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ANALYSIS

Can Destinations Increase Revenue by Limiting (or Banning) Cruise Ships? Yes, Keep Reading

Tourism officials in Aruba took notice when cruise traffic dipped last year, but then they spotted something remarkable: total tourism revenue was up.

Maybe it’s not a coincidence.

The cruise lines want local governments to welcome them with open arms (and often build them new cruise terminals).   And to do that they need to demonstrate a huge economic benefit… one that more than compensates for all those passengers creating unpleasant queues at attractions, generating traffic jams, and annoying the higher-paying overnight visitors.

So is the financial benefit there?

Professor Ross Klein at Memorial University of Newfoundland doesn’t think so.

For starters, the reports that show how much passengers are spending per shore visit (about $80 – $150 a day) are largely conducted by the cruise lines and lack a certain amount of scientific methodology. They mainly rely on surveys left in passengers rooms to fill in when they return from their on-shore visit. The survey is completely voluntary and only a small percentage of passengers actually take the time to complete it, which any basic survey book or expert will tell you means it contains “voluntary sampling bias” because the type of person who voluntarily does this may have certain spending habits that could be more or less than the average. (The way to make it scientific is to ask a randomly selected sample of passengers visiting the port.)   The other problem is that it’s difficult to recall purchases unless people sit down with their receipts. Imagine you went shopping and eating for a day and spent roughly $80 – $150 per person in your group and were given the survey below at the end of the day. It would be difficult for many to recall exactly how much was spent, especially when some of it may have been booked and paid for months in advance.

Survey expert, Matt Champagne, Ph.D., looked over the questionnaire as well. He had two immediate observations:

1) “They make the error of attempting to survey the facts. There are numerous observational and archival ways of comparing the amount of money spent on an island when a ship is in port vs. not in port, each with their own biases but all more accurate than relying on the recollection of the 2% or 3% of guests who bother to return the form.”

2) “Responses may over-represent passengers who spent more. That is, few passengers will take the 20 minutes needed to fill out a 40-item survey that reveals exactly who they are, where they live, and how much income they make, just to tell their hosts that they only bought one t-shirt.”

In other words, it’s not terribly scientific.

Screenshot [BELOW] of the actual survey

“When local tourism organizations or ports conduct similar studies, they almost always find that the sums are significantly lower, “ says professor Klein.

And that’s if they disembark at all.

All those on-board waterslides, surfing machines, climbing walls and other attractions are affecting the bottom line for destinations.  The idea of getting access to these on-board toys without the crowds is appealing.  As Kevin Sheehan, CEO of Norwegian Cruise Line, explained in a Skift article, “more passengers are choosing to play on the ship rather than get off in some ports.”

If they stay onboard, the cruise lines earn money at their spas, bars and shops.

And, of course, cruise lines also earn money on the shore excursions.  Not just by selling tours (they keep at least 50 percent of that money), but also on fees for promoting shopping at certain stores (a modern, more sophisticated and lucrative twist on traditional kickbacks). In one example, professor Klein sites a single shop in the Bahamas that paid $100,000 a year to be included on a map and in the shopping program.  “If a cruise ship is recommending a shop,” says Klein, “they’re getting money for it.”

The bottom line is that less money actually stays in the destinations than is officially calculated.

DESTINATIONS HELP SELL CRUISES

If you look at the cruise lines’ websites and brochures, there’s an awful lot of information about the destinations they visit. Why? They can’t easily change out their cruise ships each year, but they can keep things fresh by offering new destinations or itineraries.

In other words, they use the destinations as a sales tool to bring back existing customers and attract new ones.

Carnival Corp.’s chief strategy officer Josh Leibowitz said as much in a recent Skift interview.  He explained that they created the seven cruise wonders of the world –– the best places to see by water. And they’ve added “we take you to the best beaches” in their latest advertising because they noted that the idea of taking people to these key destinations “changes peoples’ mindset about cruises.”

Now, do cruise lines want passengers to spend a lot of money in those destinations? If the cruise lines aren’t earning more money from it, there’s not much incentive.

The destinations let themselves get used for this because, according to Professor Klein, they think they’re making more money from the ships than they actually are. And they think the cruise ship passengers will get a taste of the destination and return as overnight guests.

But a recent Norwegian study by Professor Svein Larsen found this was not the case. Cruise ship passengers may come back as cruise ship passengers again, but they are not at all likely to come back as overnight guests. There is, however, a group that is likely to return as overnight guests: current overnight guests – the same group that is getting turned off by all the cruise ship traffic. “It simply seems as if cruise tourism does not have any value as a promotor of Norway as a holiday destination at all,” says Larsen.

Professor Larsen also found that cruise passengers don’t buy more products just because there’s more being offered, comparing spending during weekdays and weekends (when many shops are closed). But this correlation does hold true with land visitors; they spend more when there’s more to buy.  Professor Larsen believes that the length of stay in the port is a more crucial determinant for how much money cruise passengers spend.  And the destination doesn’t get control over that. (FYI: Industry average port stop is 4.3 hours.  This and most of the other official data that destinations get from the cruise lines comes via the Business Research & Economic Advisors, which is essentially a guy named Andrew Moody with an anachronistic website – breanet.com – who lives in Pennsylvania and writes up these reports for the cruise industry via an umbrella organization called The Florida-Caribbean Cruise Association.)

SECOND BIGGEST WINNER: THE PORT

There is another key player in this equation, and that’s the port. They earn fees of around $10 – $30 a passenger every time a ship docks.  So a 4000-passenger ship may bring in $80,000 in port fees from the cruise line. (The cruise line may pay the fees, but this cost gets directly passed on to the passengers and shows up on their room bills.) There are other fees as well for ship cleaning and fuel and such that keeps the port earning considerable money. Not surprisingly, the port is often the lead supporter of the cruise lines when it comes to lobbying the local government for funds to enlarge the port or fix up the terminal or anything else.

But even this revenue isn’t always as big as it may seem.  Why?  Two reasons. First, there are often rebates on these port fees if cruise ships bring in enough passengers because the local government wants to encourage more visits to generate more spending.  In other words, the passengers pay the port fee, but the cruise lines get the refund – yes, sort of like a kickback.  And also because, according to Professor Klein, in some cases, like Cozumel, Jamaica, and Kusadasi, Turkey, the cruise lines have actually bought up the entire cruise port and they get the money – plus they can collect rent from the locals who operate shops there.

Perhaps, not surprisingly, the ports may generate some interesting figures as well. The Port of Seattle, for example, states on their website that: “During the 2015 cruise season, the Port expects 192 vessel calls and 895,055 passengers. The Port estimates that with each of these ship calls, $2.5 million is generated for the local economy. ” Even if we ignore that 895,055 divided by 192 is 4661, which would mean their average ship would have to be one of the world’s two largest ships, it still doesn’t make sense. If we instead said that the average was a healthy 3000-passenger ship and that they spend an average of $100 and the port takes $20 per passenger, that’s a total of $360,000. How do they get from there to $2.5m?

The whole thing adds up to an impressive sleight of hand. As Professor Klein explains it, they make it look like the passengers are spending more than they are, get commissions from the biggest shops, get more passengers to stay on the ships while in port and get about half the money from each excursion sold. Then they often get deductions on their passenger-paid port fees.

The passengers may get a few surprise fees and pay about double the local rate for excursions if they book their excursions onboard, but it’s not enough to prevent them from cruising again.

The main party getting duped in this equation seems to be the destination.  They certainly get some substantial money from the passengers and the port, even though chances are it’s not nearly the amount that was presented when they allowed the ships to start docking.  Their beaches get crowded, often to the dismay of the hotels and their paying guests, and the small towns may lose their soul under the swarms of visitors.  Plus the water quality may suffer – the per-ship daily average of 95,000 liters of sewage from toilets, over 500,000 liters of wastewater, 7 tons of garbage, 56 liters of toxic chemicals, and 26,000 liters of oily bilge water has to go somewhere, and even if just some of it occurs out at sea, it’s hard to contain.

And no mater how much the destinations do to welcome ships and build them sparkling new terminals with taxpayer money, there’s not much loyalty. Cruise lines, much like vampires, are happy to run after fresh blood, which can be seen at the moment as they all try to get a crack at Cuba’s exposed neck.

At the end of the day, it’s not likely as lucrative for destinations as they’ve been led to believe. And in light of Aruba’s accidental discovery that they just earned more money with less cruise traffic, maybe others will sit up and take notice.

The questions should be:

1) What are the real spending numbers, especially if promotional shopping programs are involved?

2) What’s it worth to have cruise passengers using up the resources and crowding the overnight guests? The current belief is that land-based guests spend roughly three times as much as cruise passengers. What if that figure is closer to five or six times as much … would the cruise traffic still be worth it?

There are some cruise ships that do leave more money and have lower impact… and those are the smaller, high-end ships.  But it’s hard for destinations to say “we just want those high-end ships” because they’re often owned by the same cruise lines that want to dock their bigger ships.

What’s needed is a really great excuse… like “our port doesn’t hold larger ships.” But this is increasingly difficult to say because so many destinations have enlarged their ports.  What more and more destinations could say, however, is that they don’t have the capacity on land.   In fact, certain high-end ships now insist that if they dock, they’re the only ship in the harbor, so their passengers don’t have to compete for space with other cruise passengers, especially low-end cruise passengers.

If the math checks out (that destinations can earn more without the ships, or with fewer of them), the other option is to simply legislate a full or partial ban on the ships. Then use this ban to generate publicity and attract more land-based visitors.  If you can’t imagine how this would appeal would work, have a look at this travel story.

Whatever course destinations take, it’s important that they understand how the cruise lines think. And that destinations factor in all the economic, environmental and sustainability elements when making a decision.

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