City Insider: Cruise investor enthusiasm dampened as sector hits ‘Gorging Point’

Investor enthusiasm for the cruise sector could be dampened if regulators decide to act on the increasing level of charges lines levy on customers, says David Stevenson

Talk to most investors and while they’ll probably admit to being a bit jaded about some of the travel majors, their enthusiasm tends to know no bounds when it comes to the cruise sector.

Instead of worrying about capacity reduction, the optimists enthuse about the endless growth possibilities, not least in parts Asiatic.

Yet I’ve recently noticed a subtle worry starting to emerge among some big investors, namely that the big cruise giants are reaching what some cynically call the Gorging Point.

This handy phrase typifies a tipping point where a dominant brand starts to gorge its customers with excessive charges. Apple is a classic example.

Its products still reign supreme but many customers complain that they are being gorged by excessive charges and pointless product innovation.

Gorging customers is also usually associated with brands that are starting to run out of innovation (after amazing leaps forward) and have mean-spirited investors on their back worrying about cash flow generation.

In my humble experience businesses that are threatened by a Gorging Point experience tend to be a bad bet as customers start to lose interest.

My own sense is that we have reached this point with the cruising sector.

It was reported last week that Princess is planning to increase the daily gratuity rate for most passengers to from $11.50 to $12.95. For those staying in suites, the fee will jump from $12 to $13.95.

If you are paying for a family of five staying in a suite, this adds up to a $472.50 charge in gratuity at the end of your sailing. Princess of course defends the practice by noting that they’d “adjusted the gratuity rate to be comparable to cruise industry standards”.

Princess isn’t alone in charging for these extras – the report notes that Norwegian charges between $13.50 and $15.50 while Royal Caribbean charges $12.95 for normal cruisers and $15.95 for suite cruisers. 

And the industry standards being talked about are of course rather mundane and obvious – a need to increase net revenue yields per customer.

In and of itself the increase in pricing isn’t earth shattering, but let’s be honest, it’s all part of a broader piece which is that cruise holidays boast a whole swathe of ‘extras’ including cruise taxes, fees and port expenses plus surcharges for the bar as well as room service costs.

The challenge here is that the model that works best in the travel industry is the all-inclusive fee structure. In our age of cost conscious travellers, we all love to know what our final bill will be.

We hate it when airlines charge for using credit and debit cards and I can pretty much guarantee that over time consumers will also revolt about excessive add-on charges for all-inclusive cruise holidays.

At some point one brand will break the cosy cartel and switch the business model. Of course the biggest brands are protected by the huge up-front cost of buying the ships and then fitting them out but vast capital outlays haven’t stopped innovators in other industries, especially as new financing models start to emerge.

And if an existing (or new) competitor doesn’t get there first, maybe the regulators will. It’s this fear that keeps many a smart investor awake at night.

Regulatory intervention can decimate a business’s trading performance in the wrong year and I suspect that the cruise sector could be due a visit from the men in black fairly soon.

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