Cruise Ship Economics
An evolving business model
Cruising. No other form of travel provokes such a disparate response. Some people vacation almost entirely via cruise ship. They have logged dozens of cruises and hundreds of nights over the years. They have their favorite cruise line, and have even more brand loyalty than Apple fanboys. Then there are the cruise ship antagonists. Those who view cruising as a total waste of money and even unethical form of travel. One that contributes to global warming and gives nothing back to the local community while padding the dollar of some anonymous multinational corporation.
Regardless, the cruise ship business model is fascinating.
The larger ships are floating cities, capable of hosting over 5,000 paying customers and requiring over 2,000 crew to keep things moving. These 7,000 people all need to be fed and housed while sailing around the world. The logistics of the food alone are staggering. It’s not like the cruise ship can simply send someone down the street to a nearby Costco if they run low on butter. If a cruise plans to serve salmon one night in the dining hall, they crunch data on past cruises, passenger nationality, and even the weather to predict how many people will order it. Because space on a cruise ship is at an incredible premium, they don’t want to over-stock. But they also don’t want to run out and have to tell late diners that a menu item has been scratched.
Then there’s the maintenance. A cruise ship is, again, a floating city. Every system a city of 7,000 people has to deal with, so too does a cruise ship. That includes electricity, plumbing, and sewage. All of these systems need regular maintenance and will have breakdowns. Workers who can make repairs and the parts they will need need to be onboard. Every time the cruise ship docks, and sometimes even while at sea, maintenance staff is dealing with everything from busted electrical circuits to misaligned floor paneling. All this ignores the additional obstacle every cruise ship faces: a never-ending and unwinnable battle against the ravages of salt water. The cruise ship can never win; it can only hope for an endless draw.
Yet, because cruise ships offer what has been considered luxury for hundreds of years, travel by sea, cruising remains a popular choice for vacationers worldwide. Passengers can board ships and sail just about every corner of the world, from Antarctica to the Persian Gulf to Svalbard. Some cruises are only a single night, such as the infamous Baltic Booze Cruises from Helsinki to Stockholm. On the other end of the spectrum, “The Ultimate World Cruise” by Royal Caribbean lasted for 274 nights. Much more common are cruises that run seven nights, beginning and ending on Saturdays during peak travel seasons.
Despite its long history, the cruise industry is not stuck in its ways. It is constantly evolving. A lot of this out of necessity. Travel by ship used to be more about getting from point A to point B than anything else. Wealthy patrons would pay top dollar to travel in a luxury hotel at sea, while lower-income passengers would be packed in like sardines and treated as cargo. With the advent of air travel, this all changed. The low-class options disappeared, and travel by boat became a vacation in itself. Cruise lines had to compete by offering bigger and better onboard amenities. Large ships began building entire amusement parks on board, complete with rock walls, ice skating rinks, high ropes courses, water parks, and everything else a holiday-maker expects on land.
Despite this cornucopia of possibilities, cruising hasn’t become noticeably more expensive over the last 30 years. If anything, after correcting for inflation, cruising has become cheaper. As ship capacity has increased, cruise lines have been able to spread fixed costs over more and more passengers. One surprise for first-time cruisers is that a special guest singer or comedian may only perform one time while on board the ship. This may not seem economical at first. Why pay a lot of money for a performer to only spend one night on the stage? but if the artist’s booking fee is spread over thousands of paying customers, it quickly becomes trivial.
Cruising has never been nor will ever be a cheap way to travel; the cost of building a ship alone guarantees that. However, it is no longer the province of the wealthy. Middle-class families can often afford low-end cruises, especially shorter ones that leave from Miami or Fort Lauderdale.
The other reason cruise prices have not increased with inflation over the last 30 years is a change in income stream. Cruises used to follow a nearly “all-inclusive” model. Some things, like spa services and alcohol, always cost extra, but most people expected to pay little once on board the ship. Today, a significant share of revenue comes from additional money spent on board.
There’s still the spa and the alcohol, but they are now accompanied by a plethora of other spending options. Large ships today have a veritable shopping mall on board. Passengers can buy souvenirs, clothes, art, or just about anything they can purchase landside. Then there are the premium restaurants. Standard cruise fares still include three meals a day, either at a buffet or a multi-course traditional dinner. Now, however, multiple “premium” restaurants offer a supposedly better dining experience. For a price. This has left long-time cruisers disgruntled. Many feel that the quality of the food in the buffet or in the standard dining hall has dipped. How much of that’s a true decline versus rose-tinted nostalgia is hard to say.
Regardless, it’s a fascinating Veblen good, that is, a good where demand can actually rise as price rises. In other words, conspicuous consumption. 30 years ago, it would have seemed absurd to most who were shelling out thousands for a vacation that already includes a three-course dinner to pay even more to go to a more exclusive restaurant. If nothing else, eat in the standard dining hall, pocket the extra money, and put it towards a dinner back home. Similar to the phenomenon that is DoorDash, however, today it is normal. Premium restaurants on cruise ships do brisk business. But then again, if you’re already spending $5,000 for a week at sea, what’s another $100?
Love 'em or hate 'em, cruises are here to stay. They transported everyone from the poor to the ultra-rich around the world for centuries, then entered the realm of the elite, and now have become more accessible. The ships get bigger and bigger and are closer to Vegas-on-the-seas than watercraft. As tourism continues to grow, it will be interesting to see where the industry goes next. Will some cruise lines begin to charge separately for the room and buffet? Will cruising continue to become accessible to the middle class? Will Disney still be able to charge unbelievable amounts for their cruises? It will be interesting to see how the cruise industry continues to evolve.