Euromonitor Comment: The cost of the Costa tragedy

Following Costa Concordia’s fatal cruise ship accident off a Tuscan island which has left 11 people dead, shares in the FTSE 100-listed Carnival Corp fell as much as 23%. Carnival Corp, which owns Costa Cruises, announced that it expects to lose between US$85 million and US$95 million in earnings for the year to November, as the Concordia is expected to be out of service for that period. Paz Casal, travel and tourism analyst at Euromonitor International, reviews the impact of the disaster on the cruise sector.

Healthy performance in cruise

Before the Costa Concordia´s tragedy, the cruise sector had been enjoying good growth with an optimistic outlook, mainly due to the improving economic conditions globally and the introduction of new ships.

A stronger global economy and recovering travel demand positively impacted the cruise sector in 2011, with leisure cruise retail value sales growing by 10.5%, to reach US$34,009 million world-wide. Key players, Carnival and Royal Caribbean, maintained their global expansion strategy in 2011, with great emphasis on Europe, Asia Pacific and Australasia, either by relocating ships from mature and high-cost markets or introducing brand new ships.

The ability to offer all-inclusive and multi-destination packages for much lower prices was also a major competitive advantage of cruises against other travel and tourism products. Cruises are breaking the stereotype and increasingly targeting a younger consumer segment, which increased their consumer appeal.

No long-term negative impact on cruise sales

Carnival Corp is a global cruise company and one of the largest vacation companies in the world, accounting for approximately half of the global cruise business. The accident of the Costa Concordia came at the peak time for the cruise sector, with around one third of all bookings made between January and March.

The disaster is unlikely to have a significant impact on cruise sales as a whole as cruise travelling is growing strongly, but it will most likely affect Costa Cruises bookings in the short term. News and dramatic images of the tragedy could weaken 2012 booking trends but it is expected that any negative impact on cruise sales will be relatively short-lived and that the cruise sector’s excellent safety records will help restore consumer confidence.

According to industry players, bookings have so far held stronger than expected. Regular passengers are unlikely to be deterred from booking their next trip, but the accident could prevent first-time cruisers from taking a trip in the short term.

Cancellations within the next two months are also dependent on travellers having the right type of travel insurance. For Carnival Corp, the second quarter of the financial year could be a more realistic reflection of the reputational damage the event has had on Carnival’s brand. One likely outcome of the accident is improvement in basic safety requirements and measures.

Cruise slowdown due to economic factors

2012 is not expected to be as strong as 2011 for the cruise sector worldwide due to the economic problems experienced by a number of countries in the Eurozone and rising fuel prices. In addition, many of the operators are still feeling the impact of the political unrest in the Middle East and North Africa. Nonetheless, travel retailers are expected to see leisure cruise value sales grow by 3.2% in 2012 globally.

Value for money offers are expected to help boost financial results in 2012 for key market players. Overall, markets with low penetration in cruise sales, mainly in Asia Pacific, are expected to serve as a magnet for future relocations as long as operational costs are low. International diversification is also expected to bring about benefits to players, allowing them to diversify away from maturing and increasingly regulated markets such as the US.

Future infrastructure investments in ports are also likely to bring about enormous benefits. New projects are set to eliminate check-in lines, delays in arrivals and/or departures and enhance cruise traffic.