Oversupply A Concern As Cruise Lines Flock To China

Cruise Week

Even for an industry that has gotten used to hearing announcements about expansion and investment into China, this week’s developments were extraordinary.

But what’s different this time around is that the latest news - Norwegian announced its entry into the market as did Carnival Cruise Line and AIDA Cruises - comes at a time when concerns are being aired about too much simultaneous capacity leading to pricing challenges.
For instance, Jamie Rollo of Morgan Stanley wrote this week, “Chatter about weak cruise pricing in China seems to be supported by our own channels checks, with the distribution structure and high supply growth a factor.” Rollo continued that feedback indicates steady demand growth, but that oversupply is seen as an issue.
However, Robin Farley of UBS Investment Research says the pricing issues are all relative. “It’s the volume increase that matters, pricing is already where it needs to be," says Farley. “China is an important market for the cruise lines not because it is growing price at an outsized rate, but rather it is important because the growth of pricing in China has already surpassed the tipping point about 2 years ago where a ship is more profitable in China than an incremental ship in the Caribbean.”

China sourcing, she says, positively impacts pricing in North America. Case in point is the Norwegian announcement that the new 4200 berth Norwegian Bliss, originally scheduled to be in the North American market in 2017, will instead be purpose-built for the China market.
Farley says that change of plans brings 2017 North American supply growth to below 2%.
In its announcement, Norwegian emphasized the features of the ship itself, pointing out that this Breakaway Plus-class vessel will be the 1st purpose-built ship for the Chinese market. Symbolically, NCLH President & CEO Frank Del Rio made the announcement in Shanghai, the bustling city which is becoming the Chinese equivalent of what Miami once was to North American cruising - an epicentre for growth.
Meanwhile, when Carnival Corp. CEO Arnold Donald, also in Shanghai this week, announced that the Carnival Miracle will begin sailing in China 2017, his emphasis was on Carnival Corp's size in the marketplace. Among the numbers Donald cited: Carnival Corp. is the 1st company to operate 4 brands in China; from 2012 to 2014, capacity grew 79% in China; this year it is growing 43%; next year it will be up by 58% over 2015 on a larger base; overall, Carnival Corp. has nearly 50% of the market share in China.

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