With Profit Elusive, Cruise Lines Are Trimming Services, Raising Package Prices

Demand for cruising is high, but with fuel, labour, food and interest costs soaring, cruise lines are still struggling to earn a profit.

That was demonstrated last week, when Norwegian Cruise Line, which had forecast its first annual profit in three years, fell short of estimates. Investors responded negatively, with the stock price dropping 10% in the wake of the news.

Discussing the situation during the company's year-end and fourth quarter earnings call, Norwegian Cruise Lines Holdings CEO Frank Del Rio said the company continues to explore opportunities to reduce costs and maximize revenue generation.

"You've likely seen some of the actions we've already taken to improve our cost structure," Del Rio said, "including normalization of marketing spend, corporate overhead reductions, itinerary optimization, supply chain initiatives and thoughtful rationalization of product delivery."

For cruise lines, "rationalization of product delivery" translates to reducing some services and raising prices for optional items like drink packages, specialty restaurants and service (gratuity) fees.

Several major cruise lines have recently abandoned the traditional twice-a-day stateroom service that saw cabins cleaned during the day, followed by evening turn-down and tidying service.

Carnival cut back to once-a-day cleaning on its ships in 2021. This year, both Royal Caribbean and Norwegian this year have followed that lead.

That move doesn't hit cruisers in the wallet, and isn't likely to impact demand. Travellers are seeing much more impactful service cuts in hotels on land, where even daily maid service is being phased out.

But while service is being reduced, service fees are going up, leading to criticism from guests. Last year, Royal Caribbean raised service fees by more than 10% for those staying in most cabins. In January, Norwegian Cruise Line raised its service charges for passengers staying in most cabins to $20 per day, 25% higher than its 2022 rates.

While the entry price of cruising remains attractive, guests are experiencing some sticker shock with optional add-ons too.

Drink packages have been steadily rising in price, with hikes exceeding the rate of inflation in many cases. On several lines, an alcoholic drink package now tops US$100 per person per day.

Specialty restaurant surcharges are going up too. Carnival, for example, has hiked its specialty restaurant fees by as much as 25% in recent months. The cover charge for the line's steakhouses has jumped from $38 to $48 per person since early 2022. Major lines are also cutting main dining room choices and taking steps such as charging for multiple entrees.

It's clearly a balancing act for the cruise lines. Consumers are seeing higher prices everywhere and feeling the pinch of rising interest rates. Cruising still offers great value - and most people don't need more than one entrée at dinner - but there's a limit to what the market will bear.

Asked about the potential negative impact of cost-cutting and price hikes during the earnings call, Del Rio responded: "Obviously, you don't want to kill the goose that lays the golden egg, which is the customer. We're trying to balance what customers pay, what they actually pay for, and what they receive."

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