Cruise Market Update

Transcription

1 SAN DIEGO UNIFIED PORT DISTRICT Cruise Market Update Executive Draft Report Bermello Ajamil & Partners, Inc. 6/30/2011

2 Contents Section 1 Introduction Overview Project Background and Need...5 Section 2 North American and Regional Cruise Trends Overview North American Market US West Coast...13 Section 3 Port of San Diego Overview Conclusions...24 Section 4 Worldwide Cruise Trends Overview Historic Cruise Growth...25 Section 5 Cruise Line Input: Opportunities and Challenges Cruise Line Input Summary of Opportunities and Challenges Conclusions...35 Section 6 Cartagena, Colombia Case Study Overview...36 Section 7 Cruise Projections for the Port of San Diego Forecast Preparation Conclusions...42 Section 8 Berth Implications for the Port of San Diego Overview Future Facilities Action Items...44 San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 3

3 List of Figures Figure 1: Port of San Diego Passenger Throughput Comparison (Actual vs. Projected), Figure 2: North American Cruise Passenger Supply (Market) and Demand (Passengers), Figure 3: North American vs. European Cruise Passenger Growth, Figure 4: North American Length of Cruise, Figure 5: Projected North American Cruise Passenger Growth, Figure 6: Port of San Diego and Port of Los Angeles Cruise Passenger Traffic, Figure 7: Port of San Diego and Port of Los Angeles Cruise Vessel Calls, Figure 8: Port of San Diego and Port of Los Angeles Passenger per Cruise Vessel, Figure 9: Port of San Diego Cruise Traffic by Line, Figure 10: Port of San Diego Cruise Traffic by Itinerary Deployment, Figure 11: Port of San Diego Cruise Seasonality, Figure 12: Port of San Diego Cruise Daily Distribution, Figure 13: Port of San Diego Cruise Daily Distribution, Figure 14: Port of San Diego Cruise Vessel Size, Figure 15: Cruise Industry Passenger Growth Worldwide, Figure 16: Cruise Vessel New-build Deliveries, Figure 17: Cruise Passenger Projected Worldwide Growth, Figure 18: Port of Cartagena, Colombia Passenger Growth, est. (215,835 pax thru May) Figure 19: Port of Cartagena, Colombia Passenger Growth, est. (215,835 pax thru May) Figure 20: Port of San Diego Trend Regression Analysis, Figure 21: Port of San Diego Market Capture Analysis, Figure 22: Port of San Diego Deployment Scenario Analysis, Figure 23: Port of San Diego Passenger Growth Composite, Figure 24: Port of San Diego Cruise Facilities Layout and Capacities Figure 25: Port of San Diego Cruise Vessel Passenger Capacities Percentage over 2,500, List of Tables Table 1: North American Cruise Source of Business, Table 2: Destination Challenges: Cruise Line Needs for the West Coast Region Table 3: Fit of San Diego within Identified Target Sectors (Summary) Table 4: Cruise Industry Strategic Growth Factors San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 4

4 SECTION 1 INTRODUCTION 1.0 Overview For many years the Port of San Diego had been receiving port-of-call ships. The typical itinerary began in Los Angeles and usually visited the Baja Peninsula of Mexico. In the late 1990 s, the Port of San Diego embraced the cruise opportunity and began to position itself for the growing cruise business in Southern California. This early strategic positioning included strengthening of the marketing program for specific facilities in the City. That process led to modest growth in the cruise business. However, the Port also positioned itself to take advantage of its potential as a homeport. San Diego first attempted to redevelop B Street Pier, but it became obvious that an interim facility would be needed even if B Street was redeveloped. As a result, a commitment to build an interim terminal on Broadway Pier moved forward with the encouragement of Carnival Corporation. B&A performed a market study in 2003 which provided a series of forecasts through 2017 based on certain conditions taking hold. After that, the Port s cruise business began to grow beyond expectations with San Diego reaching levels two years ahead of forecasts. As a result of this success some of the major users entered into agreements to assist the Port with financing improvements for the redevelopment of Broadway Pier and other improvements to B Street. Such commitments do not come without cruise lines themselves having reached an understanding that the Port of San Diego is of strategic importance. In fact, those years ( ) proved the viability of the market. However, the underlying market conditions began to change over the past 24 months as issues that were beyond the control of the Port of San Diego began to adversely affect the cruise business in the region. 1.1 Project Background and Need The Port of San Diego serves as a homeport primarily for cruises to the Mexican Riviera and Baja Mexico in addition to a smaller number of cruises to Alaska, Hawaii and through the Panama Canal. The cruise port destinations in Mexico served from the Port include Ensenada, Cabo San Lucas, Puerto Vallarta and Mazatlan amongst others along the western seaboard. During the current decade, cruise embarkations in San Diego and deployed capacity in the Mexico West cruise market expanded rapidly. Between 2001 and 2008, cruise calls in San Diego increased at an average annual rate of nearly 16% increasing from 107 calls to 297 calls. As a result, total cruise passengers arriving and departing from San Diego grew from 191,000 in 2001 to 991,000 in 2008, an average annual increase of 27%; over San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 5

5 the same period, deployed capacity in the Mexico West market increased by 28% per year from 1.2 million bed days to 6.5 million bed days. However, since 2008, deployed capacity in the market and cruise calls and embarkations in San Diego have steadily declined. By 2010, deployed capacity in the Mexico West cruise market had fallen to less than 5 million bed days and cruise calls in San Diego are anticipated to fall to approximately 100 during The reasons for this decline are multi-faceted and include: The economy of the source market (Southern California) is weak and as such passengers are not keen to spend disposable incomes on vacations; There is a lack of port development in Mexico West. Offering new and exciting destinations to create a variety of itineraries would be beneficial; and, Major publicity about the safety of Mexican cruise and land-based holiday destinations is taking a toll on vacation destination decisions by US consumers. As a result, cruise lines have had to reduce pricing, which has made the region less desirable for deployment and sales. Since cruise lines now are globalized, the result has been a shift of capacity out of the North American market. Given these and other factors, the issue is to what extent are these recent declines permanent or just a cyclical phenomenon that will readjust over time. Regardless of what happens, we know that San Diego is in a viable cruise market that is besieged by short-term troubles. The ups and downs of the traffic on an annual basis is fairly common in the cruise industry, therefore, a long-term perspective is the best one to take at this time. We recognize that it is hard to look at the long-term when you are at the bottom of the trough. This study intent is to provide the Port of San Diego with information of value so that an action plan can be created. The objectives of the study include the following: Review current conditions that have caused the severe decline in passengers; Establish the structural nature of the decline; o Define to what extent are regional issues and subsequent cruise traffic declines permanent or cyclical. Adjust forecasts of cruise passenger potential; and, Provide information to create an action plan. Figure 1 below provides an overview of the actual vs. projected cruise passenger throughput to the Port of San Diego based upon the 2003 market study and subsequent update in San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 6

6 Figure 1: Port of San Diego Passenger Throughput Comparison (Actual vs. Projected), As shown, the projections and performance of the Port of San Diego for cruise passengers were growing. However, there is a marked decline beginning in For forecast modeling for the Port of San Diego the focus went from the global cruise market worldwide forecasts to the North American portion of that traffic over the forecast period. Then the market share attributed to the US West Coast was forecast followed by the portion of that deployed to the Port of San Diego. Due to the current circumstances, much of the forecast modeling for the region was primarily based upon cruise line interviews and the rationale for recovery of the market within the region based upon past similar events in other destinations such as Cartagena, Colombia, Brazil and others. For the past two decades the worldwide cruise industry has maintained a steady growth pattern. The effects were evident on the US West Coast (Mexico West) and the Port of San Diego. However, subsequent regional events and the expansion of worldwide cruise competition over San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 7

7 the past several years have impacted the cruise growth within the US West Coast. Additional issues related to the poor economic state of California, Emission Control Area (ECA) along the coastal areas of North America, and the publicity surrounding violence in Mexico have all caused turmoil in the regional cruise market. The latter is the overall focus of this exercise. The Port of San Diego has taken the initiative to move forward a positive agenda to promote the recovery of the US West Coast cruise region, targeting those issues that it can begin to provide some level of impact. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 8

8 SECTION 2 NORTH AMERICAN AND REGIONAL CRUISE TRENDS 2.0 Overview In this section, we review the major issues and trends impacting the North American cruise industry, specifically the US West Coast cruise market including the regional target markets and other factors found within the cruising sub-regions. 2.1 North American Market The North American market has continued to increase albeit at a slower rate. This is reflective of the US economic situation and the strengthening of foreign markets capturing vessels. The North American passenger cruise interest is stable, but there are no significant increases anticipated at present. Overall, ticket costs are down, per diems low and capacity relatively flat. Passenger growth is anticipated to continue slowing over the short to mid-term. Again, tailored cruise products to meet consumer needs are dominating the market. This includes a variety of close to homeport options, new vessels and uniquely profitable onboard services. This trend will continue driven by consumer demand. New cruise line products can only propel the industry so far in a slow economy. The remainder of the growth anticipated will happen once the economy recovers and there is a stronger confidence moving forward. Figure 2 illustrates the supply and demand aspects of the North American cruise market from 1998 through the present. As shown the passenger demand continually follows or outstrips the market capacity in the North American marketplace. This is a continuing positive trend of the industry. However, cruise ticket pricing must also be propelled upwards to take advantage of this trend. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 9

9 Figure 2: North American Cruise Passenger Supply (Market) and Demand (Passengers), Figure 3: North American vs. European Cruise Passenger Growth, San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 10

10 In Figure 3 above, the passenger growth percentage for the North American and European markets showing the major events impacting the industry over the period. A shown, this figure indicates the positive trends of the industry during downward periods. This is positive for the US West Coast market and Port of San Diego. Figure 4 shows the length of cruise from 1998 through 2011 and the steady growth to approximately 7.2 days per sailing. In 2000 and 2001, note the downward trend in the length of sailing to meet the needs and demand of the North American cruise consumer. Figure 4: North American Length of Cruise, Table 1 provides a view of the top 10 states for source of business for the North American cruise line industry. As shown California are number 2 with more than 1,111,000 passengers annually. This is some 10.9% of the total NA passengers. Significantly, based upon our cruise line interviews, the majority of the passenger source market for the US West Coast (Mexico West) is from the states of California, Arizona, Nevada #13) and Washington state. Three of the four are ranked in the top ten for cruise passenger source markets. Thus, based upon poor economies in the US and state specific, proximity to Mexico and media exposure to the violence in the region, etc. this is shown to be a negative affect for the market overall. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 11

11 Table 1: North American Cruise Source of Business, 2010 Other factors that are continuing to influence the North American cruise market are as follows: Homeland Market: Homeports throughout the coastal US areas open key consumer source markets; 8-day and Shorter Cruise Product: Cruise vessels are deployed into vacation patterns to meet consumer needs (holiday, vacation and economic patterns and conditions); Seasonality: Seasonality of cruising is expanding in all worldwide markets offering more competition for calls for all the North American cruise regions; Airlift: This has been taken out of the equation for cruise as a large part of the consumer mix due to the deployment of vessels closer to home; Vessel Size/Capacity: Infrastructure to service larger vessels are critical factors for long-term success; and, Emission Control Area (ECA): This North American environmental exclusion zone will influence fuel consumption and costs in 2012 / 2015 for the cruise industry with estimates of 30% plus over this period. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 12

12 All of these factors drive the development of the North American cruise consumer market and subsequent deployment of cruise vessels into the supporting regions to meet consumer demands. Figure 5 shows the projected growth of the North American market from based on this analysis. As shown the growth will move from 10.7 million passengers to between 19.8 and 36.4 million passengers in Growth rates under these projection scenarios are from 2.7 to 8% per annum. Figure 5: Projected North American Cruise Passenger Growth, From this projection figures for the Port of San Diego are then extrapolated as shown below based upon numerous critical factors primarily stemming from the deployment of major cruise line brands to the cruise region and the Port of San Diego based upon consumer demand. 2.2 US West Coast There are several different itinerary packages with different markets within the region. They include: Baja; Mexico; Panama Canal; Hawaii; San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 13

13 Repositioning between Alaska and Caribbean; and, Coastal cruises. This is a seasonal cruise region, with sailings typically from October through April. Repositioning movements occur in April / May and Sept / Oct. The cruise lengths are typically 3 to 7 day cruise patterns encompassing the Mexico, Baja and coastal itineraries. There are also longer sailings to Hawaii and the Panama Canal mainly due to speed and distance. Mexico and the Coastal Cruise Region The primary homeports are San Diego, Los Angeles, Long Beach and San Francisco (secondary). The main ports-of-call are Ensenada, Catalina, San Diego, Puerto Vallarta, Cabo San Lucas and Mazatlan. Seasonal cruise itineraries are mainly 7-day, while the year round patterns tend to favor 5-day and shorter sailings. Carnival Cruise Line is the primary Baja player offering year round sailings from the Port of Long Beach. Holland America Line is the primary Mexican Riviera line at present offering numerous sailings from the Port of San Diego. As illustrated above the coastal cruise products are / will be impacted by ECA (2012/15) and the Passenger Services Act. The latter forces cruises to a far foreign port within the itinerary pattern prior to embarking or disembarking passengers in a US based homeport. These sailings have also shown historically low cabin pricing, shoreside and onboard revenues (coastal moderate/but low demand), while having fuel costs that are significantly higher due to speed & distance factors vs. similar Caribbean and competing itineraries. Panama Canal Cruise Region The primary west Coast homeports are San Diego, Los Angeles, Long Beach and San Francisco (secondary). The primary ports for this sailing are San Diego, Puerto Vallarta, Cabo San Lucas, Mazatlan, Acapulco and Caribbean islands. This is typically seasonal in nature and also used primarily to reposition cruise vessels to and from Alaska and the Caribbean. These sailings historically offer average cabin pricing, shoreside and onboard revenues capacity is variable. Fuel costs are higher due to speed & distance factors. Additionally, the Canal crossing averages $200,000 to $300,000 per transit. This cost is difficult to pass along to the cruise passenger. Hawaii Cruise Region The primary west Coast homeports are San Diego, Los Angeles, Long Beach, Honolulu, Ensenada, San Francisco and Vancouver (secondary). The primary ports are the Hawaiian Islands. This is typically a seasonal cruise itinerary also used for repositioning of cruise vessels to and from Alaska. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 14

14 Norwegian Cruise Line is the primary year round cruise operator with capacity in Hawaii. There is no impact to the West Coast. This offering is also susceptible to the Passenger Services Act, forcing several lines to use the Port of Ensenada as a far foreign port of call or homeport operation. These sailings historically provide the cruise lines an average cabin price, shoreside and onboard revenues capacity is variable. Fuel costs are higher due to speed & distance factors. Macro Challenges for the Region Presently and over the past several months the following issues have presented additional challenges to the region. Mexican violence and media attention How to contend with US travel warnings? Education of consumer in understanding geography of Mexico. Specific references to Mazatlan provide further negativity. Low per diems / harder sell in main source market Typical CA, AZ, NEV and WA key target markets. CA economic downturn affecting mass market. Low shoreside revenue options and high fuel costs in the region. Poor recognition of downstream ports-of-call (hard to sell the ship). Fuel concerns (speed & distance to ports / ECA) Long haul and fast run on 7-day itineraries create high fuel consumption. ECA in 2012 will impact fuel cost by some 15% and another 15% in These issues above are reflective of the destination challenges and cruise line needs faced within the industry. Table 2 outlines these challenges as specific to the Port of San Diego and US/Mexico West Coast cruise market. In moving forward these challenges should be addressed in some form as part of the overall action plan. They fall under four important categories as recognized by the individual cruise lines. Of key concern is the marketing and sales aspect as this drives the demand for the cruise deployment and itinerary pattern. Strong marketability is critical to the long-term success of a cruise region. That will then allow the required ticket pricing and onboard revenues to increase due to demand. However, the downstream ports are required to provide substantial landside options and a higher level of consumer satisfaction to meet cruise line and passenger expectations and offset any additional cost allowances. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 15

15 Table 2: Destination Challenges: Cruise Line Needs for the West Coast Region San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 16

16 SECTION 3 PORT OF SAN DIEGO 3.0 Overview This section provides a brief overview of the current cruise traffic to the Port of San Diego. As outlined in the introduction the Port of San Diego has done an excellent job of growing its cruise industry traffic over the past several years. However, due to a number of circumstances beyond the immediate control of the Port in 2009 overall cruise traffic began to dramatically fall in the region and Port of San Diego. In 2008 cruise traffic peaked at the Port of San Diego with more than 916,000 passengers on 254 sailings. In 2011, traffic is projected to be 307,000 on 104 sailings. This is a drop of more than 600,000 passengers (66.5% loss) in a two year span. See Figure 6. The Port of Los Angeles is also shown to provide a further note that this is not a direct issue for the Port of San Diego, but rather a regional issue impacting the key homeports in the region. POLA will have some 605,000 passengers on 144 cruises in Figure 7 provides a view of the drop in overall cruise calls during the period as well for both of these key regional ports. This is stimulated by the factors illustrated above and further recognized through cruise line interviews in Section 5. Figure 6: Port of San Diego and Port of Los Angeles Cruise Passenger Traffic, Figure 7: Port of San Diego and Port of Los Angeles Cruise Vessel Calls, San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 17

17 The average vessel capacity for cruise ships in the region is shown in Figure 8 below. In 2009 the Port of San Diego had an average passenger per ship capacity of 3,777 persons. This has dropped to 2,957-passengers in The Port of Los Angeles has shown overall lower passenger capacities over the past ten years peaking in 2009 with 2,466 passengers per ship. In 2011 that figure is 2,101 persons. As shown the trends follow a regional pattern of fluctuation. Figure 9 shows the Port of San Diego s cruise traffic by line. Holland America Line is the largest contributor with more than 60% of the overall traffic on 60 sailings with 187,000 passengers as mainly a homeport brand for San Diego. Carnival Cruise Line has 21.9% of the traffic with 67,000 passengers on the Carnival Spirit. Figure 8: Port of San Diego and Port of Los Angeles Passenger per Cruise Vessel, San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 18

18 Figure 9: Port of San Diego Cruise Traffic by Line, 2011 San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 19

19 While there are several itinerary patterns offered to and from the Port of San Diego, half in 2011 are Mexican Riviera sailings (52). This has also been the trend in the past three years for the Port. San Diego also serves as a homeport or port-of-call for 24 Panama Canal sailings as well. Refer to Figure 10. Figure 10: Port of San Diego Cruise Traffic by Itinerary Deployment, 2011 Traditionally, the Port of San Diego s peak season is from September through April with the majority of sailings to and from the Mexican Riviera, Panama Canal and Hawaii. In the summer months the year round Mexican Baja sailings have provided passenger throughout to the Port from mid-may through the end of August. In April/May and Sept/Oct the Port hosts vessels repositioning to and from Alaska and the Caribbean. As the Panama Canal expansion takes place in 2015 it is likely that these repositioning patterns may change as the lines develop new methods of exploiting the freedom of movement the Canal provides for its larger vessels in order to transition them to and from the West Coast of the US. There are a number of issues that will affect this option including the cost of the canal transit, ECA and fuel costs. See Figure 11. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 20

20 Figure 11: Port of San Diego Cruise Seasonality, Mexico / Hawaii / PC Year round Baja Mexico / Hawaii / PC Figure 12 illustrates the daily cruise distribution for the Port of San Diego in As shown the primary days of use for the terminal facilities are weekend, which are in line with the typical 7-day homeport cruise pattern. In addition, Figure 13 provides a glimpse at the changes that have occurred to the daily traffic distribution over the past five years as cruise lien deployments have been modified in the region impacting the Port of San Diego. These include the diminishing role of the short Baja sailings and the expansion of homeport options for the Port of San Diego driving a peaking of weekend deployments. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 21

21 Figure 12: Port of San Diego Cruise Daily Distribution, 2011 Figure 13: Port of San Diego Cruise Daily Distribution, San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 22

22 Figure 14 illustrates the vessel capacity for A majority of the vessels are from passengers. However, in 2009 and 2010 the passenger capacity vessels dominated the traffic at the Port of San Diego. Long-term, it is likely that once the trend to redeploy occurs for the West Coast these vessels will be the norm. Figure 14: Port of San Diego Cruise Vessel Size, 2011 In Table 3, San Diego s general potential for participation in each of the target market sectors is summarized. San Diego s strategic position in each sector was assessed either as being strong ( ), fair ( ), or weak ( ). Table 3: Fit of San Diego within Identified Target Sectors (Summary) San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 23

23 As shown, the Port of San Diego has a strong advantage in the Mexican Riviera deployments due to its geographic position related to speed & distance to the downstream ports of call. It is also an excellent port for a number of other patterns due to its marquee value for a variety of brands. Other specific notes include the following: Baja sailings Mainly homeport operations in Long Beach (Carnival); Possible mid- to long-term homeport move to SD for seasonal capture of market and reduced fuel consumption; and, San Diego has a high marquee and revenue value as a port-of-call. Mexican Riviera San Diego is a key homeport (good market reach/logistics air, etc.); Location provides for lower fuel consumption downstream; and, San Diego is a difficult location as a port of call (POC) due to the PSA. Panama Canal San Diego is a key homeport (good logistics / market access smaller); and, Good POC for marquee value (dependent upon homeport). Hawaii Good homeport option (PSA vulnerable); and, Low value as POC due to speed & distance (sell of Hawaii). Pacific Coastal Key homeport (good market reach/logistics air, etc.); Location provides for higher fuel consumption downstream; and, Good POC, but can be used from both San Francisco and Los Angeles. Repositioning / World Good homeport (good logistics / market access smaller for Intl. than Los Angeles due to airlift factors some of this is perception factor); and, Good POC for marquee value. 3.1 Conclusions Traffic is gravitating to the more profitable routes and becoming less dependent on Mexico. These include Repositioning, Hawaii and Panama Canal sailings. Traffic is also concentrating more on weekends as the port-of-call activity from Los Angeles decreases. Although the average ship size decreased in 2011, the number is still high with 30% being larger than 2,500 passengers. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 24

24 SECTION 4 WORLDWIDE CRUISE TRENDS 4.0 Overview In this section, we review the major trends propelling the cruise industry forward on a worldwide basis. These are fundamentally positive trends overall and therefore do little to establish the future direction of the US Mexico West Coast cruise market and impact to the Port of San Diego. However, it is important to note that the region and Port of San Diego competes in a worldwide marketplace and therefore must realize the impacts of issues within the region or ports. Additionally, the development of the worldwide fleet in terms of both numbers of cruise vessels operating and the cruise passenger capacity of each also impacts the region and Port of San Diego in terms of cruise line deployments based upon consumer demand, flexibility of the individual cruise lines to deploy their fleet and the requirements of the Port hard and soft infrastructure to meet the cruise line and consumer needs and expectations. 4.1 Historic Cruise Growth At a worldwide level the fundamentals propelling the growth of the cruise industry remain in place. The industry is profitable. However, the cruise industry has also now developed many more regional cruise deployments and consumer markets making it easier for them to move assets to new destinations faster to maximize profits, while lowering overhead costs and risk. Although future ship building has slowed in the short-term, this trend was always included in the future forecasts. The industry is now in the lower trough of the ship-building Order-book. With the advent of a renewed world economy and the near-term expansion of the China and SE Asia cruise market new-builds will increase. As shown in Figure 15, expansion in the North American market has eased over the past five years while the UK and continental European consumer market has expanded rapidly. This growth will continue over the short-term followed by the next likely expansion of China and SE Asia, which will have a tremendous impact on the overall cruise passenger growth in that region. However, this latter element will likely have little direct impact on the existing North American markets and the deployment of cruise vessels away from the traditional cruising regions of the Caribbean, Alaska and others. It is likely that China will be a more independent consumer market attracting the birth of new cruise lines and brands to meet the needs and expectations of the local consumer groups. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 25

25 Figure 15: Cruise Industry Passenger Growth Worldwide, Responding to this demand, cruise lines continue to order new vessels as shown in Figure 16. Presently there are 18 new cruise vessels scheduled for delivery through In respect to the continuation of the cruise ship order book trend, it will most likely see a flat trend in the mid-term, which does not provide additional growth opportunities for new or emerging markets. It will be significant to assess the order book strengths as the industry moves forward over the mid-term as discussed above. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 26

26 Figure 16: Cruise Vessel New-build Deliveries, The cruise lines are poised for new-build orders over the next 6 to 9 months and it is expected to show some significant European-based vessel orders. There are currently nine vessels on order designated for European market. Additionally, new-builds continue to be specialized for key consumer market penetration and include such items as micro-breweries, pubs, lounges, etc. designed for consumers. Over the mid-term it is expected that European fleet deployments will break out into Africa, Caribbean and Alaska. Royal Caribbean International s Project Sunshine for 2014 could also start an order trend. Table 4 provides an overview of the main strategic industry growth factors. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 27

27 Table 4: Cruise Industry Strategic Growth Factors Future Market Direction of the Worldwide Cruise Industry Despite recent events, the major cruise line industry players have shown particular resilience in times of recession and economic downturns. Over the past 20 years, the cruise industry has been able to fill its ships as the industry has grown. This suggests the industry is supply led, where increases in ship inventories lead to similar increases in cruise passenger volumes. Based upon the modeling of the worldwide cruise market the passenger capacity may grow from its present 19-million worldwide passengers to between 42 and 67-million by See Figure 17 below. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 28

28 Figure 17: Cruise Passenger Projected Worldwide Growth, San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 29

29 SECTION 5 CRUISE LINE INPUT: OPPORTUNITIES AND CHALLENGES 5.0 Cruise Line Input As part of this study cruise line input was assembled to identify the potential opportunities and challenges that face the region and Port of San Diego over the short to long-term. This also provides a baseline for the growth projection scenarios. Within this section is the feedback from key cruise line decision-makers and a subsequent summary of the opportunities and challenges addressed within these interviews that will need to be addressed as part of an Action Plan for the Port of San Diego. MSC may be in the regional market in 4 to 5 years. Mexico could rebound in 3 to 5 years citing South America as an example of the 1970 s (gone for 20 years). There is not one simple solution for the overall marketplace. These may include: o Airlift for San Diego restrictions; o Cost differential; and, o Port alliance is critical with local communities. ECA zone issue may be adverse to Mexico would be good for Mexico to not be a part of ECA. Mexico is a low yielding market cruise lines are better off in other locations due to low revenue potential. A cruise tourism symposium in the short-term such as a round table discussion of issues with key players would be beneficial. Land development Getting the Mexican Government to provide land for entrepreneurial development to trigger investment in tourism would be beneficial. Canal widening will provide new flexibility for Solstice and Freedom class vessels. RCCL has no core products in the region as it is tough to do short itineraries and a limited / no variety of port products. Exceptionally high speed runs create high expenses. By example, Mariner decreased fuel cost by cruising in Europe instead of US West Coast. West Coast had hoped to have best product and increase awareness. Source market is important for products. Mexican Riviera is not strategically important. Due to other ports and regions worldwide being developed there are not enough vessels in the fleet for this region. Historically tried other port combinations in the region with little success. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 30

30 7-night Mariner (LA based) arguably better served being in LA due to logistics and market access. Mexican violence perception issues even spilling over into the Caribbean to some degree. Examples include: o Cozumel/Costa Maya; o Guadeloupe issues (canal cruise) comfort level is shaky; and, o Acapulco dropped off Canal cruises due to violence. RCCL is trying to hold on in terms of regional capacity! Century (12/13) ½ season of Hawaii / Panama Canals. o Celebrity gets more per day than 7-night Caribbean good product; and, o Brought down fuel consumption to some degree. ECA if Mexico becomes a part of ECA this will also ruin the Panama Canal sailings (2012/2015). Wine Country few in moderation in terms of deployments for the future. o These types of deployments will not replace Alaska; and, o There is a spot for them seasonally and as filler. RCCL has seen a better Alaska season thus far in Azamara will sail the Sea of Cortez every other year. Hawaii / Coastal due to PSA cannot start cruises in San Diego and end in Honolulu no open jaws. There are limited options on many itinerary patterns in the region. Mexico is doing extremely poorly on revenues. Hawaii is not doing well either. HAL s Mexican Riviera - reducing to one ship in o Oosterdam replaced by Zaandam (less capacity); and, o Vessel moving to Australia / New Zealand. Violence is keeping people away (Mazatlan). Puerto Cortez development was stalled due to lack of interest on the part of the lines. o End of Sea of Cortez too far up due to speed & distance issues. Panama Canal is lower yield mainly due to canal cost and limited market expansion. HAL passengers want more exotic destinations. o Mexico supports the current deployments. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 31

31 o o Hawaii / Panama Canal itineraries are not sustainable. How do we sustain capacity growth in these markets? Pacific Coastal sailings do well in the shoulder season, but will fall off over time due to lack of appeal and demand. Princess has 5 ships on West Coast. When the Canal widens we will have the ability to move ships anywhere making the west coast more vulnerable. Mexico is unlike Europe. Very small market and limited pent up demand; and, People due to not cruise to Mexico they choose the vessel! CA / West Coast sourcing o Rebounds better for Princess than mass market lines due to strong past passenger base in region. Carnival Corp. looked at Porto Magdelana. o This would not necessarily change deployment for Princess. Cunard is a blip on the west Coast radar and mainly used for World, Americas and Introductory cruises. Los Angeles provides the better distribution system setup due to convenience over San Diego. Source market for these sailings is primarily West Coast. Issues in San Diego / Los Angeles are not infrastructure driven. Mexico offers very low ticket revenues For NCL it is harder to sell longer sailings. Target is 7-day product; and, 8-plus days is too high due to fuel consumption. People generalize Mexico as one place and do not differentiate regions where travel warning is targeted. For any new port on the coast it must not only be created, but also need name brand recognition. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 32

32 NCL will not necessarily be in this market in the mid-term. o Last Mexican Riviera this season none beyond 2012; and, o Need to have more stable environment for future deployment. Other major issues for West Coast include: o Passenger Service Vessel Act (PSA); and, o ECA Mexico must not become a part of this or it will cause further market damage and erosion. Carnival short term Mexico: o Struggling on price, but running at 100% occupancy; o Mantra is get them onboard and make revenues downstream; and, o Volume does not vary much across the fleet / regions. Pricing is not recovering in 2012 following 2009 H1N1 and 2010 violence issues Economic trends: o Key US market for West Coast is CA, AZ, NEV, WA.; and, o CA economy hit very hard and it is a difficult time to be positioned in the mass market cruise side this hit s harder here! Fuel: o Itineraries require high speeds and high fuel consumption to get to any interesting ports. Safety and security: o This is a high priority; o With many choices for passengers they are risk adverse to this region; o US population is geographically challenged and paint Mexico as unsafe with a broad brush; and, o Mazatlan safety issues are very problematic. Met with federal tourism authorities they are frustrated that they are investing monies into tourism marketing and not seeing a return. Tourism is growing, but with very low rates and occupancies. Port ½ way down Baja that is purpose-built would be a big help as passengers view Mexico as been there and done that option. o Need something new! o Carnival would invest if it is appropriate. o They would work with local entities. o They have a track record of successfully working on these destinations. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 33

33 ECA Mexico should not be a part of it. Carnival wants to remain committed to the West Coast: o Help draw people to the cruise vessels. o SD Spirit thru fall /5 day sailings. o LB 2 vessels 7 and 3/4 day sailings. Carnival is looking for ways to slow or modify vessels on these runs. May reduce capacity in the short-term through compression. o Will not abandon the West Coast. Long-term need opportunities to cut down distance and slow down. o San Diego comes into play and has an opportunity. o May operate from San Diego to cut fuel costs only if Carnival can still draw the Los Angeles market then it is a convenience to be in San Diego. Will need to deal with fuel savings in the near future! o 2012 will cost an additional 15%. o 2015 another 15%. o Cannot pass on so much cost to the passenger. Focus should be on a well marketed port and region for appeal in the long-term for them to move ships. Keep focus with the Mexican Govt. on ECA, Violence and potential new developments on the coast. 5.1 Summary of Opportunities and Challenges Overall for the West Coast Market based upon the feedback received from key cruise line decision makers the following points need to be addressed: Low per diems; Need for larger potential passenger base (outside of SW US); High operational costs mainly due to fuel consumption and Canal costs; Tough to market and compete against itineraries and destinations with higher marquee values and better demand; and, Lack of Mexico knowledge for the consumer. Travel warning /violence an issue with direct choice effects Emission Control Area (ECA) If Mexico is not a part of this zone then it will benefit as vessels will pay less for fuel. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 34

34 Passenger Services Vessel Act (PSA) Impacts itinerary patterns and options specifically for San Diego. Panama Canal Transit fees are difficult to overcome and do not allow for good profitability ($200,000 to $300,000 plus). Widening of the canal in 2015 will allow all cruise vessels to transit allowing for more freedom of movement making the West Coast more accessible for European vessels and large ships, but vulnerable as well of vessels departing easily to other markets. San Diego location Would cut fuel costs to Mexico and Baja destinations. Downstream Mexico ports Speed & distance too far and too fast. Violence perception not differentiated (Mazatlan named). Poor marquee value and revenue options in these ports. New port(s) in region over long-term with revenue options is good value (must meet strict speed & distance, SE, security options). Relationship forging Stakeholder roundtable to begin discussion on key regional issues is important in the short term. Work with Mexico and regional government entities, as well as cruise lines, private entrepreneurs on port and security issues, etc. Rebuild the brand (examples are Colombia and South America). 5.2 Conclusions A rebound of the US economy, particularly in California will be a big step in a positive direction for the rehabilitation of the US West Coast and Mexican cruise markets. Mexican market perceptions are difficult to overcome and will take time to dislodge and effectively change. This cannot be forecast. Operating costs are high in the region due to fuel consumption requirements and a lack of ports along the coast requiring higher speed runs to deliver itinerary patterns to the consumer. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 35

35 SECTION 6 CARTAGENA, COLOMBIA CASE STUDY 6.0 Overview While there are similar examples of regions and destinations that have risen and fallen over the past several decades in terms of tourism demand and cruise line activity such as Alaska, Mediterranean, South America, Asia, etc., they have typically been based upon activities of a duration that eventually is resolved such as terrorism, health (bird flu), economic, regulatory, etc. In the case of the US West Coast a confluence of issues has hit the region simultaneously including economic, violence and regulatory. However, based upon cruise line feedback the primary driver is the regional violence in Mexico that has forced them to no longer overlook or give a lower priority to the other factors affecting their deployments in the region. Thus, they are resolved to depart the region and exploit new territory for higher per diems and less cost. Cartagena, Colombia is likely the most appropriate and comparable comparison in this regard to the current issues plaguing the Port of San Diego since Cartagena, Colombia is a beautiful walled fortress city in Colombia that due to its geographic location on an island peninsula is insulated from mainland Colombian violence and drug issues. In the late 1990 s and early 2000 s this UNESCO world heritage site cruise destination was growing its cruise business. Its geographic location and excellent destination potential allowed for solid growth. However, in April 2001 and updated in July 2002 the following Travel Warning Letter was issued by the US State Department. Subsequently, travel to Colombia via air and cruise began to slow despite efforts by the Port and City of Cartagena to educate the North American consumer and cruise line industry as to its location and lack of violence. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 36

36 TRAVEL WARNING U.S. DEPARTMENT OF STATE Office of the Spokesman Colombia July 3, 2002 This Travel Warning revises the Travel Warning of April 17, 2001 and alerts Americans to ongoing security concerns due to continuing violence in the region. The Department of State warns U.S. citizens against travel to Colombia. Violence by narco-traffickers, guerrillas, illegal selfdefense (paramilitary) groups and other criminal elements continues to affect all parts of the country, both urban and rural. Citizens of the United States and other countries continue to be the victims of threats, kidnappings, domestic airline hijackings and murders. Threats targeting official and long-term resident Americans are expected to continue and possibly increase in response to U.S. support for Colombian drug eradication programs. Colombian groups have been known to operate in the border areas of neighboring countries, creating similar dangers for travelers in those areas. Bombings have occurred throughout Colombia, including urban areas, and some foreign interests have been among the targets. Last year, more than 3,000 people were reported kidnapped throughout Colombia, and there is a greater risk of being kidnapped in Colombia than in any other country in the world. In the past two years, 18 Americans were reported kidnapped in various parts of the country. Most kidnappings of U.S. citizens in Colombia have been committed by guerrilla groups, including the Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN), which were both initially designated as Foreign Terrorist Organizations by the Secretary of State in 1997 and re-designated as such in October Most kidnappings have occurred in rural areas, with a few occurring on the fringes of cities. Since it is U.S. policy not to make concessions to terrorists, the U.S. Government s ability to assist kidnapped U.S. citizens is limited. For further information concerning travel to Colombia, travelers should consult the Department of State s latest Consular Information Sheet for Colombia at Thus, cruise traffic to Cartagena began to collapse in 2001 losing more than 75% of its passenger base. In 2003 only 31,000 cruise passengers visited the City, of which most were European. Following several years of resolution by Colombia and a recovery period beginning in 2007, in 2011 the port will see more than 350,000 cruise passengers. This is a rebound of more than 1,000%. Cartagena could do little on its own to resolve the internal violence issues of the country of Colombia. Instead, they concentrated on continuing to cater to the cruise market they had during the downturn and worked with State and local officials in Colombia and in the United States to resolve the Travel Warning Letter issue as soon as violence in the country began to subside. This was a 6-year period from that impacted cruise growth in Cartagena. See Figure 18 for cruise passenger figures. Furthermore, once the recovery did take place due to continuing evolution of the cruise industry in terms of passenger demographics and revenue management the Port of Cartagena has also become a homeport growing from 1,400 to almost 33,000-passengers in This is continuing to escalate with a majority of the passengers coming from South America and Europe. See Figure 19. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 37

37 Figure 18: Port of Cartagena, Colombia Passenger Growth, est. (215,835 pax thru May) Figure 19: Port of Cartagena, Colombia Passenger Growth, est. (215,835 pax thru May) San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 38

38 SECTION 7 CRUISE PROJECTIONS FOR THE PORT OF SAN DIEGO 7.0 Forecast Preparation Due to the circumstances of this particular assignment, the traditional projection methodologies do not work in this short-term environment. These typically look at market capture rates and the competitive market positioning of the region and destination. However, these are short-term projections that are driven by the immediacy of the situation and therefore must take into consideration these key factors: Economy (US and California/regional); Mexico (violence issues and publicity); and Lack-of-ports in the region (generating high speed & distance issues and low marquee value). The projections illustrated in this section anticipate regional trends based upon cruise line feedback in the short, mid and long-term. Thus, our forecast methods and various assumptions inherent in each incorporate our best interpretation of demand and supply conditions in the marketplace. These projections must also observe possible limiting factors of downstream ports based upon feedback in market. For these projections a combination of long- and short-term techniques are utilized. Figures 20 and 21 illustrate the traditional methodology used for forecasting. Figure 20: Port of San Diego Trend Regression Analysis, In the case of San Diego based upon the regional issues presently at play, these are not valid and focus on long-term historical analysis. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 39

39 The substantial upturn in 2012, rebounding beyond 800,000-passengers by 2018 is not a consistent model. Likewise in Figure 21, the long-term market capture methodology does not work in the shortterm. Thus, the outlook for the first 5 to 6-years is likely more grand than can be anticipated due to an anticipated recovery period for the region. Figure 21: Port of San Diego Market Capture Analysis, Thus, the focus of the methodology employed for this exercise is to focus on the short-term Port of San Diego deployment scenarios based upon critical feedback from the cruise line industry. Afterward, into the mid- to long-term additional influences in the marketplace may then cause additional growth or lack thereof in the region once a regional recovery has occurred. The deployments focused on for this exercise are as follows: Holland America - OOSTERDAM 28 HP, ROTTERDAM 5 HP, STATENDAM 9 HP, WESTERDAM 3 HP, ZUIDERDAM 1 HP; Carnival - CARNIVAL SPIRIT 15 HP; Seasonal Mexico POC (26) CCL, Seasonal Hawaii H (6) CCL, Year Round 5/5/4 Day POC (72); Celebrity INFINITY 3 HP, CONSTELLATION 1 HP, CENTURY 4 HP, MILLENNIUM 2 POC, Seasonal Mexico H (26); San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 40

40 Others - SILVER CLOUD - 2 HP, CRYSTAL SYMPHONY - 5 HP, EXPLORER 1 POC, SILVER SPIRIT 1 POC, SEVEN SEAS VOYAGER 1 POC, SEABOURN SOJOURN 1 POC, EUROPA 1 POC, OCEANIA MARINA 1 POC, SEA PRINCESS 1 POC; NCL - Seasonal Panama Canal H (12) NCL, Seasonal Mexico H (26) NCL, Seasonal Coastal H (6); Princess - Seasonal Mexico POC (26); RCCL - Seasonal Panama Canal H (12) RCCL, Seasonal 5/5/4 Day POC (36); Disney - Seasonal Mexico POC (26), Seasonal Mexico H (26), Seasonal Mexico H (13); and, EURO LINES - Seasonal Panama Canal H (12), Seasonal Coastal H (16). Figure 22: Port of San Diego Deployment Scenario Analysis, As shown in Figure 22 this assessment focused on the short-term expectations followed by an anticipated recovery period and growth in the long-term. However, even using this methodology the long-term projection is not valid due to the circumstances of the region and the potential deployment trends of the cruise lines themselves. Until a recovery occurs they do not have expectations of their deployment patterns in this region. Typically, a cruise line has a solid idea of their deployment months out and a straw itinerary from which to build and define their organizational structure and initiatives some 3 to 5-years. But, due to the nature of the cruise business these latter ideas can change drastically due to outside forces such as the economy, violence, natural disasters, regulatory conditions and operational costs factors. The prime influential factor is and will be consumer demand. San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 41

41 Thus, in this exercise traffic may drop as low as 150,000 in 2014 before beginning a slow rebound to some 187,000-passengers over the mid-term. Based upon feedback from the cruise lines and other factors a short-term scenario 1 and longer-term scenario 2 have been developed based upon our projection modeling. Figure 23 provides an illustration of these results with passenger traffic dipping below 200,000 through 2016 before recovery beings to occur. Substantial recovery to passenger numbers in 2008 s range may not occur until mid to late 2020 s. However, this far out is speculative in nature. Figure 23: Port of San Diego Passenger Growth Composite, Conclusions The market in Southern California will reach bottom in Rebounding will be a factor of the economy and the Mexico market. The Mexico market can be helped by creating new safe destinations. Lines will take about 2 years after the economy rebounds to begin to increase capacity in the region. For this projection we are showing the rebound occurring between 2015 and San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 42

42 SECTION 8 BERTH IMPLICATIONS FOR THE PORT OF SAN DIEGO 8.0 Overview Demand is obviously down for berths at the Port of San Diego and throughout the region. However, based upon new-build trends and deployment characteristics cruise vessel size will continue to increase. The Broadway Pier cannot handle large cruise ships. In 2011, more than 1/3 of the cruise ships calling in San Diego are larger than Broadway Pier can handle. Thus, dual cruise facilities are needed to handle vessel size growth. See Figure 24. Figure 24: Port of San Diego Cruise Facilities Layout and Capacities B-Street Primary Facility + 4,000 passengers / 2 ships Broadway Secondary Facility +/- 2,000 passengers max Figure 25 illustrates the percent of ships over 2,500 passengers that will sail to and from the Port of San Diego over the projection period from 2011 through 2040 based upon our assessment. As shown, this percentage will increase from just over 20% in 2011 to as much as 70% by The trends of the San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 43

43 new buildings in the cruise industry continue to move to larger hulls with more outside cabins in an industry effort to maximize space. Thus, this creates vessel with larger overall passenger capacities. Figure 25: Port of San Diego Cruise Vessel Passenger Capacities Percentage over 2,500, Future Facilities B-Street is the key facility for the Port of San Diego moving forward as it is the only facility capable of handling large cruise ships. Broadway Pier was designed as the overflow space for smaller cruise ships. As the market returns the fleet will be even more tilted toward the deployment of larger ships into the region. 8.2 Action Items Target those items where the Port of San Diego can affect change such as: o Port s facilities; o Marketing efforts to the cruise lines and their consumers; San Diego Unified Port District Cruise Market Update (Executive Draft Report) Page 44