#10: Why do cruise ships keep getting bigger? And will it ever stop?
The commercial and financial forces that influence the size of cruise ships
Hi there! I’m Jess 👋
Bureau of Adventure is a newsletter about the travel business and taking better vacations.
Last week, the largest cruise ship in the world embarked on its first revenue voyage. If you’re too online, you may recognize Icon of the Seas from the small twitter panic the ship set off six months ago. Renderings led people to call it a monstrosity, human lasagna, or - my personal favorite - the Candy Crush version of “Silo.” Cruises are a perennial punching bag - just read the comments of any NY Times article about the cruise industry - and the size of new ships feeds criticism of the industry.
Today, I want to reflect on why cruise ships have gotten so big. Why does nearly every cruise brand build new ships that are larger than their fleet average? It’s not just Royal Caribbean and other companies in the mass-market “big ship” segment. Silversea and Seabourn, luxury brands that started with small 200-300 passenger ships in the 1990s, now build 600+ passenger-ships. Holland America’s newest vessels carry 2,600 guests. In the 1990s, they marketed themselves as a brand of mid-sized ships carrying less than 1,500 people.
Economies of scale, and their limits
You may be reading all this and thinking the answer is obvious: “economies of scale!” That’s partially true. Larger ships are less costly to operate per passenger. They’re also less costly to build (per berth) at the few European yards that specialize in cruise shipbuilding.
However, if you pay attention to the airline industry - you know that chasing lower unit costs doesn’t always work. After all, the A380 was a massive flop and Boeing has shut down production of the 747. In the airline business, lower cost per seat only make sense if you can sell every incremental seat for a reasonable price. In practice, it only works for the few airlines that have massive volume, like global super-connector Emirates. 500 seats are too much for most airlines to fill profitably, even though the total number of global airline passengers is growing.
It turns out that airline customers pay more for frequency (I want to depart at 10:00) and non-stop flights (don’t make me connect through Heathrow), both of which drive airlines to offer more flights on smaller planes. The popularity of the 787, which carries half as many passengers as the A380, is a testament to the fact that chasing lower unit costs is not always a winning strategy. You want the highest profit per seat, even if your costs are higher.
In the cruise industry, we see this dynamic play out in a few ways. A major differentiator for higher priced luxury cruise lines - aside from amenities and service - is smaller ship size. “We go where the big ships can’t”. They tolerate higher operating costs (per passenger) because they’ve found customers with a higher willingness to pay.
In the US mass market, there are currently two products where demand is so high, you can essentially fill a ship of any size with customers - the Caribbean and, to a lesser extent, the Mediterranean. Even then, it has to be from major homeports (South Florida, Port Canaveral, & Galveston) on the most popular products (3-7 night durations). All eight of Royal Caribbean’s largest 5,000+ pax ships are deployed to the Caribbean in the winter and only one of those ships moves to the Mediterranean for the summer. On these “milk runs” - regular, high-demand itineraries - it makes sense to drive down unit costs. There’s effectively an infinite supply of customers looking for a Caribbean vacation (from these homeports and for those durations). There’s no benefit to operating smaller ships on more departure dates or itineraries, since customers are not particularly picky about itinerary (Jamaica or Grand Cayman, who cares?) or departure day (Saturday vs Sunday).
In the next decade, more products will generate enough demand to warrant these enormous ships. Alaska and West Coast Mexican Riviera itineraries will eventually get “up-gauged”. European-sourced brands already deploy their largest ships on their “milk runs” to Norway, the Baltic, and the Canary Islands.
But what about products with less demand? Carnival, for example, operates Caribbean cruises from Norfolk, Charleston, Jacksonville, Mobile, and Tampa. These homeports enable people to drive to their cruise, which is extremely popular. But these homeports are served by older, relatively small ships (2-3,000 pax). Ignoring physical constraints, will Carnival build demand so these destinations can eventually support 5,000 passenger ships? Crazier things have happened. I never would have imagined Norfolk, VA could support a year-round 3,000 pax ship.
Sustainability goals & alternative fuels
Another major driver of cruise ship size is sustainability (as crazy as that may seem). The International Maritime Organization has committed to making all shipping net-zero by 2050 with carbon-intensity reductions along the way (measured per unit). Cruise companies have signed up for these goals. The easiest way to meet the intermediate carbon-intensity targets is build larger, more efficient ships.
Alternative fuels are becoming a major factor too. Cruise ships have a lifetime of 30+ years, which means ships built today will be in service after the 2050 carbon-neutral goal.
While there is no clear path to decarbonization, there is a hazy one and it requires space. Ships will likely be powered by a combination of new gaseous fuels (LNG or hydrogen), liquid fuels (methanol or ammonia), and batteries. Most of these fuels require carbon-based inputs now, but there’s a belief (hope?) that there will be carbon-neutral substitutes in the next few decades. All these alternatives fuels are significantly less dense than the diesel fuel ships use today. Methanol, for example, requires double the space as diesel fuel for the same amount of energy. Hydrogen is worse.
Today, companies are building ships with the expectation that they will have to convert fuel types mid-way through the lifecycle. They need to build the right fuel tanks or reserve space for them now. As ships get larger, the proportion of volume used for propulsion gets smaller. That has driven larger ship size. It’s not a coincidence that when Carnival Corp came out with the first LNG-powered cruise ship, it was their largest ship ever. LNG is a gaseous fuel that requires more storage volume, venting, and specialized tankage. To make a ship with all that extra mechanical space competitive, it needs to be huge.
Where does it end?
In 20 years, will all mass-market ships carry 5,000+ people? Why not 10,000?
There are limits. For a start, many destinations have physical constraints that prevent larger ships from accessing them. Vancouver, Jacksonville, and Tampa have bridges that restrict the height of ships sailing there. Homeports make enough money from the cruise business that there are usually solutions to these constraints. Destination ports are a different matter. While it might make sense for a homeport to build a new terminal on the ocean-side of a bridge, few ports-of-call can justify that kind of investment. Still, it only takes a few ports in a region to make a 7-day cruise product.
Another common constraint is tourism infrastructure. Even when a ship can physically dock in a destination, that place may not be able to handle 5,000 visitors. Companies push the envelope here, since customers don’t understand this when booking a cruise and small destinations are appealing at the time of purchase.
In some ports, tour companies bring guides and buses from the nearest capital city to serve the biggest ships. When your ship visits Isafjordur in Iceland, your guide may be from Reykjavik. Shore excursion managers grumble about these issues, but I’m not convinced they will prevent larger cruise ships from visiting a destination in the long-term. If enough ships get big, enterprising tour operators will hire more guides and rent more buses. Remember: many destinations that are overrun by cruise ships accept several ships simultaneously. Would it make any difference if the same number of people showed up on two vessels instead four?
In short, I’m not convinced today’s physical or tourism-infrastructure constraints will prevent the mass-market coalescing around 5,000+ pax ships. Not all of today’s destinations will make themselves accessible to those ships, to be sure. But enough could be available to feed the demand for the most-popular trips vacations.
History has born that out. In the 2000s, Alaska was “full”. But in the last few years, Royal Caribbean and NCL started deploying larger ships to Alaska. New docks have been built, existing docks have been expanded, and NCL has invented an entirely new destination. Guides are hired seasonally, many from out of state, so that can be scaled up. While there’s vocal opposition to the cruise industry in Alaska, it’s not yet translated into legislation to limit the industry’s growth.
If physical and infrastructure constraints don’t limit the size of ships, what will?
From a commercial perspective, there will always be markets that are not addressable with the largest ships. The most significant ones are:
Destination-oriented cruises will benefit from smaller ship size for similar reasons to airlines. When you sell 7-day resort-style vacations, you have a high volume of commodity demand. It’s not too hard to find another 1,000 pax for a given departure. When you sell a European itinerary, suddenly people care if they are visiting Venice, Istanbul or Amsterdam. In fact, people pay quite a bit more to visit the places they prefer, and their preferences are varied. Ship size has been increasing for mass-market destination-oriented brands (like Princess, Holland America, and Celebrity) - but vessels in this category will be relatively smaller.
A selection of destination-oriented itineraries from Princess. Premium niches will continue to exist. Viking’s explosive growth is based on charging a premium for destination-oriented cruises on 1,000 passenger ships. And size is not just about access to destinations. At higher price ranges, most customers just prefer being on smaller ships.
The mass-market will still need to diversify its capacity. As an example, Carnival operates three ships out of Los Angeles - two 4,000 pax ships and one 3,000 pax ship. They mostly operate a range of 3-8 day cruises to the Pacific coast of Mexico, but the smallest ship does a 14-night roundtrip to Hawaii every month. Hawaii is a distinct product from Mexico, but a longer cruise with many sea days has limited appeal. If Carnival operated two larger ships, it would be more difficult to diversify capacity across distinct products. They’d have to commit more capacity to Hawaii, selling the last 1,000 beds at low prices, or they’d have to forgo Hawaii and flood Mexico with more capacity than they’d like.
This last example makes me believe there will still be a need for many 3,000-4,000 passenger ships in the mass market, and the biggest ones will not grow much beyond ~5,000 passengers (2,500 rooms). The largest hotels in the world have 7,000 rooms, more than double the largest cruise ships. However, cruises have fixed start/end dates. Hotel’s don’t - guests come for weekends, mid-week conventions, and full-week stays. A cruise ship can only serve one of those markets at a time.
It’s worth mentioning a final potential constraint on ever-growing ship size: regulation. As cruise ships become larger and more numerous, residents around the world are increasingly questioning their value. Last year, Bar Harbor residents voted for a 1,000 passenger cap. The number of cruise visitors is a constant source of debate in destinations like Alaska, Norway, and Key West. These restrictions are sometimes implemented in haphazard ways that the cruise industry challenges in court, but I suspect more bans will be implemented and upheld.
All of these considerations will become more urgent for cruise executives as their smaller ships reach the end of their lifecycles. The mass-market lines built many sub-3,000 passenger ships in the 1990s and 2000s. We’re approaching the 30-year retirement age for many of those ships. It’s easy to build new huge ships when you have a fleet of smaller ones to deploy. What do you do when those are retired?
My prediction: Mass-market companies won’t build many sub-3,000 pax ships for the reasons I outlined above (scale economies and sustainability). In the mass-market, average ship size will continue to increase as more 3,000+ passenger ships are built and older sub-3,000 passenger ships are retired, but the largest ships won’t get much bigger.
In fact, this has already been the trend. Even though it’s 5-10% larger by volume, Icon of the Seas carries roughly the same number of passengers as Oasis of the Seas, 2009’s largest ship in the world. Since 2009, 15 more ships have been built in the 5,000+ category, but none meaningfully surpasses Oasis. From a commercial perspective, Icon is just another ship in this 5,000+ category.
Do the cruise companies’ current plans align with my prediction? More or less. Royal Caribbean’s president teased that their next class of ships will be significantly smaller. Meanwhile, Carnival is working on a new class of 5,000+ pax ships.
Thank you for reading! As always, I’d love to hear from you. Reply to this email or leave a comment.
Hi Jess,
Great read as always!
I would like to add a few points that were not mentioned and are important in understanding the reasoning behind these big ships.
First one is the ship is the destination, therefore, the typical big ship customer is not entirely motivated by destination but rather by the experience onboard.
It is also an entry product for cruisers to be, younger families are amongst the key customers for this type of experience at sea. Price point is attractive to younger audiences that are, as we know, priced out of more exclusive experiences in smaller ships.
The Icon of the Seas will operate mostly between the US and CocoCay (Royal's private island) bringing a different type of experience to their customers.
Thank you
Bruno
Thank you Jess! Deep analysis of travel, particularly cruising, is so fascinating. Tremendous detail makes for interesting reading. Keep up keeping us so well informed.