The foundering of Costa Concordia, the cruise liner, off the west coast of Italy is unlikely to prompt a rethink of the industry model, predicated on filling ever bigger and more luxurious vessels with ever greater numbers of passengers. However, the terrible loss of life and the chaotic evacuation of more than 4,000 passengers and crew from the ship suggest that the vaunted economies of scale of these floating mega-resorts carry significant risks. The shipwreck does not necessarily make all cruise ships more dangerous, nor will it do for the cruise business what the fatal crash of a Concorde supersonic airliner did to another branch of high-end tourism. But these tourists are easily scared. And in the short term, bookings could fall, hitting the liner operator’s London- and New York-listed parent Carnival Corporation (and its rivals), right in the peak booking season.
Without the cash flow from bookings, and full berths, cruise ship operators will struggle to defray their soaring fixed costs and maintain capital expenditure. Carnival has been resilient enough through the financial crisis. But in the latest downturn, it faces similar pressures to any other business exposed to discretionary spending. Results for the year to last November show as much: revenue rose 9 per cent to $15.8bn, but net income fell 3 per cent to $1.9bn. Fuel costs soared 35 per cent , five times the pace of increase in its payroll costs.
However, the challenges are not only operational: Carnival, like its peers, pegs its hopes on growth in European passengers, who account for about 40 per cent of its revenue. Now, with the region on its uppers, and the shipwreck on its doorstep, those hopes may be dashed. Carnival’s share price, down by 28 per cent year on year, has lagged behind the S&P 500 consumer discretionary index for fully five years. Yet the shares, trading on 13 times this year’s expected earnings, still do not fully factor in the risks that lie ahead of the cruise operator on dry land.