The Economics
of Cruising:
Abstract
This article offers a
microeconomic analysis of the
international market for
short ocean cruises, as the
major element of global
cruising activity. It draws
attention to some specific
issues in cruising economics,
such as problems with units of
measurement and the
multinationally footloose
nature of resource acquisition
for the industry. The paper
offers an analysis of supply
considerations and discusses
the market structure of the
industry as a competitive
oligopoly dominated by three
cruise lines as suppliers and
the Caribbean as the main
destination cruising region.
Key variables are shown to be
economies of scale, pricing
and product differentiation.
Adrian O. Bull is Principal
Lecturer in Tourism at the
University of Lincolnshire and
Humberside, England.
28 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96
An application to the
short ocean cruise market
Adrian O. Bull
Introduction
Since the 1960s, cruising has developed from being a substitute
off-season use for passenger liners normally engaged on line voyages
to a substantial, and often footloose, sector of tourism activity. Ships
have become destinations or floating resorts rather than primarily
means of transport, and markets have been balkanised into many
types.
This paper proposes that one of these types - the market for
short ocean cruises - can be defined in economic terms as a separate
market. Globally, this market has perhaps the highest international
profile in terms of cruising, and displays characteristics of
internationalisation and economic organisation which are unique. The
paper analyses and discusses the main microeconomic issues involved,
with particular reference to operating economics and the market
structure of the industry.
Categories of cruising market - an economic perspective
In order to investigate the economics of cruising, it is first
necessary to define cruising products and market places. One
approach (Hobson, 1993a) is to treat the whole of cruising as being a
single, but segmented, market, where products are highly
differentiated according to consumers’ requirements, but where there
is an assumption of overall competition and substitutability. Hobson,
for example, suggests that there are four market segments: mass,
middle, luxury and specialty.
 With differentiated products, the
notion of what constitutes an
individual and specific market
may be problematical. Any two
or more products are usually
considered to be of the same
generic commodity class if there
is a reasonably high level of
substitutability between them,
which may be measured by a
positive cross-price elasticity of
demand. However, there is no
clear definition of the degree of
substitutability (or of a specific
value of cross-price elasticity)
necessary to determine the cut-
off point for pr oducts to be
classified as being within the
same market. This lack of
definition results in considerable
legal argument in antitrust law
cases (Watson, 1977).
The boundaries of a cruising
market may be ‘defined’
qualitatively by recognition
amongst producers, and amongst
consumers, that the products
traded are performing essentially
the same function, or possess
some basic homogeneous
characteristics. This implies, for
consumers, that there is some
determination of indifference
between products based on these
characteristics. In the long run
this may lead to an identifiable
price nexus amongst cruise
products, although in the short
run the differentiating
characteristics between products
and the way they are marketed
may produce price and demand
variations which suggest that
products are not really in the
same market at all (Dilley, 1992).
Within any one market, the level
of homogeneous characteristics
should be such as to create
substitutability on both the
supply and demand sides
(Carlton & Perloff, 1990). In
supply terms this implies that
both the production function and
the cohesiveness of the market
place constrain the pricing of
products.
A market may be bounded within
a geographic area (Watson,
1977). As location theory shows,
in terms of supply, production
costs and methods may differ for short ocean cruises, is the
greatly from one area to another, largest and most heavily
or transport costs may be so high researched area of cruising. The
as to constrain supply areas remainder of this paper will use
(Isard, 1956). In terms of this market as an exemplar
demand, transaction costs and because of its importance, but
poorer consumer information transfer ability of findings to
about more spatially remote other markets would be limited
alternatives act as constraints. by those differences outlined
In addition, governments may above.
impose trading regulations which
bound markets. The short ocean cruise
market
Whilst it is evident that many
cruise lines draw upon custom This market accounts for the
from around the whole world, largest area of activity in
owing to the inherently cruising, with a major
international nature of most contribution to specific regions of
cruising products, the above the world’s tourism. There are
analysis suggests that there are different units of measurement,
in economic terms several such as cruise passenger
cruising markets, whic h are numbers, berths available, and
bounded both geographically and passenger days. A feature of
by limitations on substitutability cruise industry reporting is
in both supply and demand. This disagreement over statistics.
would produce a range of
markets whose operation would Passenger numbers are cited as
differ notably one from another. a measure of demand (Fells,
A schema of such markets might 1995), although perhaps they are
resemble those shown in Table 1. more a measure of consumer
numbers at market equilibrium.
The last of these markets, that World ocean cruising numbers
Table 1: Overview of Cruising Markets.
Location /type Comment Supply / markets
River, canal and Several markets Small, shallow-draft vessels,
lake cruises according to location often domestic markets,
cabotage-limited
Special interest Worldwide markets, Often purpose-built vessels,
(such as sail, highly differentiated specialist crews, a degree of
education or ) monopoly through
exploration differentiation
Long distance ocean Single world market Large vessels, often relying
cruises, including on ‘tradition’ and luxury,
RTW cruises resources acquired inter-
nationally
Extended ferry Usually domestic or Joint product with car ferry
‘mini-cruises’ between country pairs, services (see Peisley, 1992a)
especially in W Europe
Short ocean cruises World market, but Mostly large vessels, usually
heavily dominated by purpose-built for mass
U.S. demand. market cruising
Differentiated by
location, dominated
by the Caribbean
THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 29
 Table 2: International Cruise Capacity 1995, in Percentage of Berths.
Caribbean
Mediterranean
Alaska / West Coast of North America
Rest of the world
Out of service
Total
(over 99% of whom are short sea
cruise passengers taking a cruise
of less then 14 nights) are
estimated at 6.3 million (Darnill,
1995), or 5.7 million (CLIA,
1996). Growth of 10-12% per
annum in the decade to 1993 has
been followed by static numbers
since then.
Berths available are a measure
of supply, assuming constancy of
ship operation. In 1995, some
129,000 berths were available
in ocean cruise ships (Fells, 1995;
Peisley, 1995), although some
percentage of these are always
out of service, owing to refits,
maintenance or ship
repositioning. The geographical
allocation of supply is strongly
oriented to the Caribbean, as
shown in Table 2.
There is disagreement, however,
over the number of berths
available from individual
suppliers, since there is cross-
chartering and shifting owner-
ship of ships and lines. This
issue will be further explored in
the section on market structure.
Passenger days are the main
output measurement of the
industry worldwide. For 1994,
they are estimated at 34.9 million
(Blum, 1995) and 37.7 million
(Fells, 1995). Blum estimates
that about one-third of these
(12.2m) are days spent in the
Caribbean. For 1995, C LIA
estimates a usage of about 37
million passenger days world-
wide, related to a supply of some
46.3 million passenger berth
days, giving utilisation of 80%.
30 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96
applied to international tourism
suggests that capital will be
June December sourced internationally from
wherever it has the highest
marginal efficiency over the
25 50
20 2 investment cost (Bull, 1995), and
17 0 that other factor inputs will be
30 30 obtained usually from the
8 18 tourism destination country,
unless there are significant
100 100 savings or productivity benefits
available by acquiring them
Source: Adapted from CLIA (1996). elsewhere and the host
government imposes no import
controls on these factors. At the
This utilisation rate compares very least, land and tourism
very unfavourably with those of resources must normally be
the previous ten years which sourced from the destin ation
ranged between 88% and 98%. It country.
is caused by a sharp increase in
the supply of berths as new ships No such limitations apply to
are launched, coupled with a cruising. Cruise lines can
static or marginally declining operate as almost perfect
demand. Although there is dis- multinational corporations,
agreement over precise statistics, provided that they operate cruise
most commentators concur that sectors between ports of different
there is a general trend towards countries. [If cruise lines operate
oversupply (Miller, 1996). between ports of the same
country, then cabotage rules are
Sourcing factor inputs likely to apply, which usually
restrict carriage to operators of
Cruising provides an extremely that country. There has been
good opportunity for multi- considerable debate recently in
national operation in tourism, the U.S. Congress about the
accompanied by international effect of cabotage. Other than
acquisition and deployment of American Hawaii Cruises, all
factors of production wherever ocean cruises operating from the
there is the highest marginal U.S. are foreign-operated, and
productivity. escape cabotage rules by sailing
to, or back from, non-U.S. ports.]
Conventional investment theory Not even land and tourism
Table 3: Source of Inputs for Major Cruise Lines.
Company ownership: USA, Israel, UK, Norway, Greece, Ukraine
Capital: USA, Japan, Germany, UK
Marine registration: Panama, Liberia, Bermuda, Cyprus, Bahamas
(Hobson, 1993a)
Ships: Norway, Finland, Italy, Germany (yards such as
Meyer Werft, Fincantieri, Kvaerner, Bremer
Vulkan and Alsthom Atlantique)
Officers: 26% Italian, 22% Greek, 21% Norwegian, 8%
British (adapted from Schwartzman, 1994)
Crew: Mos tly i nternational, wi th many s outhern
Europeans and Filipinos
Bunkering: Cheapest source on cruise or repositioning
resources need to be acquired
from a specific country. As a
result, cruise lines are relatively
footloose businesses which source
factor inputs from a range of
countries. Table 3 shows where
the major cruise companies
acquire their major inputs.
The footloose nature of cruising
has been an advantage to
countries which otherwise would
earn little from tourism (Bull,
1995). For example, CTC Lines,
now Ukrainian-owned, was
developed by the former Soviet
Union to earn foreign exchange
by operating cruise ships in
various par ts of the world
(Peisley, 1992b) and supplying
services to passengers from all
the main demand markets.
Ocean cruising therefore is
unusual in being a high-capital
but footloose industry with wide
opportunities for inter-
nationalisation.
Operating economics
In shipping, costs are
traditionally divided into capital
costs, fixed running costs, and
voyage costs.
• Capital costs include those of
purchasing and depreciating
vessels, together with interest
payments on investment
capital.
• Fixed running costs are all
those which are incurred when
a vessel is put into service (not
laid up), and include all areas
of insurance and indemnity,
crewing wages, stores,
surveys, repairs and landside
management costs.
• Voyage costs, which of course
are variable in r espect to
voyages, include port charges,
fuel costs, voyage-related
stores, age ncy and other
landside handling costs.
In comparison with cargo vessel
operation costs, those in cruise
lines are particularly high in
certain areas. Firstly, cruise
Costs
Variable costs
Fixed costs
0
Figure 1: The cost structure of cruise shop operation
ships are expensive capital items
in com p ar iso n w it h ca rg o
v e s s e l s of similar tonnage.
Typically, a container liner or dry
bulk carrier of 50,000 - 100,000
tonnes may cost US$50-100m
(Apelbaum, 1994). Vessels for
mass market short ocean cruises
are currently being built,
typically at around 70,000
tonnes, at a cost of US$300-350m
(CLIA, 1996). This difference
reflects the cost of passenger
a n d extra crew accommodation,
high quality public areas and
amenities, and a generally less
utilitarian design. Depreciation
and insurance costs are
accordingly higher, together with
expensive passenger liability
insurance.
Secondly, wages costs are com-
paratively high in cruising
compared with cargo operation.
Where a cargo ship of 50,000
tonnes may need 20-30 crew
(Apelbaum, 1994), cruise vessels
of similar size have crews of 400-
600 (Schwartzman, 1994) of
whom more than three-quarters
will be ‘hotel staff’, catering staff
and leisure/entertainment per-
sonnel. Voyage-related stores
costs, especially for food,
beverages, linen and disposables,
are similarly high. A cruise liner
is in effect both a ship and a
THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 31
Total costs
Voyage
costs
Output
Full ship
capacity
resort, and therefore bears the
costs of both.
A total cost function for cruise
ships is likely to resemble that in
Figure 1, and is similar to those
found in many capacity-
constrained tourism service
enterprises (Bull, 1995).
Fixed costs, including the vessel
and its depreciation, adminis-
trative costs and wages for those
crew who are permanent,
represent a high proportion of
total costs. A vessel cannot be
subdivided, so that there is no
real flexibility in supply. Voyage-
related costs are incurred when a
particular cruise is operated,
regardless of the number of
passengers. Variable costs are
frequently comparatively small
and relate to the dir ect
provisioning, accommodation and
handling (both at sea and
landside) of passengers.
If all berths are sold at their full
price, then total revenue
increases as the line TR1 in
Figure 2, and the maximum
profit position (total revenue
minus total costs) will be that of
full capacity and maximum
revenue. Profit will be the
amount represented by the line
AC in the figure.

Costs
Total costs
0 Output
Figure 2: Cruise costs and revenue
If the mark et is not strong
enough to sell all berths at full
price, the cruise line cannot
easily reduce the number of
bert hs available (and hence
passenger days) without taking
a ship out of service. Doing this
would mean that although
variable and voyage costs would
be saved, the fixed costs (as in
Figure 1) would still be incurred,
as would laying-up costs. It is
ther efore preferable to try to
maintain passenger numbers in
almost any way possible, the
most common of which is
discounting (Belsky, 1994;
Hobson, 1993b; Kalosh, 1995;
Miller, 1996). This may mean
that total revenue only reaches
the line TR2 in Figure 2. Filling
the ship still results in the
s ma ll est po ss ible l o ss o n a
cruise, represented by the line
CB. As long as this loss is less
than inescapable fixed costs, it
i s preferable to maintain the
supply of cruises. It is also
important to maintain ships in
revenue-earning service for as
many days in the year as
possible, since any ship
undergoing maintenance or
sitting in port between cruises is
a costly wasting asset;
turnaround times are minimised
(Bull, 1995).
32 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96
A bunkering.
TR1
C economies of scale; this is
B and more economic ships (for
TR2
Full ship
capacity
Thus, short and medium-term
supply decision in cruising are
related to maintaining demand
and revenue, and achieving cost
reductions. Demand and revenue
maintenance is related to
product, pricing, and other
aspects of competitive marketing,
which are considered in the
following section on mar ket
structure. Cost reductions can be
achieved in a number of ways:
• Using flags of convenience for
marine registration enables
cruise lines to source crews
from low-wage labour markets
as well as avoiding operating
taxes or the enforcement of
costly regulations (Mentzer,
1989).
• Reducing crew numbers or on-
board service, although
p assenger-crew ratios and
service quality are important
product differentiation items
which contribute to higher
selling prices and less-elastic
demand (Peisley, 1992b).
• Saving fuel costs by sailing
more slowly, spending time in
ports-of-call where a ship acts
as a floating resort hotel, and
including in itineraries ports
with cheap or low-tax fuel
• In the longer term, taking
advantage of internal
achieved by operating larger
example, Carnival, Princess
and Royal Caribbean Cruises
operated 28 ships between
them in 1995 with a mean
ship size of 47,362 tons and
1429 berths (Schwartzman,
1994), but between 1995 and
1998 are commissioning 15
new ships with a mean ship
size of 76,370 tons and 2013
berths (Fells, 1995)).
• Making use of the investment
in larger ships to expand and
diversify the sup ply of
complementary products on
board, such as bars, boutiques
and casinos (Kalosh, 1995);
these are in a strong trading
position effec tively as
monopoly suppliers to on-
board passengers.
A consequence of investment in
larger units is concentration on
mass market cruise types and
locations. In order to maintain
high passenger utilisation rates
with very large vessels, suppliers
gather cruises into areas of high
demand, such as the Caribbean
all year round, and Alaska and
the Mediterranean in summer.
These areas have good access to,
and short flying times from,
generating markets, as well as
popular and attractive cruising
grounds, weather conditions and
ports-of-call. Larger vessel sizes
also mean that cr uising is
physically concentrated to places
with deep water access and
canals or docks with adequate
width (some new vessels are too
large even for the Panama
Canal). Such mass market
concentration inevitably
influences the nature of the
industry and market structure.
Market structure
If there is a positive, but not
infinite, cross-price elasticity of
demand between products in a
market place, then the structure
of that market is one of
monopolistic competition or
oligopoly. A monopolistically
competitive market has many
firms, and no restriction on entry.
Despite similarity in the basic
characteristics or performance of
products, each firm sells a
version of the product which is
differentiated from others. Given
the definition of the short ocean
cruise market offered earlier in
this paper, this is what suppliers
are doing. However, full mono-
polistic c ompetition implies
contestability (Baumol et al. ,
1982) where it is possible for any
number of firms to operate
sustainably. Free entry to and
exit from the market will allow
the possibility of a large number
of firms being present. Barriers
to entry into a market may
include patents and legal
restrictions, contrived barriers
such as heavy branding and
advertising, and economies of
sc ale which cause output at
min imum average cost to be
large relative to the size of the
market.
There are clear barriers to entry
in the market for short ocean
cruises, in the forms of heavy
capital requirements, registration
and licensing regulations, and
the increasing economies of scale
in operating vessels of larger size.
The market has therefore
developed an oligopolistic
structure, in which a small
number of suppliers dominate the
supply of short ocean cruises.
Table 4 shows how supply is
concentrated in the hands of a
few firms.
During the 1990s there has been
relatively high turnover amongst
suppliers, with some exits from
the industry, a number of
mergers or takeovers (which have
led in part to the predominance
of companies such as Carnival),
and inter-company trading of
vessels. Since a single large
cruise ship can account for up to
1.5 - 2% of mark et capacity,
trading in these mobile assets
can quickly alter relative volumes
of supply and the level of
concentration in the industry.
Concentration has increased so
that the “big three” suppliers -
Carnival, Royal Caribbean and
P&O/Princess - account for
almost half of all capacity. In
addition these companies are
reputed to be the most profitable
in the industry (Miller, 1996),
and are predicted to grow at the
expense of smaller, less-well
capitalised suppliers (Kalosh,
1995).
In relation to the broad choice of
strategy open to oligopolists,
between competition and co-
operation, there is relatively
minor overt co-operation between
suppliers, through the Cruise
Lines International Association
(CLIA). Although CLIA members
control 96% of berths offered to
North American consumers
(Murphy, 1996) which represents
some two-thirds of the worldwide
market, CLIA’s economic role is
limited to cruise promotion and
distribution activity. Individual
suppliers operate mainly as
oligopolistic competitors, using
product differentiation and
promotion as major strategic
weapons (Hobson, 1993b; Mintel
International Group, 1993). For
example, Carnival Cruises are
vertically, or quality, differen-
tiated as inexpensive, the
‘Macdonalds of the industry’ and
as ‘fun’ cruises (Trumfio, 1995),
whilst Cunard vertically
differentiates its products as
prestigious and sophisticated in
order to maintain a price
differential.
Table 4: Major Suppliers of Short Ocean Cruises 1995
(number of berths available for short ocean cruises)
Operator
Carnival Corporation
P&O Cruises (inc Princess Cruises)
Royal Caribbean Cruise Line
Kloster (inc NCL and RCL)
Cunard Line
Total
Source: Adapted from Peisley (1995) and CLIA (1996).
THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96 33
Horizontal product differen-
tiation, that is, distinguishing
products by offering different
characteristics rather than
different quality levels of the
same characteristics, allows
cruise suppliers to segment
markets and specialise. Whilst
this may apply to all suppliers,
who may differentiate by offering
different specifications of a key
cruising product characteristic
such as food (Marti, 1995), it is
particularly important for
smaller companies to enable
them to create a measure of
monopoly in niche markets. For
example, Walt Disney
Corporation is entering the cruise
industry with family cruises
offered as a complementary
product to theme park visitation
in Florida (Zbar, 1995). At the
same time, cruise suppliers seek
to differentiate their products
from those of land-based resorts
which in many ways are
substitutes.
For the type of oligopoly
structure indicated, pricing
activity is very important. With
differentiated products and
capacity constr aints, at the
development and entry stage for
a cruise line or for a new vessel,
decision making is likely to be
Cournot-type, representing
competition to set output levels
and install fixed productive
capacity. Hence, there is
considerable competition to build
new ships of the most efficient
type and size (Darnill, 1995).
Once capacity exists, prices
become the strategic variable,
Berths % of market
25800 20
16600 13
16300 13
10000 8
6000 5
129000 100
 denoting Bertrand-Edgeworth-
type decision making. This two-
stage approach is typical of sunk-
cost models (Schmalensee, 1992).
The concentration on price as a
strategic variable is enhanced
since cruises are services which
are non-storable and perishable,
so that producers must adjust
prices to influence demand or be
left with useless output (Carlton
& Perloff, 1990). As a result,
cruise prices vary according to
such differentiating charac-
teristics as the crew-to-passenger
ratio or the age of the ship
(Mentzer, 1989), but for any
similar package of characteristics
prices are highly competitive.
Table 4 shows daily rates charged
by a number of operators for
similar cruise products in 1995.
Table 4 indicates that, given the
degree of differentiation between
operators, ships types and
services, and differing cruise
locations and lengths, there is
still a high degree of homogeneity
within prices, suggesting a
closely competitive oligopoly
market structure.
new areas. However, there are
constraints on the latter, in terms
of consumer access, touristic
interest, climate, and a range of
suitable ports-of-call. Short
ocean cruises are in many cases a
substitute product for land-based
resorts, competition from which
can strongly influence demand.
The planned growth in the supply
of berths for short ocean cruising
remains at a high level. Because
of long construction times, new
investment in ships locks in
growth in supply up to five years
ahead, assuming that older
vessels are not scrapped at the
same rate. The average size of
mass market cruise ships is
increasing, owing to economies of
scale, but this makes supply ever
more ‘lumpy’ and will continue to
force operators to concentrate on
demand management strategies
to ensure high utilisation.
Inevitably this means continuing
competitive downward pressure
on cruise prices for as long as
ther e is excess supply in
particular places or at particular
times.
need to receive higher prices to
remain profitable. The option of
using older vessels pr ovides
savings in capital costs, but
usually means higher running
costs as well as problems in
meeting upgraded maritime
health and safety regulations.
Suppliers of cruises will continue
to seek growth in revenue by the
sale of complementary goods and
services such as add-on shore
excursions, on-board casino
gaming and shopping. The latter
can be in an advantaged position
through having a captive market,
but will continue to bring about
(perhaps unfair) competition with
shops and services in ports-of-
call, many of which rely on cruise
passengers for the bulk of their
trade.
As a result of these actions, the
short ocean cruise industry is
likely to remain a competitive
oligopoly, with high global
concentration among mass
market operators of large ships
accompanied by a larger number
of smaller, specialist suppliers.

The economic outlook for Smaller operators continue to

short ocean cruising
Most commentators agree that as
a sector of tourism, cruising
demand demonstrates con-
siderable and continuing growth.
Much of this growth involves the
development of demand from new
sources, particularly from Asia
and from Europe, and the
extension of cruising grounds into
modify and differentiate their
products to sell in specialist
market segments. This may
necessitate the construction of
specialist smaller cruise ships,
such as ‘explorer’ or sail-assisted
vessels. With fewer economies of
scale in construction and
operation, these vessels often
operate at higher average cost
than larger liners, and operators

Table 5: Per diem prices for short ocean cruises, 1995

(Prices per berth in an outside twin/queen stateroom on a newer,
midsize, standard-class cruise vessel)

Operator US$ Operator US$

American Hawaii 251 Norwegian Caribbean 261-335

Carnival (liners) 228-252 Premier 224-302
Celebrity (liners) 240-293 Princess (liner) 230-300
Commodore 232-246 Regency (newer ships) 212-240
Costa 199-299 Royal Caribbean (liners) 218-361
Cunard (Countess) 268-310 Royal 228-355
Holland America 213-286 Sun Line 217-274

Source: Adapted from Schwartzman (1994).

34 THE JOURNAL OF TOURISM STUDIES Vol. 7, No. 2, DEC. '96

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