Their megaships turned from a revenue-generating asset into an expensive-to-maintain nightmare.
By MC01, a frequent commenter on WOLF STREET:
On February 1, 2020, a passenger from Hong Kong who had recently disembarked from the cruise ship Diamond Princess tested positive for Covid-19. This initiated a nightmarish experience for the ship passengers and crew, including 712 confirmed infections out of the 3,711 people aboard; it has tragically claimed 12 lives so far.
This was followed by a series of outbreaks on cruise ships, ranging from the extremely serious (Ruby Princess, with 662 testing positive out of 3,800 aboard) to the relatively light (Westerdam, with one testing positive out of 1,500 aboard).
In response to these outbreaks, Viking Cruises – headquartered in tax- and privacy-friendly Basel, Switzerland – was the first cruise line to announce a complete suspension of operations on March 11, followed in close order by operators worldwide big and small.
The cruise industry is in serious trouble: It is estimated at very least 400 of the existing 423 ocean-going cruise ships will spend the whole month of April without generating revenues and costing the industry about $1 billion in layup costs alone for the month. The lost revenue? That’s another matter.
At the moment, the only major cruise line with plans to restart operations is Carnival, in the second half of June. But it remains to be seen how much appetite for cruises there will be then, and much more critically, if port authorities will allow the ships to leave and enter their ports.
To understand why the numbers are so mind-boggling, we need to take a step back and look at how the cruise market has evolved over the past thirty years.
In 1987 Royal Caribbean Cruises launched the first modern cruise ship or “megaship”: the MS Sovereign. Sovereign has Gross Tonnage (GT), a measure of overall internal volume and hence of how “big” a ship is, of 70,000GT. This is over three and a half times larger than the SS Pacific Princess, the cruise ship used to film the soap opera Love Boat which was typical of the pre-megaship era.
Thanks to the enormous success of the Sovereign and her two sister ships, the megaship concept increased in popularity during the 1990s and surged after 2001, when Fincantieri of Italy introduced the Vista-class, 11 behemoths of over 80,000GT which went on to serve with several Carnival subsidiaries. Since then at least 10 brand new megaships have been added every year, and their size has ballooned, so to speak: presently, the record is held by the monstrous Oasis-class ships, all larger than 220,000GT.
A single Oasis-class megaship costs Royal Caribbean $1.35 billion. That’s just for the ship, not counting insurance, maintenance, pay and training for the crew and everything that has to be stocked aboard to keep the passengers happy and the crew fed and well-clothed. And that’s a lot of stuff: An Oasis-class megaship has a crew of 2,200 and a standard passenger capacity of 5,500 (cruise ships rarely, if ever, sail at maximum capacity).
As of March 2020, there were 42 cruise ships over 120,000GT on order or under construction, with prices for each ship ranging from $600 million to $1.8 billion, with the top end being for the yet unnamed Global-class megaship Genting Hong Kong ordered from MV Werften of Rostock. That’s an enormous amount of money right there.
And all the megaships that are already in service are turning from a revenue-generating asset into an expensive-to-maintain nightmare.
Right now all these idled megaships are in a state called “hot layup,” during which the ship has a full deck and engine crew on board to maintain all systems operational; and a “skeleton” hotel crew to keep the interior clean, run the water daily, check and maintain the amenities etc. In this state, a ship can be brought back into service in a matter of days, usually just the time needed to recall the full hotel staff and put the finishing touches on the ship for service.
As can be imagined hot layup is expensive. According to Carnival’s most recent SEC filing, the cost for a hot layup range from $2 million to $3 million per month for each of their vessels. And that’s on top of the lost revenue and other fixed expenses for the cruise line such as debt servicing.
Most of these megaships won’t be back in service anytime soon. At some point, they will have to enter a state called “cold layup” to save money. This means calling in a specialized service provider such as Wilhemsen of Norway, that will first assist the deck and engine crew in shutting down all systems, and that will then install “deactivation equipment,” such as dehumidifiers for sensitive internal areas, additional cathodic protection for the hull, watertight sealing of underwater openings, external diesel generators, etc.
The service company also provides watchmen (usually two per each ship), a team that periodically inspects the ship and updates the log and makes emergency repairs, and a security detail on standby near the layup area.
The costs for a megaship in cold layup are around $1 million per month.
And what will happen when a megaship is needed once again? While the crew is recalled in phases to reactivate more and more systems, the service provider will progressively remove the layup equipment. This procedure takes approximatively 14 days.
After this, the hotel crew is brought back in phases and starts to clean the megaship from top to bottom, and checks everything, from water faucets to the tables in the dining rooms. Repairs are carried out as needed. This phase may take another 14 days, but on the largest megaships it can take around 20 days.
The costs for this procedure are estimated to run in the range of $2 million to $4 million for each megaship.
And there’s one final piece of bad news for cruise lines. Under the terms of the CARES Act to be eligible for a dip at assorted US government funds, a company has to be “created or organized in the United States or under the laws of the United States” and have a majority of their workers “based in the United States.”
The big problem is of course that the major US cruise lines are all incorporated overseas: Carnival in Panama, Royal Caribbean in Liberia, and Norwegian in Bermuda. Coupled with their propensity for hiring foreign nationals to staff their megaships – which in turn fly flags of convenience from the Bahamas to Panama – these companies are at the present ineligible to get even a single dollar of bailout money.
Apparently, this was not an oversight but a bipartisan agreement and there’s little or nothing that can be done short term to rectify it. Cruise lines will just have to weather at least this first phase of the storm on their own. By MC01, a frequent commenter, for WOLF STREET