agents gripe that cruise companies have been slowly cutting their income. Their main complaint is that port charges and other "noncommissionable fees" are becoming a bigger slice of the overall fare customers pay.

One three-day Caribbean cruise that sold for $319 included $119 in fees and taxes that didn't qualify for a commission, said Davidoff, the Maryland travel agency owner.

Cruise lines also routinely increase the number of cabins agents must sell to qualify for higher commission levels, which for Carnival range from a minimum of 10 to 20 percent for top sellers.

Carnival's Frank says there's nothing wrong with insisting agents produce more to earn premium commissions as the cruise companies build new ships and provide them with more product to sell.

There also is speculation that the big companies might eventually try to sell through select agents designated as brand dealers.

A tiny luxury line, SeaDream Yacht Club, offered such dealerships last year to agents who made capital investments in the company, said Hovorka of Raymond James. Few agents took the deal, he said, and SeaDream abandoned the plan.

But the offer might be harder to resist from one of the industry giants, Driscoll said. "If you had two companies with 80 percent of the market," he said, "they might have the leverage."

-- Steve Huettel can be reached at huettel@sptimes.com or (813) 226-3384.

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