The Economics

of Cruising:
An application to the
Abstract short ocean cruise market
This article offers a
microeconomic analysis of the
international market for
short ocean cruises, as the
major element of global
cruising activity. It draws
attention to some specific Adrian O. Bull
issues in cruising economics,
such as problems with units of
measurement and the
multinationally footloose
nature of resource acquisition
for the industry. The paper
offers an analysis of supply Introduction
considerations and discusses
the market structure of the Since the 1960s, cruising has developed from being a substitute
industry as a competitive off-season use for passenger liners normally engaged on line voyages
oligopoly dominated by three to a substantial, and often footloose, sector of tourism activity. Ships
cruise lines as suppliers and have become destinations or floating resorts rather than primarily
the Caribbean as the main means of transport, and markets have been balkanised into many
destination cruising region. types.
Key variables are shown to be
economies of scale, pricing This paper proposes that one of these types - the market for
and product differentiation. short ocean cruises - can be defined in economic terms as a separate
market. Globally, this market has perhaps the highest international
profile in terms of cruising, and displays characteristics of
internationalisation and economic organisation which are unique. The
paper analyses and discusses the main microeconomic issues involved,
with particular reference to operating economics and the market
structure of the industry.

Categories of cruising market - an economic perspective

In order to investigate the economics of cruising, it is first

necessary to define cruising products and market places. One
approach (Hobson, 1993a) is to treat the whole of cruising as being a
single, but segmented, market, where products are highly
Adrian O. Bull is Principal differentiated according to consumers’ requirements, but where there
Lecturer in Tourism at the is an assumption of overall competition and substitutability. Hobson,
University of Lincolnshire and for example, suggests that there are four market segments: mass,
Humberside, England. middle, luxury and specialty.

28 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96

 With differentiated products, the costs and methods may differ for short ocean cruises, is the
notion of what constitutes an greatly from one area to another, largest and most heavily
individual and specific market or transport costs may be so high researched area of cruising. The
may be problematical. Any two as to constrain supply areas remainder of this paper will use
or more products are usually (Isard, 1956). In terms of this market as an exemplar
considered to be of the same demand, transaction costs and because of its importance, but
generic commodity class if there poorer consumer information transfer ability of findings to
is a reasonably high level of about more spatially remote other markets would be limited
substitutability between them, alternatives act as constraints. by those differences outlined
which may be measured by a In addition, governments may above.
positive cross-price elasticity of impose trading regulations which
demand. However, there is no bound markets. The short ocean cruise
clear definition of the degree of market
substitutability (or of a specific Whilst it is evident that many
value of cross-price elasticity) cruise lines draw upon custom This market accounts for the
necessary to determine the cut- from around the whole world, largest area of activity in
off point for pr oducts to be owing to the inherently cruising, with a major
classified as being within the international nature of most contribution to specific regions of
same market. This lack of cruising products, the above the world’s tourism. There are
definition results in considerable analysis suggests that there are different units of measurement,
legal argument in antitrust law in economic terms several such as cruise passenger
cases (Watson, 1977). cruising markets, whic h are numbers, berths available, and
bounded both geographically and passenger days. A feature of
The boundaries of a cruising by limitations on substitutability cruise industry reporting is
market may be ‘defined’ in both supply and demand. This disagreement over statistics.
qualitatively by recognition would produce a range of
amongst producers, and amongst markets whose operation would Passenger numbers are cited as
consumers, that the products differ notably one from another. a measure of demand (Fells,
traded are performing essentially A schema of such markets might 1995), although perhaps they are
the same function, or possess resemble those shown in Table 1. more a measure of consumer
some basic homogeneous numbers at market equilibrium.
characteristics. This implies, for The last of these markets, that World ocean cruising numbers
consumers, that there is some
determination of indifference
between products based on these Table 1: Overview of Cruising Markets.
characteristics. In the long run
this may lead to an identifiable Location /type Comment Supply / markets
price nexus amongst cruise
products, although in the short
River, canal and Several markets Small, shallow-draft vessels,
run the differentiating lake cruises according to location often domestic markets,
characteristics between products cabotage-limited
and the way they are marketed
may produce price and demand Special interest Worldwide markets, Often purpose-built vessels,
variations which suggest that (such as sail, highly differentiated specialist crews, a degree of
products are not really in the education or ) monopoly through
same market at all (Dilley, 1992). exploration differentiation
Within any one market, the level
Long distance ocean Single world market Large vessels, often relying
of homogeneous characteristics
cruises, including on ‘tradition’ and luxury,
should be such as to create RTW cruises resources acquired inter-
substitutability on both the nationally
supply and demand sides
(Carlton & Perloff, 1990). In
supply terms this implies that Extended ferry Usually domestic or Joint product with car ferry
both the production function and ‘mini-cruises’ between country pairs, services (see Peisley, 1992a)
the cohesiveness of the market especially in W Europe
place constrain the pricing of
Short ocean cruises World market, but Mostly large vessels, usually
products.
heavily dominated by purpose-built for mass
U.S. demand. market cruising
A market may be bounded within Differentiated by
a geographic area (Watson, location, dominated
1977). As location theory shows, by the Caribbean
in terms of supply, production

THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 29

 Table 2: International Cruise Capacity 1995, in Percentage of Berths. applied to international tourism
suggests that capital will be
June December sourced internationally from
wherever it has the highest
marginal efficiency over the
Caribbean 25 50
Mediterranean 20 2 investment cost (Bull, 1995), and
Alaska / West Coast of North America 17 0 that other factor inputs will be
Rest of the world 30 30 obtained usually from the
Out of service 8 18 tourism destination country,
unless there are significant
Total 100 100 savings or productivity benefits
available by acquiring them
Source: Adapted from CLIA (1996). elsewhere and the host
government imposes no import
controls on these factors. At the
(over 99% of whom are short sea This utilisation rate compares very least, land and tourism
cruise passengers taking a cruise very unfavourably with those of resources must normally be
of less then 14 nights) are the previous ten years which sourced from the destin ation
estimated at 6.3 million (Darnill, ranged between 88% and 98%. It country.
1995), or 5.7 million (CLIA, is caused by a sharp increase in
1996). Growth of 10-12% per the supply of berths as new ships No such limitations apply to
annum in the decade to 1993 has are launched, coupled with a cruising. Cruise lines can
been followed by static numbers static or marginally declining operate as almost perfect
since then. demand. Although there is dis- multinational corporations,
agreement over precise statistics, provided that they operate cruise
Berths available are a measure most commentators concur that sectors between ports of different
of supply, assuming constancy of there is a general trend towards countries. [If cruise lines operate
ship operation. In 1995, some oversupply (Miller, 1996). between ports of the same
129,000 berths were available country, then cabotage rules are
in ocean cruise ships (Fells, 1995; Sourcing factor inputs likely to apply, which usually
Peisley, 1995), although some restrict carriage to operators of
percentage of these are always Cruising provides an extremely that country. There has been
out of service, owing to refits, good opportunity for multi- considerable debate recently in
maintenance or ship national operation in tourism, the U.S. Congress about the
repositioning. The geographical accompanied by international effect of cabotage. Other than
allocation of supply is strongly acquisition and deployment of American Hawaii Cruises, all
oriented to the Caribbean, as factors of production wherever ocean cruises operating from the
shown in Table 2. there is the highest marginal U.S. are foreign-operated, and
productivity. escape cabotage rules by sailing
There is disagreement, however, to, or back from, non-U.S. ports.]
over the number of berths Conventional investment theory Not even land and tourism
available from individual
suppliers, since there is cross-
chartering and shifting owner- Table 3: Source of Inputs for Major Cruise Lines.
ship of ships and lines. This
issue will be further explored in Company ownership: USA, Israel, UK, Norway, Greece, Ukraine
the section on market structure.
Capital: USA, Japan, Germany, UK
Passenger days are the main Marine registration: Panama, Liberia, Bermuda, Cyprus, Bahamas
output measurement of the (Hobson, 1993a)
industry worldwide. For 1994,
they are estimated at 34.9 million Ships: Norway, Finland, Italy, Germany (yards such as
(Blum, 1995) and 37.7 million Meyer Werft, Fincantieri, Kvaerner, Bremer
(Fells, 1995). Blum estimates Vulkan and Alsthom Atlantique)
that about one-third of these
Officers: 26% Italian, 22% Greek, 21% Norwegian, 8%
(12.2m) are days spent in the
British (adapted from Schwartzman, 1994)
Caribbean. For 1995, C LIA
estimates a usage of about 37 Crew: Mos tly i nternational, wi th many s outhern
million passenger days world- Europeans and Filipinos
wide, related to a supply of some
46.3 million passenger berth Bunkering: Cheapest source on cruise or repositioning
days, giving utilisation of 80%.

30 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96

resources need to be acquired
from a specific country. As a
Costs Total costs
result, cruise lines are relatively
footloose businesses which source Variable costs
factor inputs from a range of Voyage
countries. Table 3 shows where costs
the major cruise companies
acquire their major inputs. Fixed costs

The footloose nature of cruising

has been an advantage to
countries which otherwise would
earn little from tourism (Bull,
1995). For example, CTC Lines,
now Ukrainian-owned, was Output
0
developed by the former Soviet
Full ship
Union to earn foreign exchange capacity
by operating cruise ships in
various par ts of the world
(Peisley, 1992b) and supplying
services to passengers from all
Figure 1: The cost structure of cruise shop operation
the main demand markets.

Ocean cruising therefore is

unusual in being a high-capital ships are expensive capital items resort, and therefore bears the
but footloose industry with wide in com p ar iso n w it h ca rg o costs of both.
opportunities for inter- v e s s e l s of similar tonnage.
nationalisation. Typically, a container liner or dry A total cost function for cruise
bulk carrier of 50,000 - 100,000 ships is likely to resemble that in
Operating economics tonnes may cost US$50-100m Figure 1, and is similar to those
(Apelbaum, 1994). Vessels for found in many capacity-
In shipping, costs are mass market short ocean cruises constrained tourism service
traditionally divided into capital are currently being built, enterprises (Bull, 1995).
costs, fixed running costs, and typically at around 70,000
voyage costs. tonnes, at a cost of US$300-350m Fixed costs, including the vessel
(CLIA, 1996). This difference and its depreciation, adminis-
• Capital costs include those of reflects the cost of passenger trative costs and wages for those
purchasing and depreciating a n d extra crew accommodation, crew who are permanent,
vessels, together with interest high quality public areas and represent a high proportion of
payments on investment amenities, and a generally less total costs. A vessel cannot be
capital. utilitarian design. Depreciation subdivided, so that there is no
and insurance costs are real flexibility in supply. Voyage-
• Fixed running costs are all accordingly higher, together with related costs are incurred when a
those which are incurred when expensive passenger liability particular cruise is operated,
a vessel is put into service (not insurance. regardless of the number of
laid up), and include all areas passengers. Variable costs are
of insurance and indemnity, Secondly, wages costs are com- frequently comparatively small
crewing wages, stores, paratively high in cruising and relate to the dir ect
surveys, repairs and landside compared with cargo operation. provisioning, accommodation and
management costs. Where a cargo ship of 50,000 handling (both at sea and
tonnes may need 20-30 crew landside) of passengers.
• Voyage costs, which of course (Apelbaum, 1994), cruise vessels
are variable in r espect to of similar size have crews of 400- If all berths are sold at their full
voyages, include port charges, 600 (Schwartzman, 1994) of price, then total revenue
fuel costs, voyage-related whom more than three-quarters increases as the line TR1 in
stores, age ncy and other will be ‘hotel staff’, catering staff Figure 2, and the maximum
landside handling costs. and leisure/entertainment per- profit position (total revenue
sonnel. Voyage-related stores minus total costs) will be that of
In comparison with cargo vessel costs, especially for food, full capacity and maximum
operation costs, those in cruise beverages, linen and disposables, revenue. Profit will be the
lines are particularly high in are similarly high. A cruise liner amount represented by the line
certain areas. Firstly, cruise is in effect both a ship and a AC in the figure.

THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 31

 A bunkering.
Costs TR1
• In the longer term, taking
advantage of internal
C economies of scale; this is
achieved by operating larger
B and more economic ships (for
Total costs example, Carnival, Princess
and Royal Caribbean Cruises
TR2 operated 28 ships between
them in 1995 with a mean
ship size of 47,362 tons and
1429 berths (Schwartzman,
1994), but between 1995 and
1998 are commissioning 15
new ships with a mean ship
size of 76,370 tons and 2013
berths (Fells, 1995)).
0 Output
• Making use of the investment
Full ship in larger ships to expand and
capacity diversify the sup ply of
Figure 2: Cruise costs and revenue complementary products on
board, such as bars, boutiques
and casinos (Kalosh, 1995);
If the mark et is not strong Thus, short and medium-term these are in a strong trading
enough to sell all berths at full supply decision in cruising are position effec tively as
price, the cruise line cannot related to maintaining demand monopoly suppliers to on-
easily reduce the number of and revenue, and achieving cost board passengers.
bert hs available (and hence reductions. Demand and revenue
passenger days) without taking maintenance is related to A consequence of investment in
a ship out of service. Doing this product, pricing, and other larger units is concentration on
would mean that although aspects of competitive marketing, mass market cruise types and
variable and voyage costs would which are considered in the locations. In order to maintain
be saved, the fixed costs (as in following section on mar ket high passenger utilisation rates
Figure 1) would still be incurred, structure. Cost reductions can be with very large vessels, suppliers
as would laying-up costs. It is achieved in a number of ways: gather cruises into areas of high
ther efore preferable to try to demand, such as the Caribbean
maintain passenger numbers in • Using flags of convenience for all year round, and Alaska and
almost any way possible, the marine registration enables the Mediterranean in summer.
most common of which is cruise lines to source crews These areas have good access to,
discounting (Belsky, 1994; from low-wage labour markets and short flying times from,
Hobson, 1993b; Kalosh, 1995; as well as avoiding operating generating markets, as well as
Miller, 1996). This may mean taxes or the enforcement of popular and attractive cruising
that total revenue only reaches costly regulations (Mentzer, grounds, weather conditions and
the line TR2 in Figure 2. Filling 1989). ports-of-call. Larger vessel sizes
the ship still results in the also mean that cr uising is
s ma ll est po ss ible l o ss o n a • Reducing crew numbers or on- physically concentrated to places
cruise, represented by the line board service, although with deep water access and
CB. As long as this loss is less p assenger-crew ratios and canals or docks with adequate
than inescapable fixed costs, it service quality are important width (some new vessels are too
i s preferable to maintain the product differentiation items large even for the Panama
supply of cruises. It is also which contribute to higher Canal). Such mass market
important to maintain ships in selling prices and less-elastic concentration inevitably
revenue-earning service for as demand (Peisley, 1992b). influences the nature of the
many days in the year as industry and market structure.
possible, since any ship • Saving fuel costs by sailing
undergoing maintenance or more slowly, spending time in Market structure
sitting in port between cruises is ports-of-call where a ship acts
a costly wasting asset; as a floating resort hotel, and If there is a positive, but not
turnaround times are minimised including in itineraries ports infinite, cross-price elasticity of
(Bull, 1995). with cheap or low-tax fuel demand between products in a

32 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96

market place, then the structure of supply and the level of Horizontal product differen-
of that market is one of concentration in the industry. tiation, that is, distinguishing
monopolistic competition or Concentration has increased so products by offering different
oligopoly. A monopolistically that the “big three” suppliers - characteristics rather than
competitive market has many Carnival, Royal Caribbean and different quality levels of the
firms, and no restriction on entry. P&O/Princess - account for same characteristics, allows
Despite similarity in the basic almost half of all capacity. In cruise suppliers to segment
characteristics or performance of addition these companies are markets and specialise. Whilst
products, each firm sells a reputed to be the most profitable this may apply to all suppliers,
version of the product which is in the industry (Miller, 1996), who may differentiate by offering
differentiated from others. Given and are predicted to grow at the different specifications of a key
the definition of the short ocean expense of smaller, less-well cruising product characteristic
cruise market offered earlier in capitalised suppliers (Kalosh, such as food (Marti, 1995), it is
this paper, this is what suppliers 1995). particularly important for
are doing. However, full mono- smaller companies to enable
polistic c ompetition implies In relation to the broad choice of them to create a measure of
contestability (Baumol et al. , strategy open to oligopolists, monopoly in niche markets. For
1982) where it is possible for any between competition and co- example, Walt Disney
number of firms to operate operation, there is relatively Corporation is entering the cruise
sustainably. Free entry to and minor overt co-operation between industry with family cruises
exit from the market will allow suppliers, through the Cruise offered as a complementary
the possibility of a large number Lines International Association product to theme park visitation
of firms being present. Barriers (CLIA). Although CLIA members in Florida (Zbar, 1995). At the
to entry into a market may control 96% of berths offered to same time, cruise suppliers seek
include patents and legal North American consumers to differentiate their products
restrictions, contrived barriers (Murphy, 1996) which represents from those of land-based resorts
such as heavy branding and some two-thirds of the worldwide which in many ways are
advertising, and economies of market, CLIA’s economic role is substitutes.
sc ale which cause output at limited to cruise promotion and
min imum average cost to be distribution activity. Individual For the type of oligopoly
large relative to the size of the suppliers operate mainly as structure indicated, pricing
market. oligopolistic competitors, using activity is very important. With
product differentiation and differentiated products and
There are clear barriers to entry promotion as major strategic capacity constr aints, at the
in the market for short ocean weapons (Hobson, 1993b; Mintel development and entry stage for
cruises, in the forms of heavy International Group, 1993). For a cruise line or for a new vessel,
capital requirements, registration example, Carnival Cruises are decision making is likely to be
and licensing regulations, and vertically, or quality, differen- Cournot-type, representing
the increasing economies of scale tiated as inexpensive, the competition to set output levels
in operating vessels of larger size. ‘Macdonalds of the industry’ and and install fixed productive
The market has therefore as ‘fun’ cruises (Trumfio, 1995), capacity. Hence, there is
developed an oligopolistic whilst Cunard vertically considerable competition to build
structure, in which a small differentiates its products as new ships of the most efficient
number of suppliers dominate the prestigious and sophisticated in type and size (Darnill, 1995).
supply of short ocean cruises. order to maintain a price Once capacity exists, prices
Table 4 shows how supply is differential. become the strategic variable,
concentrated in the hands of a
few firms.
Table 4: Major Suppliers of Short Ocean Cruises 1995
During the 1990s there has been (number of berths available for short ocean cruises)
relatively high turnover amongst
suppliers, with some exits from Operator Berths % of market
the industry, a number of
mergers or takeovers (which have
led in part to the predominance Carnival Corporation 25800 20
of companies such as Carnival), P&O Cruises (inc Princess Cruises) 16600 13
Royal Caribbean Cruise Line 16300 13
and inter-company trading of
Kloster (inc NCL and RCL) 10000 8
vessels. Since a single large Cunard Line 6000 5
cruise ship can account for up to
1.5 - 2% of mark et capacity, Total 129000 100
trading in these mobile assets
can quickly alter relative volumes Source: Adapted from Peisley (1995) and CLIA (1996).

THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 33

 denoting Bertrand-Edgeworth- new areas. However, there are need to receive higher prices to
type decision making. This two- constraints on the latter, in terms remain profitable. The option of
stage approach is typical of sunk- of consumer access, touristic using older vessels pr ovides
cost models (Schmalensee, 1992). interest, climate, and a range of savings in capital costs, but
The concentration on price as a suitable ports-of-call. Short usually means higher running
strategic variable is enhanced ocean cruises are in many cases a costs as well as problems in
since cruises are services which substitute product for land-based meeting upgraded maritime
are non-storable and perishable, resorts, competition from which health and safety regulations.
so that producers must adjust can strongly influence demand.
prices to influence demand or be Suppliers of cruises will continue
left with useless output (Carlton The planned growth in the supply to seek growth in revenue by the
& Perloff, 1990). As a result, of berths for short ocean cruising sale of complementary goods and
cruise prices vary according to remains at a high level. Because services such as add-on shore
such differentiating charac- of long construction times, new excursions, on-board casino
teristics as the crew-to-passenger investment in ships locks in gaming and shopping. The latter
ratio or the age of the ship growth in supply up to five years can be in an advantaged position
(Mentzer, 1989), but for any ahead, assuming that older through having a captive market,
similar package of characteristics vessels are not scrapped at the but will continue to bring about
prices are highly competitive. same rate. The average size of (perhaps unfair) competition with
Table 4 shows daily rates charged mass market cruise ships is shops and services in ports-of-
by a number of operators for increasing, owing to economies of call, many of which rely on cruise
similar cruise products in 1995. scale, but this makes supply ever passengers for the bulk of their
more ‘lumpy’ and will continue to trade.
Table 4 indicates that, given the force operators to concentrate on
degree of differentiation between demand management strategies As a result of these actions, the
operators, ships types and to ensure high utilisation. short ocean cruise industry is
services, and differing cruise Inevitably this means continuing likely to remain a competitive
locations and lengths, there is competitive downward pressure oligopoly, with high global
still a high degree of homogeneity on cruise prices for as long as concentration among mass
within prices, suggesting a ther e is excess supply in market operators of large ships
closely competitive oligopoly particular places or at particular accompanied by a larger number
market structure. times. of smaller, specialist suppliers.

The economic outlook for Smaller operators continue to

short ocean cruising modify and differentiate their
products to sell in specialist
Most commentators agree that as market segments. This may
a sector of tourism, cruising necessitate the construction of
demand demonstrates con- specialist smaller cruise ships,
siderable and continuing growth. such as ‘explorer’ or sail-assisted
Much of this growth involves the vessels. With fewer economies of
development of demand from new scale in construction and
sources, particularly from Asia operation, these vessels often
and from Europe, and the operate at higher average cost
extension of cruising grounds into than larger liners, and operators

Table 5: Per diem prices for short ocean cruises, 1995

(Prices per berth in an outside twin/queen stateroom on a newer,
midsize, standard-class cruise vessel)

Operator US$ Operator US$

American Hawaii 251 Norwegian Caribbean 261-335

Carnival (liners) 228-252 Premier 224-302
Celebrity (liners) 240-293 Princess (liner) 230-300
Commodore 232-246 Regency (newer ships) 212-240
Costa 199-299 Royal Caribbean (liners) 218-361
Cunard (Countess) 268-310 Royal 228-355
Holland America 213-286 Sun Line 217-274

Source: Adapted from Schwartzman (1994).

34 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96

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