29.7 million.
That’s the number of people who took a cruise at the industry peak in 2019, before the pandemic. While this number took a serious hit in the subsequent years, it is expected to roar back and continue to grow through the rest of the decade.
I really want to ignore cruise tourism. I really do.
First of all, I don’t understand it. I don’t know why anyone would want their vacation to look like that. Of course, like most things we don’t understand, we only have to look within our own families. I have a brother who goes on cruises with his family.
They love it, and clearly, they aren’t the only ones.
But whether you like cruising or not, it is impossible to deny that cruise ships are massive, floating environmental disasters.
In fact, here’s a little something from just the other day!
+Video: Carnival Magic accidentally discharges scrubber wastewater in port
(Note: What are scrubbers? Well, they turn air pollution into water pollution.)
Cruise tourism, like most other parts of an evolving ocean economy, is not going away. It is only growing. Demographic trends in emerging economies - growing middle classes, increased leisure time - mean this form of travel has the opportunity to explode in the next decade.
So, much like energy and aquaculture, instead of turning a blind eye to the dirty bits (or the investment equivalent of divestment), it’s time to roll up the sleeves, snap on the rubber gloves, and get in the dirty cesspool that is cruise tourism.
Cruising the Ocean50
There are three cruise companies in the Ocean50 Index. Carnival Cruises, Norwegian Cruise Lines, and Royal Caribbean are giants of the industry. All are headquartered in the U.S. and listed on U.S. stock exchanges. These three companies cover about 75% of the total cruise market.
+The economics of cruise ships - The Hustle
The Ocean 100 research found that cruise tourism was the most concentrated industry, with the top 10 companies capturing over 90% of industry revenues. In this case, these three companies combined to pull in $26 billion in 2022.
The concentration isn’t surprising considering the significant barriers to entry and the massive upfront and fixed costs that drive the industry. Even a casual observer of the tourism industry has seen that the key to this segment is scale. The size of the new ships is truly impressive (and troublesome).
Earnings Calls - Tuning In For The Discussion
Norwegian Cruise Lines reported their Q3 earnings this week, with Royal Caribbean reporting last week and Carnival at the end of September. While I was interested in the numbers at a high level, it was the discussion of risks to the business I was most interested in.
(I’ve been listening to these conference calls on a cool app called Quartr. You can follow companies so that you have a calendar of all the calls, both future and past.)
Specifically I was really interested in how these companies view ocean sustainability climate change. Would there be any acknowledgment of financial risk to their businesses from dying coral reefs, increased storm frequency and severity, or any other myriad changes in the ocean environment in which they operate?
Or some concern about the moves by port cities like Venice, Italy, to limit or deny access to large vessels. Is the ground swell rising against cruises that dump thousands of visitors each day only to scoop them back up before they spend any money locally a concern?
After all, one effect of the pandemic shutdown was that some tourist communities figured out life is much better without them.
“It was a stroke of luck,” says Key West mayor Teri Johnston, of the CDC’s original no-sail order. “It gave our residents a chance to see what Key West would look like without the disembarkations—sometimes 10,000 people a day. We’ve never seen cleaner waters, cleaner skies, and our overnight visitors have had the rare opportunity to take a leisurely walk down the street.”
Less than a year later, the Italian government followed suit, formally banning large cruise ships from entering Venice’s fragile lagoon, declaring the area in front of the iconic St. Mark’s Square a national monument. In September 2021, French Polynesia also zeroed in on the industry, announcing that cruise ships carrying more than 3,500 passengers would no longer be allowed at its ports of call, including those in Bora Bora and Tahiti, which relied on cruise ships for more than a third of its visitors.
+Key West doesn’t want your big cruise ships - Outside
Spoiler alert: There was no discussion about any of these things.
Pandemic Recovery and Middle East Tension, not Sustainability
In the conference calls this week, analysts consistently referenced comparisons to the 2019 pre-pandemic peak in industry revenues and passengers, and the data shows why.
This industry took a severe hit and has yet to recover fully. But the trajectory over the coming years looks good. From a business perspective, these companies are well-positioned to benefit from a booming recovery over the next few years.
Depending on their mix of itineraries, there was also discussion about events in Israel. However, with these floating assets, the companies can adjust easier than most.
Tax-Free - U.S. Headquartered, but Not U.S. Incorporated
Perhaps recent moves to collect taxes from overseas operations would measure on the rader?
After all, cruise companies are experts at avoiding taxes and regulation.
While these three big corporations are headquartered in the U.S. and listed on U.S. stock exchanges, none are incorporated here.
Norwegian Cruise Lines is incorporated in Bermuda, Carnival in Panama, and Royal Caribbean in that regulatory hotspot of Liberia.
“The Liberian registry was created in 1948, primarily as a means to offer U.S.-based ship owners a way to crew their vessels without being subject to U.S. labor and wage regulations and U.S. taxation. Today, the body overseeing the Liberian flag is not the government of Liberia, but a private business based in Vienna, Virginia -- the Liberian International Ship and Corporate Registry (LISCR).”
+Hiding behind the flag - PBS
These companies do a lot to make it seem like they are U.S. companies, but they aren’t.
While being listed on a U.S. stock exchange certainly comes with some rules regarding accounting, ships themselves are only subject to the laws of the country in which it is registered. In the case of cruise ships, much like fishing vessels, the more lax and obscure the flag country, the better.
“Cruise lines want to register somewhere where they pay no taxes, are exempt from labor and wage statutes, and don’t have to follow health and safety codes,” says Jim Walker, a Miami-based maritime lawyer. “They’re looking for a place that will leave them alone, not oversee their operations.”
“According to annual report filings, the major cruise lines pay an average tax rate of 0.8% — far below the 21% U.S. corporate tax rate.”
+The economics of cruise ships - The Hustle
Yet they receive taxpayer-covered infrastructure investment everywhere they go. Like the ports and cities that are turning large cruise vessels away more and more, that will change.
“Last year, 50,000 people signed a petition against cruise ships in Marseille. Remy Yves, from the organisation Stop Croisières, says: “The French southern region has invested around €35m in tax revenue to electrify docks for cruise companies. But it’s the companies who should pay for this – they pay no taxes here or anywhere else.”
+Europe ports bear brunt of cruise ship pollution - The Guardian
Side Note: Global 15% Tax Rate
The recent initiative to establish a global minimum tax rate should be a big deal for these companies. But there was no mention of it on the conference calls. So far, the only holdouts to signing on are Kenya, Nigeria, Pakistan, and Sri Lanka.
If you start seeing cruise ships change their flags of convenience to Sri Lanka, you’ll know why. In fact, it wouldn’t be at all surprising.
Any holdout to this legislation will become the world’s last great tax haven.
What About Labor Transparency?
Last week, I mentioned the Outlaw Ocean Project’s bait-to-plate tool and the immediate corporate impact it had. After all, these big public companies can’t be linked to modern slavery. Right?
In a world of increased transparency of life at sea, is there any risk for shareholders in these large cruise companies?
Flagged ships do not have a precise legal minimum wage. There are several failed attempts brought to the USA Congress. While the allegations are representative and there are organizations that defend their job rights (such as the ITWF) cruise companies finally win out. Some of them, flagged by Panama (see Carnival above), lobbied hard to obtain an exemption of the obligation to provide a day of rest per week to workers.
+The impacts of cruise industry on tourism destinations - ResearchGate
Not Good for the Oceans, and Don’t Care
The cruise industry is bad for the oceans or the environment in general. The question is whether they care.
Aside from just looking out over the water from 10 stories above the surface, does the average cruise passenger care what’s happening below?
From the three conference calls I listened to this week, sustainability and the health of the oceans are nowhere on the radar of these companies.
It’s just not what they’re selling.
Additionally, the analysts that posed questions to management might have brought up sustainability initiatives, concerns of ports turning against the cruise industry, or ocean health.
No one even asked. Not one question. So, it seems that core investors aren’t concerned either.
One of the three companies, Carnival Cruise Lines, mentioned sustainability. It was in the context of fuel efficiency. Certainly, using less fuel is better for the environment. And investing in new ships that use cleaner fuels or retrofitting old ones is a significant investment for these companies.
However, with fuel representing the main variable operating cost, much like an airline, being fuel efficient is merely cost management.
As oil prices trend higher and global instability spreads from Russia to the Middle East, any company with such significant exposure to energy prices would be negligent to not become more efficient wherever possible.
Plus, cruise ships are covered under International Maritime Organization regulations. So any fuel transition is mostly forced upon them from above, not initiated at the corporate level.
But, might as well claim some sustainability credit, amiright? And Carnival is ahead of its peers in implementing these fuel changes, so credit there.
The Opportunity And Challenge of The Cruise Industry
Can cruising ever be sustainable? Certainly, they are faced with the same substantial decarbonization challenges as the rest of the shipping industry.
But some companies are taking a different tack than the ‘bigger-is-better’ strategy:
“I think it’s sheer wrong to build bigger and bigger and bigger cruise ships,” Skjeldam (CEO of Hurtigruten, a cruise operator) says. The average cruise ship has around 3,000 passengers, but cruise companies have been investing in ever-bigger liners. “7,000 [passengers], 8,000, 9,000,” Skjeldam says. “It’s just wrong.”
+The cruise industry is on a course for climate disaster - Time
At first glance, there seems to be plenty of opportunity to engage with these companies to make more improvements faster. The opportunity to become the most sustainable option in the industry seems to be being taken by those with smaller boats and higher-end clientele.
Yet it’s clear why these companies dominate their industries and need to be part of the Ocean50 index. They soak up a huge portion of revenues in their industry and have a clear symbiotic relationship with our oceans.
But right now, they see it as a one-way street; adhering to that centuries-old belief that the ocean is big enough to just keep dumping our shit into it.
I’ll admit, not my most optimistic article. But to leave you on a high note, here are six videos of cruise passengers missing their boat.
Terrific