The Insane Logistics of Shutting Down the Cruise Industry.

Posted by

In March 2020, the cruise industry shut down. There are no qualifiers to that sentence– it’s not that certain ships from certain companies in certain countries shut down, it’s that every ship from every company in every country stopped accepting passengers in March 2020.

That’s unprecedented! Never before, in modern times, has there been such a complete, global shut down of an industry of this size. This isn’t like airlines, or restaurants, or movie theaters. They couldn’t keep operating at a certain level or with certain precautions or in certain geographies– every single cruise ship shut down. The second that happened though, time started ticking. Cruise lines were on the clock with the biggest challenge they might ever face: they had to survive as organizations with no revenue, no passengers, and little-to-no government support until it was safe and legal to sail again. As it turns out, doing nothing, as a company, is actually quite a lot of work.

After ships dropped of their last loads of passengers, thousands of people remained onboard: the crew. Naturally, management started to wonder what they should do with them. At first, the answer was nothing. You see, as the shutdown started, much of the global cruise fleet was in the Caribbean, finishing up the peak season before crossing the Atlantic for the summer Mediterranean cruise season.

As most Caribbean cruises leave from the U.S., that meant that the American CDC’s March 14th No-sail order was what officially prevented them from sailing–even if in practice most shut down voluntarily. That no-sail order, however, was initially slated to expire after just thirty days, so most cruise lines decided to leave their ships staffed and wait it out, under the hope that they could salvage their summer seasons. On April 9th, though, the CDC extended the order for 100 days, until July 24th, making it very clear that this would not be a short-term stoppage.

In most cases, cruise ships are subject to the laws of the countries in which they are registered, which means that most cruise lines register their vessels in countries with loose labor laws, like Panama, the Bahamas, or Malta. That typically lets them hire from anywhere, which in practice give them access to low-wage labor pools from Eastern Europe or the Philippines. Now, cruise ships are, of course, massive, and correspondently needs a massive number of staff to run. The Carnival Panorama, for example, has a crew size of 1,450 people, and Carnival, its owner has some 23 ships. That meant that, once they decided to officially pull the plug in April 2020, they had some 26,000 staff members from all around the world who each needed to get home.

In the era of pared-back flight schedules, border closures, and complex testing and quarantine protocols, it soon became very clear that finding 26,000 flight itineraries for 26,000 stranded crew members would not be a quick and simple exercise. So, rather than 26,000 itineraries, they cut it back to just about seven.

In late April, 18 of Carnival’s 23 ships started sailing to a spot off the coast of the Grand Bahama island. Then, once together, over a few days in early May, some 10,000 crew members shuffled between the various ships using tenders. The task entailed more or less grouping the crew into geographic regions- south-east Asian crew boarded the Carnival Conquest, South-Asian crew boarded the Ecstasy, eastern-European crew boarded the Magic, and so on and so forth. Once the crew transfer was completed, on May 4th, seven ships– the Liberty, Dream, Magic, Breeze, Ecstasy, Conquest, and Glory– left.

The Carnival Glory had the shortest journey of them all–tasked with repatriating many of the Caribbean crew members to their homes. Just five days after departing, it docked in St Lucia, then the next day in St Vincent and the Grenadines, then St George’s, Barbados, and so on and so forth–completing a multi-week milk-run of the West Indies. Next to complete its mission was the Carnival Breeze, dropping British crew off in Southampton, while the Carnival Magic made a quick stop in Gibraltar before arriving in Dubrovnik, Croatia to repatriate much of Carnival’s eastern-European crew.

Meanwhile, the journeys of the Liberty, Dream, Conquest, and Ecstasy were just getting started as they each stopped at various South African ports to re-stock, refuel, and drop off African crew-members. After two weeks of sailing the Indian Ocean, the Dream and Conquest arrived in the waters off the coast of Denpasar to bring many of the Indonesian crew home, while the Liberty arrived in Mumbai, India. The dream then made a quick journey west to Jakarta to drop off more of its Indonesian crew, just as the Ecstasy made it to Mumbai as well, carrying even more Indian crew members. Then, as soon as the Conquest met the Dream in Jakarta, the two sailed together to Manila to drop off a huge number of Philippine staff members, while the Liberty and Ecstasy sailed South to anchor off the coast of Colombo and drop off Sri Lankan crew. With that, as June turned into July, this repatriation mission was complete, with some crew having spent two months sailing from the Bahamas to get back home. While getting these 26,000 crew members off their boats and off their payroll was a major concern of management at Carnival once the long-term nature of shut-down became clear, attention among all cruise line management teams, quickly refocused onto how to actually survive as a business when there’s no business to be made.

In the third quarter of 2019, each of the three largest cruise companies earned billions in revenues, in the same quarter one year later, Carnival earned $31 million in revenue, Norwegian $6.5 million, and Royal Caribbean managed to earn negative $33 million in revenue–something almost unheard of among large companies.

So, how you do survive as a company when you quite literally have no way to make money? Well, cruise lines did have one thing going for them. Prior to COVID, they were highly, highly profitable. In fact,  many often pocketed hundreds of dollars in profit per passenger. In addition, cruising is a highly cyclical industry. What that means is that when the overall economy is good, the cruise business is quite good, while when the overall economy is bad, the cruise business is quite bad. That’s because when the money gets tight for a person, one of the first things to go is vacation. Therefore, cruise lines are used to weathering out leaner times, so they traditionally keep quite a lot of cash in their war chests.

At the end of the third quarter of 2020, by which time the companies had unlocked more liquid assets and passed the initial shock phase of the shut down, Norwegian cruise line holdings, the third-largest cruise conglomerate in the world, had some $2.4 billion in the bank. Meanwhile, the Royal Caribbean Group had about $3 billion in cash, while the Carnival Group, by far the largest cruise company in the world, held about $8.2 billion in cash. That’s what’s referred to as their “runway,” and the task was to get their burn-rate, how much they spend per day to stay in existence, to its lowest possible level. In the case of Carnival, if they spent $50 million per day, for example, they would only survive some 164 days without revenue. If they were able to get that down to only $25 million a day, though, they’d have 328 days, almost a year of runway.

Once the long term nature of the shutdown became clear, furloughing or firing almost all on-ship staff and a sizable chunk of onshore staff was an easy decision for cruise line management. One of the tougher decisions was what to do with their key assets: the ships. Unlike people, they couldn’t just let them go. In the case of Carnival, their oldest ship, smallest, and cheapest ship–the Ecstasy–cost some $275 million to build back in 1991. Nowadays, they are building $780 million ships like the Carnival Panorama. Put all together, this means a cruise line’s fleet is incredibly valuable, and since the ships weren’t carrying passengers around the world, they had to put them somewhere.

However, as it turns out, both the world cruise ports and the world’s cruise ships weren’t built with a total industry shutdown in mind. First of all, you can’t just turn off a cruise ship, tie it up, and lock the door behind you. With very little exception, from the moment a ship enters service to the moment it’s decommissioned, there are people onboard as these massive machines require constant monitoring and maintenance to stay in working order.

In addition, cruise ports were built to suit the need, and since the early days of the industry, the need has been for ships to stop every week or so to unload passengers, restock, and load back up. They’re designed for the majority of ships to be at sea which historically was fine, because the majority of ships were always at sea. Now, however, that means there just isn’t enough space in the world’s cruise ports for every cruise ship to tie up and wait things out. In fact, there’s not even close to enough space, and most ports charge ships tens of thousands of dollars per day to tie up, so the vast majority of the world’s cruise fleet is out at sea floating around.

They each now carry an average of about 100 crew members- a fraction of their normal staffing levels- performing the most essential functions- navigation, maintenance, engineering, food preparation, medical care, and more. In the case of Carnival 15 of their 23 ships are currently anchored off the coast of the Bahamas, and about once a week, one of them will sail to Miami to pick up food, mail, and other supplies, which they then transfer between the ships upon return. Most lines are operating with some version of this floating cluster approach as it’s clearly one of the lowest-cost methods for storage that keeps ships in an adequate state of readiness for when cruising finally returns.

And that’s the key question right now: when will it be possible for cruising to return?

In Summer 2020, some thought the answer was then. Particularly in Europe, which had a robust summer travel season, quite a few smaller cruise ships and even some larger ones brought passengers back onboard, with precautions. In general, this meant the ships were capacity capped and passengers had to be tested before boarding, were subject to temperature checks, were required to wear a mask in communal areas, and could only go ashore on managed excursions. With these and other rules, cruise companies thought they might have cracked the code of sailing safely and profitably during a pandemic, but then reality hit.

On the MS Roald Amundsen–an expedition cruise ship that typically carries about 500 passengers through the Arctic or Antarctic– 62 people tested positive for COVID after a trip around Svalbard, putting stress on the contact-tracing system of northern Norway. Elsewhere in Norway, the SeaDream 1 had to cancel a cruise after a positive COVID test, and then a few months later, the very same ship left Barbados on the very first cruise in the Caribbean since the start of the pandemic, which soon had to be cancelled due to nine passengers and crew testing positive. On the other side of the continent, UnCruise Adventurer left Juneau in early August on the very first cruise with passengers from an American port since March 2020, until a passenger’s test came back positive, forcing them to return to port, put all passengers under quarantine, and cancel the rest of their season.

This is the reality of cruising during a pandemic. As long as the passengers are originating from a place with rampant community spread, no matter how many precautions are taken, it doesn’t work from a public health perspective, it doesn’t work from a business perspective, it just simply doesn’t work. Therefore, for the most part, even in the cases where governments weren’t stopping them, cruise lines stopped trying.

Nowadays, however, in Spring 2021, tens of millions of COVID vaccines are entering people’s arms every day around the world, and a solution has arisen. Instead of trying to prevent COVID from spreading on their ships, the cruise lines are simply going to prevent people who could have COVID from getting on their ships. Many of the major players, including Royal Caribbean, are requiring all adult passengers to be fully vaccinated before boarding. Even though no vaccine is 100% effective, having a fully vaccinated ship means that even if someone does board with COVID, this will not set off a chain reaction of community spread throughout the vessel.

Given these new policies, cruise lines are reworking their schedules to center their business on the places where vaccines are rolling out the fastest. For example, with less than two months notice, Royal Caribbean announced that it would be sailing from Israel, home of the world’s fastest vaccination campaign, for the first time ever with one of the largest cruise ships in the world– the Odysseys of the Seas. In addition, while the Summer cruise season is traditionally centered on the Mediterranean, in 2021, many of the first cruises to restart will be based out of the Caribbean, in close proximity to the U.S. which has also had one of the world’s fastest vaccination campaigns.

Cruise lines have, for the most part, succeeded with their grand challenge. A the end of 2020, Royal Caribbean, for example, still had $3.6 billion in the bank, as runway, and had pushed their burn rate down to $270 million a month. That means they can survive without revenue until at least February 9th, 2022. Norwegian cruise line, meanwhile, had enough to make it until April 25th, 2022, while Carnival had enough to last June 9th, 2022.

The Cruise lines will be fine. But there is another side to the equation. While cruise lines are typically massive, global enterprises, they rely on the places they visit, they rely on all the small businesses that operates tour and excursions for passengers at each port of call. Specifically, they rely on places like Ketchikan, Alaska. Two summers ago, Ketchikan was one of the most sought after cruise-destinations in the world– they would quite literally run of space on the docks. Last summer, they were experiencing the most acute form of economic ruin.

Source.

So now, you know.

Rgds, Sailor

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s