Cruise ship refers to giant ships that are used for luxury travel to different parts of the world, with a large number of passengers at the same time. Each of these cruise ships are larger than some of the world’s largest aircraft carriers. Cruise ships contain various attractions to entertain their passengers, ranging from five-star hotels on the ships, restaurants, skydiving, spas, and the opportunity to indulge in various cuisines from different countries across the world. Additionally, cruise ships have all the facilities of a city or resort, which further enhances the whole cruise shipping experience. In this article, let’s talk about the economics of these floating cities.
Overview of Cruise Ships
Each cruise ship is about 1,200 feet long and can carry up to a few thousand passengers. The Royal Caribbean International’s ‘Harmony of the Seas’ is the world’s largest cruise ship with a length of 362 meters or 1188 feet. It is larger than the world’s largest aircraft carrier, the 1092.2-feet USS Gerald R. Ford. Although there are oil tankers, container ships, or bulk carriers that are larger in size, the capacity of a cruise ship is much higher.
It is because the capacity of these ships can be expanded by adding wider space or extra floors if required. Weighing in at 228,081 gross tons, the Symphony of the Sea is the second-largest cruise ship globally, with 17 decks, 22 restaurants, food bars, and 24 elevators. The ship has a total capacity of 6680 passengers in its 2759 cabins. The ship produces 30,000 meals per day and has to rely on seawater for pure drinking water. Each ship has a desalination system that makes the saltwater drinkable. Each cruise ship is built for the maximum comfort and entertainment of the passengers, for which cruise companies have to invest a hefty amount. According to Marineinsight, the construction of Royal Caribbean’s Oasis Luxury class cruise ship Allure of the Seas and Oasis of the Seas cost 1.4 billion each. These two ships are among the most expensive operational cruise ships globally.
Cruise ships have to maintain specific rules and regulations set by the International Maritime Organization (IMO). Before sailing, each cruise ship needs to collect a certificate after reviewing the ship’s design, passenger safety, and maintenance of environmental standards. In addition, ships have to collect investigation clearances from their own registered country to fulfill international requirements. Moreover, before sailing on the waterbody of any country, they must obtain permission from the port authorities of the country.
In this case, the Port Authority verifies if the ship maintains the country and international regulations. While most cruise ships sail to the Caribbean Sea adjoining regions, Southern Europe, and the Mediterranean Sea adjacent to North Africa, some ships operate in Alaska, the South Pacific, the Baltic Sea, and New England as well.
Over the past decade, the cruise shipping industry has grown more than the tourism and transportation industries. The number of participants in cruise shipping has increased from 3.4 million in 1990 to about 10 million in 2004. According to the 2019 Annual Review of Cruise Lines International Association, about 30 million people traveled on cruise ships in 2019 alone. According to Cruisemarketwatch, the global market value of the cruise industry was $23.8 billion in 2021. In addition, Carnival Corporation, Royal Caribbean Cruises, and Norwegian Cruise Line has a combined market share of 75% of the industry. In addition, the USA and Germany hold leading positions as passenger sources in the cruise industry.
It costs passengers up to $371 for a basic room on a 3-day Western Mediterranean cruise tour, departing from Rome, Italy. However, if passengers want to stay in a suite, the cost may increase up to more than $1400. In addition, cruise ships arrange various picnics for passengers at an extra charge of $50 to $175 per person. Furthermore, passengers have to spend differently to enjoy the salon, spa, and other experiences available on the ship, which is actually the revenue-generating source of the cruise ships.
The annual operating costs of these massive ships sometimes exceed hundreds of billions of dollars. In 2018, the Royal Caribbean Company had total revenue of $9.49 billion from 26 cruise ships, Of which 71.5 percent is generated from ticket selling, and the remaining 28.5 revenue is generated from onboard purchases and other sources. However, 55.4 percent of the total revenue is spent on the ship’s operating expenses. These expenditures include commissions, transportation, staff salaries, etc. Moreover, Some cruise ships even have a weekly shopping budget of $1 million. Companies market and promote cruise shipping so that it seems like a vacation of 7 to 15 days combined with various adventures and experiences to their targeted customers. The larger the ship, and the more facilities it provides, the higher its operating cost.
Economics of Cruise Ships
The average lifespan of a cruise ship is about 30 years. However, it can cost these floating cities up to a few million dollars for the design and interior decoration of various services and experiences such as hotels and shopping malls. In addition, the construction of these ships is very labor-intensive and time-consuming as it takes 18 to 30 months to build a ship. As a result, cruise ship services are becoming more expensive.
Cruise ships mainly sell tickets and generate revenue from onboard purchases. Onboard purchases include alcoholic beverages, casino gambling, spa treatments, art auctions, retail shops, and shore excursions. About 62% of the ship’s total revenue comes from ticket sales and 38% from onboard purchases. For example, the cruise ship “Quantum of the Sea” features activities like bumper cars, rock climbing walls, and skydiving. In addition, cruise ship companies make money from train rides to various locations, hotels affiliated with the cruise lines, and cruise tours. Cruise lines also sell travel insurance. Since cruise shipping is a high fixed cost business, ships carry 5 to 10 percent more passengers than their capacity.
According to U.S. tax code policies, cruise companies will be able to register their business in low-latency countries. As a result, while major cruise ship companies are technically American, they are headquartered in countries such as Panama, the Bahamas, and Malta. This allows companies to operate at lower tax rates. According to the annual report of The Cruise Lines International Association, major cruise lines pay an average tax rate of 0.4 percent, whereas the U.S. corporate tax rate is 21 percent. In addition, in countries such as Panama, the Bahamas, and Malta, where labor laws are not strong. So, most cruise ships have the opportunity to exploit U.S. employment and safety regulations and hire employees from low labor cost countries.
The maintenance and operating costs of these giant ships are also relatively high. The expenses involved in daily operations include crew costs, foods and beverages, repair and maintenance, insurance, administration costs, fuel, and docking or port costs. The crew cost depends mainly on the total number of crew members and the country’s employment policy in which the ship is registered. Additionally, the number of crew members varies depending on the size of the ship and its services. These ships usually have 700 to 1500 crew members. According to Carnival Corporation’s 2017 annual report, the crew cost was 40 percent of that year’s total operating cost.
According to the current policy issued by the International Convention on the Safety of Life at Sea (SOLAS), these ships are required to be maintained and repaired every three years. However, this is only done off-season and must be done in specific shipyards with hull cleaning and proper safety equipment facilities. Maintenance and repair costs usually depend on the construction cost. According to the 2017 Financial Statement of Carnival Corporation and Norway Cruise Line, costs in this sector were estimated at 1.5 to 2.5 percent of the total construction cost per year. Also, insurance costs are determined based on the age of the ships.
Administration costs include Office Expenses, Communication Expenses, Cruise Management Expenses, etc. However, the cost depends on the specific cruise company which operates the ship. According to Carnival Corporation, RCCL, and NCL’s 2017 annual cost, such costs were 12 percent of the company’s total operating costs.
Moreover, fuel cost fluctuates mainly depending on the ship’s fuel consumption and fuel price in the market. The use of fuel depends on the engine power, distance, size, and speed of the ship. Cruise ships use heavy fuel oils such as IFO 380 or IFO180 while at sea. Besides, they use marine diesel oil (MDO) or marine gas oil (MGO) to reduce pollution when approaching the port, as sulfur oxides emissions are relatively low in these types of fuels. Furthermore, the port cost usually depends on the dock of the country, the type of port, the structure there, the gross tonnage of the vessel, the total number of passengers, and how long the ship has been in the port. In addition to that, the cruise ships have to provide commissions to the travel agencies for passenger bookings.