Could the Coronavirus Storm Sink the Cruise Industry?
WHY YOU SHOULD CARE
Quarantines, canceled sailings and worries over infection are weighing on a $45 billion industry.
Dream holidays have become a nightmare for cruise passengers caught in the middle of China’s coronavirus outbreak.
About 3,700 people were marooned off the coast of Japan in quarantine on the Diamond Princess, with more than 600 passengers showing signs of infection. Another ship, the Westerdam, was quarantined in Cambodia after being repeatedly rerouted across the South China Sea and denied entry to five other countries. Both sets of passengers have since been allowed to move freely again.
Though Coronavirus infections and scares have been limited to two ships so far, both owned by Carnival Corporation, the $45 billion cruise industry faces a battle to regain customer trust.
More than 50 cruises (and counting) have been canceled, seven ports closed and thousands of vacationers’ plans disrupted as authorities scramble to prevent the spread of the coronavirus.
“If it dies down now then it’s probably manageable,” says Alex Brignall, an analyst at Redburn covering the cruise industry. “If it gets outside Asia on a cruise ship, it will be very different.”
Shares in the three major cruise operators — Carnival, Royal Caribbean and Norwegian Cruise Line — have fallen between 10 and 16 percent since the beginning of the year as investors register their concern.
Companies themselves have warned that bookings for all regions have been “soft” since the outbreak. Royal Caribbean last week said that cancellations, alongside a moratorium on remaining sailings in Asia until the end of April, would lead to a roughly 12 percent fall in earnings this year. Carnival guided to a hit of roughly 14 percent a share should Asian itineraries be canceled until May.
Asia is a small but fast-growing market for cruises. The number of Asian passengers rose to about 4.2 million in 2018, up from 1.2 million five years earlier, according to the industry group Cruise Lines International Association (CLIA). More than half of those were Chinese.
We have already taken aggressive steps to minimize risk.
Richard Fain, Royal Caribbean
According to the U.N. World Tourism Organization, Chinese outbound travelers spent $277 billion in 2018 — more than any other nationality.
Costa, a Carnival brand and the first to offer cruises around China, launched a ship specifically for the Chinese market in May 2019, complete with seven karaoke rooms and bigger casinos. Royal Caribbean, the second-largest cruise company, has two liners scheduled to travel to China this year. No changes have been made to those plans.
“We have already taken aggressive steps to minimize risk through boarding restrictions and itinerary changes,” Richard Fain, chief executive of Royal Caribbean, said in a statement last week. The CLIA says that cruise companies have been “agile and responsive” to the situation.
The industry has faced crises before. The sinking of the Costa Concordia in 2012 off the coast of Italy led to 32 deaths. A year later, 4,200 passengers and crew were stranded on the Carnival Triumph for nearly a week without power after an engine room fire, while norovirus outbreaks frequently hit the headlines.
But “crashing a cruise ship is not contagious, nor is running out of electricity,” says Brignall, adding that with a high number of older passengers and enclosed conditions on board, “if something slips through the net, then the impact can be huge.”
David Handley, a maritime lawyer at Watson Farley & Williams in London, says that the most pressing issue was routing ships out of Asia. “How do cruise lines deal with some very expensive assets that were scheduled to be in Asia and which now there’s no point having in Asia because people just won’t travel,” he says.
As operators wait for Asian sailings to resume, the cruise industry has been quick to highlight the stringency of its regular sanitation procedures.
“We do checks during the voyage as well as checks at the beginning. Crew members are trained to look out for unwell passengers,” says one industry executive, who asked not to be named. “It is one of the things on which we place most value.”
All cruise ships have a hospital room and passengers are regularly encouraged to use hand sanitizer. Since the coronavirus outbreak, larger cruise companies have started operating mandatory temperature scans before boarding and passengers from China have been banned from sailing.
They have also paid out millions in compensation. Based on an average cabin price for next year, the cancellation of a full capacity 12-day cruise on Norwegian from Hong Kong would cost the company in the region of $3 million in refunds.
But while customers are compensated for canceled trips, most major cruise lines do not have commercial insurance to cover situations such as the coronavirus outbreak because premiums are punishingly high. Costs will have to be absorbed or paid out from a mutual liability insurance available through a group of shipowners’ clubs called the International Group of P&I Clubs.
Claims in excess of the $10 million retained by individual member clubs are pooled between the whole group.
Eric Chung, 68, who was aboard the Diamond Princess with his family, says that staff had been guarding passageways and passengers had only been allowed on deck if they were wearing masks and rubber gloves.
He brushes off the quarantine measures saying he would happily take another cruise, but next time would book a cabin with windows. As the executive points out: “The cost of a screw-up is huge. People have to be comfortable on board. Bad PR from cutting any corners could be a business killer.”