Cruise Ship: How They Make Money

I recently found myself looking up at the Coral Princess (pictured below) and wondered: “How much does a cruise ship cost?” I speculated that it must be at least $1 billion. Turns out this ship was pretty reasonable. Princess Cruises only paid $330 million for the ship when it bought it in 2002.

I find that sometimes the answer to one question just leads to more questions, like: How much do these cruise ships earn? What is their useful life? Where do they make most of their profits?

So this week, I did a bit of research and here is what I found:

Most ships have a 25-year lifespan. However, you’ll be hard-pressed to find a ship marketed to North Americans built more than 15 or 20 years ago. After that, people want the younger, sexier model. Imagine that? The good news for passengers is cruise ship operators have been in a bit of an arms race to have the newest, nicest, and most spectacular ships. The major operators are competing against each other, and they are also trying to expand the cruise industry’s share of the travel market.

A cruise industry trade group (CLIA) forecasts that over 22 million people worldwide will take a cruise this year. That is the largest annual total ever, but still a relatively small number, which equates to roughly 4% of the traveling public. The key to moving cruises from a niche vacation option to the mainstream is convincing people who have never been on a cruise before to take one. To that end, the newer ships, such as the massive Royal Caribbean Quantum have amenities like bumper cars, a rock climbing wall, and even an on-board skydiving simulator, in addition to the pools, casino, spa, and retail shops that are cruise ship staples. Many of these amenities, and changes to the onboard programming, are designed to attract a younger crowd. The average age of a cruise ship passenger has fallen from 56 in 2002 to under 50 today. (Hello…calling all millennials. Are you out there?)

Cruise Ship: How They Make Money

Cruise ship operators make approximately 72% of their revenue from tickets and the other 28% on-board—shore excursions, casinos, alcohol, gift shops, spas, photos, as well as travel insurance (sold through the cruise line) and other services.

Onboard revenue is disproportionately more profitable:

Onboard revenue is disproportionately more profitable, which is why cruise lines work hard to fill every room. Fares can change daily, and those willing to wait until the last minute may get an amazing deal. The cruise line would rather get $499 for a one-week cruise than zero since the cost of fuel and crew is essentially the same whether the ship is full or not. Also, cruise operators have found that people tend to be fairly consistent about how much they spend onboard regardless of what they spent for their tickets.

The cruise industry is a high fixed-cost business (like stadiums or airlines) that requires very high occupancy to be profitable. This is one reason why several operators went out of business very quickly after 9/11 when there was a sudden drop in business. The biggest operator is Carnival Cruise Lines, with 47% market share, followed by Royal Caribbean with 22%. Both companies operate under numerous brand names. The average profit margin for cruise ship operators ranges from 4-14%, depending on the company and the year.

The cruise line association reported that the industry generated $46 billion in total economic impact in the United States in 2014 and supported 373,738 U.S. jobs.

What do you think? Do you see a cruise in your near future?