Cruise industry’s billion-dollar question: what to do with the ships?

Cruise industry’s billion-dollar question: what to do with the ships?
Alice Hancock 31 August 2020 https://www.ft.com/content/b0d09282-1559-4169-a3ec-92c12ebfb78e

With little appetite for sailings, the $150bn industry has tough decisions to make on its fleets

The English seaside resort of Weymouth is in the heart of the Jurassic coast, an almost 100-mile stretch of shoreline renowned for its fossils. But this summer the region’s geology has faced unexpected competition for tourists’ attention from a fleet of vast cruise ships idled close to the town.

A curiosity for visitors, the hulking vessels are a grim reminder of the spiralling crisis the pandemic has inflicted on the $150bn cruise industry. Instead of trying to top the record 30m passengers carried last year, the industry’s more than 60 operators are having to tackle the fraught and costly question of what to do with the almost 350 ships that should be criss-crossing the globe.

The last time ships were idled for any significant period was in the wake of the September 11 terrorist attacks. But executives say the coronavirus crisis, which has left small congregations of ships moored off coastlines from the US to Indonesia, is far more life-threatening for the industry.

“9/11 was the last big thing for the cruise industry and it only lasted a short time so this is unprecedented,” said Alex Downes, an industry consultant who also works as a captain on the Marella cruise line.

Almost six months since many governments imposed lockdowns to curb the virus, companies are drawing up plans to sail again. MSC, the largest privately owned operator, is making a tentative return to the Mediterranean this month, while Carnival, the world’s largest, is plotting a European relaunch.

But with Covid-19 resurgent in Europe, pockets of cases erupting in Asia and the US still struggling to control the pandemic, the challenge of what to do with vessels risks becoming even more urgent as the financial burden on companies grows.

Last month, Mr Downes handed over the ship he had most recently captained, the Marella Celebration, to a Turkish company that had bought it for scrap.

“It was sold so there was no point in maintaining anything except to the minimum legal standards . . . there were 40 of us [on board], where there are normally 600 crew members and 1,500 passengers,” he said.

Marella is not the only company sending ships to the scrapyard. Royal Caribbean, the world’s second-biggest cruise line, has so far announced the scrapping of three of its vessels.

Wouter Rozenveld, director of Sea2Cradle, which specialises in ship recycling and is overseeing the scrapping of two Carnival liners, said this year was the first that his company had worked with the cruise industry.

“There will definitely be more ships scrapped and more than normal until this Covid virus is under control,” he said.

If the pandemic’s ultimate trajectory is the biggest unknown for the industry, much of the immediate picture is clear — and painful. Given the abundant supply, cruise lines have diminished bargaining power over how much they can expect for scrapped ships.

Companies are being forced to accept “quite a low price” because “it’s a buyers’ market” and taking apart such complicated vessels is “a cumbersome operation”, said Mr Rosenveld.

Historically, it has been common for ship owners to send vessels to be dismantled in India and Pakistan, where costs are far lower. Sea2Cradle estimates that it costs up to $160 a tonne more to scrap a ship in Europe than in Asia. For a cruise ship, which averages 25,000 tonnes without fittings or passengers, that could amount to $4m.

But the industry in south-east Asia has been dogged by allegations of environmental and human rights abuses.

Kendra Ulrich, shipping campaigns director for the environmental group Stand.earth, said: “Having [ships] broken down in south Asia is very, very inexpensive. It’s like anywhere else where industrialised nations are dumping their waste on the global south where there are poor environmental and labour standards.”

Carnival has sent its ships to be scrapped at an EU-approved yard in Turkey, but Ms Ulrich is concerned that a lack of global regulation means not everyone in the industry will follow suit.

“There is a risk,” she said, that cruise companies will “cut corners and do the minimum to maximise their profits because they are in such dire economic straits”.

Analysts at US investment bank Morgan Stanley are dismissive of the idea that scrapping ships can move the dial financially for the operators, saying that the contribution would be “immaterial”.

What is clear, though, is that an assessment of the value of their fleets is key to whether cruise companies will be able to ride out this storm. Multiple groups have used their vessels, which can cost anything between $500m and $1bn to build and typically have a lifespan of 40 years, as collateral when seeking emergency funding.

Carnival, for example, has raised more than $10bn since the pandemic started, including $900m in junk bonds this month.

The financial firepower is helping keep ships in what is known as “warm lay-up” — the condition the majority of the industry’s fleet is currently in. It involves a much smaller crew staying on board to keep a ship in working order, running taps in cabins, turning over engines and maintaining more glamorous features such as ice rinks and water slides.

Josh Leibowitz, president of Seabourn, Carnival’s ultra-luxury cruise line, said: “All day long the ship is being looked after, polished, cleaned; there’s obviously not as much wear and tear without guests on board.”

Carnival has said it has more than 12,000 staff on board maintaining its 104 ships.

The fate of vessels that are not in warm lay-up but have not been earmarked for scrap is not necessarily rosy. They are in a state known in the industry as “cold lay-up”, or essentially switched off for an extended period. Nigel Thomas, maritime partner at London law firm Watson Farley & Williams, is doubtful they will return at all.

“In cruise ship terms, you would have to spend so much money getting it up and running again to make the grade,” he said. Ships, still some way short of their typical lifespan, are being decommissioned.

Before the pandemic there was a secondary market for ships in which smaller operators bought up boats from the industry’s dominant participants. And although deals are still happening — Fred Olsen, for example, last month bought two vessels from Carnival-owned Holland America Line for an undisclosed sum — the market is shrinking as smaller operators go under.

Executives know that their fleets will remain trapped in various degrees of hibernation until the public feels confident to sail again. It is why MSC is spending €500,000 on health protocols, including three levels of testing for passengers, for every seven-day cruise.

Pierfrancesco Vago, MSC’s executive chairman, said: “We purposely decided to go significantly above and beyond the strictest guidelines set forth by regional and national health authorities.”

But many operators are acutely aware of the damage another major Covid-19 outbreak on a cruise would do. A spate of infections on an Arctic expedition ship run by Hurtigruten, the first company to resume international cruises since coronavirus, was described by one senior cruise company executive as “embarrassing for the whole industry”.

“[The cruise industry] needs to start to evolve the story from victims to survivors to thrivers,” said Seabourn’s Mr Leibowitz. “The only way it is going to happen is if people are feeling confident to go out there.”

Until they do, the world’s cruise ships will be a curiosity, as they are in Weymouth, in a way their owners never imagined — or wanted.