Humans have since time immemorial been fascinated with ships, seas and oceans. Whilst ships have in the past been used mainly for transportation of goods and people and of course for war, seafaring has always been associated with travel to new and strange destinations, excitement and romance.
With the contemporary day and age being firmly focused on new alternatives for leisure, excitement and life experiences, the western tourism industry has astutely used this human fascination with the seas to develop an extremely desirable tourism option; namely sea and ocean cruises. Such cruises offer exciting and pleasurable vacation options for people. They are offered by specialised cruise liners and provide customers the experience of travelling on the high seas in large, well appointed and luxurious ocean going vessels. Cruise holidays provide customers with luxury experiences and opportunities to engage in numerous leisure activities like (a) sun bathing on expansive ocean liner decks, (b) use of large swimming pools, (c) a range of body comfort activities through the use of spas, gyms and Jacuzzis, (d) various types of eating and dining options, and (e) a range of on ship holiday activities like games, contests, singing and dancing.
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The modern day cruise industry emerged in the 1970s in North America (Dowling, 2006). Whilst cruises originally aimed to provide customers with luxurious trans-ocean transportation options, the industry has since then transformed into a vacation alternative for people to travel to land based destinations or to sightseeing locations in the oceans (Dowling, 2006). A cruise now stands for a complete start-to-finish experience in luxury, comfort and the good life, rather than an option for travelling from point A to point B (Dowling, 2006). Whilst cruise vacationers still form a very small segment (just about 2%) of the global tourism industry, their volumes grew from 500,000 passengers in 1970 to 6.6 million passengers in 2000 (Gisnas et al, 2008). Such volumes have continued to grow during the last decade and are estimated to be 17 million annual passengers today (Gisnas et al, 2008). The industry experienced significant growth in the 1970s, when it first emerged, and has been growing at between 8 and 9% since then (Gisnas et al, 2008). Sectoral growth in the cruise sector has also not been cyclical like other shipping segments (Gisnas et al, 2008).
Carnival Corporation and plc (Carnival Corporation) is the world’s largest operator of cruise ships. With 11 individual brands and a total fleet of 96 vessels, the organisation operates cruises in North America, Europe and Australia (Carnival…, 2010). Whilst the global recession affected the travel and tourism industry significantly and also affected the revenues of the company to some extent, Carnival Corporation expects to grow significantly in the coming years, as recessionary forces weaken and individual and business spending starts moving upwards once again (Carnival…, 2010).
This specific analysis attempts to (a) examine the operations and mechanisms of the cruise industry, (b) analyse the strategies and operations of Carnival Corporation, and (c) recommend suitable future growth strategies for the company.
2. Overview of Cruise Industry
2.1. Brief history of Cruise Industry
The first cruise route, historical records reveal, was established by British P&O in 1882 with the introduction of S/Y Ceylon for pleasure cruising (Cartwright & Baird, 1999). The ship operated on the western coast of Norway and was well known to wealthy UK citizens (Cartwright & Baird, 1999). The most famous example of a cruise liner of those days is that of the Titanic, which sank on her maiden voyage from Southampton to New York, in April 1912, after a collision with an iceberg (Cartwright & Baird, 1999). Whilst trans-ocean services between North America and Europe expanded greatly between the two great wars, the emergence of commercial aircraft after the closure of the Second World War led to the elimination of human transportation through ships (Cartwright & Baird, 1999). The years that followed the closure of human transportation through ships however saw the emergence and the steady growth of pleasure and tourism oriented cruises (Cartwright & Baird, 1999).
The cruise market is currently dominated by three important organisations namely, Carnival Corporation (the subject of this study), Royal Caribbean International and Star Cruises. Whilst the industry was home to a number of players in the 1970s and 1980s, progressive mergers and alliances have led to the formation of oligopolistic market situation that is dominated by three strong entities (Gisnas et al, 2008). Carnival Corporation leads the business with a 45% market share, followed by Royal Caribbean (21%) and Star Cruises (10%) (Gisnas et al, 2008). Appendix 1 provides details of the capacities of the major cruise liners.
The cruise market is divided into two main geographic segments, (a) the US market and (b) the European market. The US market, which includes North America and the Caribbean, forms 62% of the total market, whereas Europe accounts for 24% of cruise users (Kamery, 2004). The European market, whilst smaller than the US market, is growing swiftly and is expected to increase by more than 9% per annum in the coming years (Kamery, 2004). The UK market has until now been the dominant European market, even as the German, Scandinavian, Benelux, Austrian and Swiss markets are showing strong growth (Kamery, 2004).
Cruises can be segmented into five main categories, namely contemporary cruises, budget cruises, premium cruises, luxury cruises and special cruises. Appendix 2 provides details of the different types of cruises.
The industry can otherwise be segmented by languages, which surprisingly is an important point of differentiation (Gisnas et al, 2008). Individuals prefer to go on cruises with people who speak the same language (Gisnas et al, 2008). Important market segments are (a) American families, (b) senior citizens from the EU, (c) conferences and incentives, (d) themes and (e) adventure (Gisnas et al, 2008). In North America the target population for cruises companies comprises of adults, who are more than 25 years in age and earn more than 40,000 USD per annum (Gisnas et al, 2008).
The target market includes (a) people who have cruised before, (b) vacationers who have not previously engaged in cruises and (c) non vacationers as well (Gisnas et al, 2008). The segment makes up practically 44% of the US population (Gisnas et al, 2008). Whilst the average age of passengers has come down to just below 45 in the US, The average age of passengers in the UK is also coming down significantly (Gisnas et al, 2008).
The potential of the market is high because the existing penetration rate at 3% for North America, 1% for Europe and 2% for UK is very low. The main markets continue to be North America and Europe. The Asian market is however growing very slowly. Appendix 3 Provides details of passengers both by nationality and by origin.
3. Analysis of Carnival Corporation
3.1. Company Overview
Carnival Corporation & plc is the market leader of the cruise industry. Carnival Corporation was founded in 1972 by Ted Arison (Carnival…, 2010). Both Carnival Corporation and Carnival plc have grown organically, as well as through mergers that have led to significant increases in organisational operations (Carnival…, 2010).
The present organisation came about from a merger between Carnival Corporation and P&O Princess Cruises plc, wherein it was agreed that P&O would be listed on the London Stock Exchange (Carnival…, 2010). The organisation is thus dually listed on the London and New York Stock Exchanges and has head offices at Miami, USA, and at Southampton, UK (Carnival…, 2010).
The company has 11 cruise line brands, each of which controls a geographical location. To elaborate, AIDA cruises controls the German business, Carnival Cruise lines, Holland America Line, Princess Cruises, and the Seaborne Cruise Line operate in the United States, Cunard Line, Ocean Village, and P&O Cruises service the UK market, Costa Cruises controls the Italian business, Iberio Cruises controls the Spanish business, and P&O Cruises Australia controls the Australian business (Carnival…, 2010).
The organisation earned revenues of 13.1 billion USD in 2009 compared to 14.65 billion USD in 2008. It owns 93 ships, has a passenger capacity of 180,746, and employs 85,000 people. Carnival Corporation carried 8500 passengers in 2009 (Carnival…, 2010).
3.2. Operational Performance
The operations and financial performance of the company suffered significantly in 2009 compared to 2008. The sales and net income figures for these two years are provided below.
Year
2009
2008
Sales
Million
USD
5912
6550
Percentage Movement
(10%)
Net Profits
Million
USD
885
1090
(19%)
Net Profit Ratio
0.15
0.16
Whilst the company management states that they have been able to cushion the impact of the recession effectively, the financial analysis of key performance indicators reveals a different picture. Both sales and profits have come down sharply (Carnival…, 2010). It also needs to be noticed that the sales of the organisation have come down by 10 %, even as the cruise industry overall contracted only by 3 % in 2009 (Carnival…, 2010).
Other operational and profitability ratios like ROI and have also come down in the wake of reduction in sales and profitability.
3.3. PESTEL Analysis
The PESTEL frame works helps analysts to examine environmental factors in a methodical manner (Porter, 1980). The specific examination of political, economic, social, technological, environmental and legal factors assist in understanding key change drivers and external influences on the working of organisations (Porter, 1980). A PESTEL analysis helps organisational managements in aligning organisational strategies with environmental realities and work towards ensuring that organisations do not purposely follow strategic rules that are at variance or in opposition to environmental forces (Porter, 1980).
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With cruise lines essentially being international in the nature of their operations, their working can be significantly affected by terrorism related conditions (Porter, 1980). Increase in terrorism activities invariably leads to stricter immigration laws and to reduction in tourism enthusiasm (Porter, 1980). Apart from terrorism, cruise activity can also be affected by political instability in geographical locations that are part of the cruise network, as well as by tourism related taxation policies in different countries (Porter, 1980).
Tourism, being an essentially discretionary activity is strongly influenced by changes in global economic conditions (Porter, 1980). The last two years have seen reduction in tourism business and cruise activity. Apart from the economic environment, the movement of exchange rates can also affect tourism and consequently cruise activity. Whilst tourism is currently going through a difficult phase, (having reduced by 4% in 2008 and 2009, and expected to grow by 0.3% in 2010) a post recession boom is likely considering that tourism contributes approximately 10.6% of global GBP.
Social and cultural features play important roles in the cruise industry (Porter, 1980). The majority of cruise customers come from affluent and western social segments and place great stress on lifestyle quality (Porter, 1980). The market for cruises has until now been dominated by customers from the advanced western nations.
Cruise liners are constantly investing in technology to make their ships more customers friendly as well as easier to operate. Internet sales enable customers to reduce costs through elimination of intermediaries (Porter, 1980).
The tourism industry, because of the associated travel costs, is strongly associated with emission of green house gases. Any sort of rationing of petroleum products can as such lead to significantly adverse effects upon the tourism and cruise sector.
The cruise business can also be influenced to some extent by trade laws and customs procedures and regulation. The existing global visa regime is tremendously skewed in favour of the inhabitants of rich countries and this can affect the growth of cruise customers from the emerging nations.
3.4. Critical Success Factors
Analysis of available information leads to the conclusion that success in the shipping industry will depend essentially upon economies of scale and degree of differentiation (Gisnas et al, 2008). Extending this concept to the cruise industry, the critical success factors in the industry can be narrowed down to the four following factors (Gisnas et al, 2008).
Exploitation of scale economies: Economies of scale can be achieved in different operational areas like vessel size, maintenance programmes, and economies of hotel operations
Product Differentiation: This can be achieved through the conceptualisation and implementation of different types of cruises.
Generation of Customer Loyalty: This will enable companies to obtain higher shares of repeat customer business
Management of Strategic Investments: This will enable an organisation to get infrastructural advantage through optimisation of investments, both in terms of money and costs.
4. Strategic Recommendation
Carnival Corporation is currently experiencing difficult environmental conditions because of the global recession that was triggered off by the housing collapse and the subprime crises in the USA (Porter, 1980). With the economies of affluent North American and European countries, wherein the brunt of the crises, global tourism was significantly affected during the past two years (Porter, 1980). The bulk of the cruise industry services the citizens of the United States, the UK and other affluent European nations and a sharp economic downturn in these nations will expectedly have significantly adverse on the sales and operational performance of the members of this sector (Porter, 1980).
The strategic growth plans for carnival Corporation must accordingly incorporate the impact of the extra ordinarily difficult current environment (Porter, 1980). Whilst the current economic environment is challenging the company’s operational and financial capabilities, it is also providing significant opportunities to strong existing players (Porter, 1980). The growth recommendations for Carnival Corporation have been based upon the information obtained from the PESTEL analysis, the utilisation of strategic theories like Porter’s generic growth strategy and Ansoff’s growth matrix, the critical success factors for members of the industry and the opportunities and threats that exists in the current environment (Porter, 1980).
Michael Porter, in his seminal contribution towards corporate strategy forwarded the theory that companies can achieve competitive advantage only through the adoption of specific strategies, namely cost leadership, differentiation, or niche occupation (Porter, 1980). Porter went on to state that whilst many organisations feel the need to adopt more than one of such strategies, such an attitude was essentially faulty, and the desire by company managements to adopt essentially distinct operational strategies could lead to loss of focus, confusion in growth objectives and engagement in contradictory and self destructive actions (Porter, 1980).
Carnival Corporation has constantly followed a strategy of differentiating of products from that of its competitors. Whilst the organisation’s growth is also due to its origin and operations in the extremely strong US and British markets, the company has constantly differentiated its offerings through innovation in the types and lengths of cruises to its customers. The company is otherwise strongly focused on sustainability and is taking action to reduce its carbon footprint through the lowering of energy use on its ships, preserving clean air, and reducing operational waste.
The PESTEL analysis reveals that whilst the industry is vulnerable to global terrorism actions and the political instability of countries that form part of the operational area of the industry (Porter, 1980). Apart from such political factors, the industry is vulnerable to economic downturns. It is however becoming obvious that the downturn has possibly bottomed out and that western economies are moving towards recovery (Porter, 1980). Whilst recent economic developments in Greece and Spain are disquieting, broad economic indicators show the possibility of some economic improvement in 2010 and firm upward economic movement in 2011.
This situation provides abundant opportunities to the company’s growth plans. Whilst 2009 has seen a dip in the company’s sales and profitability, financial reports reveal that the company has a very strong cash position and comfortable leverage ratios. With its considerable financial ability and its experience in growth through buyouts and acquisitions, the current economic circumstances should provide significant opportunities for the company to acquire smaller and financially weaker organisations, who would be finding it difficult to survive in the present circumstances.
Igor Ansoff’s model of growth stipulates that companies move in their growth curve from selling currently available services in existing markets through various phases to selling new products in new markets (Tutor2u.net, 2009). Ansoff’s growth model is provided in appendix 4. Carnival Corporation should clearly follow a carefully formulated strategy of external and internal growth. External growth should be targeted through the search and acquisition of attractive cruiser lines whose operations and viability has suffered because of the crises. The corporate management should aggressively scout for acquisition and use its strong financial resources to good effect. Such a strategy will also lead to better scale economies and will of course need efficient management of strategic investments (Tutor2u.net, 2009).
The company, in accordance with Ansoff’s model should steadily pursue strategies for differentiating their services through the conceptualisation and implementation of different cruise themes. It is also opportune for the company to seriously look at the emerging Asian tourism sector, preferably through the acquisition of a local cruise operator. The Asian economy is fairing much better than the European economy and significant accretion is occurring in the upper middle class segments of China and India. Such population segments are totally unexposed to cruise vacations and provide fertile ground for Carnival Corporation to thrust their Asian operations.
Carefully conceived strategic plan of organic and acquisitive growth will enable the company to consolidate its leadership position and exploit current environmental opportunities (Tutor2u.net, 2009).
5. Conclusions
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