China’s cruise lines are struggling this year. Capacity has fallen by an estimated 14 percent from last year and will decline by another 4.4 percent in 2019 based on estimates using deployment and ship announcements. However, cruise industry operators have good reason for optimism.
The enormity of the Chinese market means that there are millions (if not hundreds of millions) of potential cruise customers in China. Middle- and upper-middle-class consumers, which are the bread and butter of cruise lines around the world, are growing in both number and spending power in China. Moreover, some companies, particularly Royal Caribbean, already enjoy a very good brand reputation in China.
According to cruise industry experts who recently met in Shenzhen for the 13th China Cruise Shipping Conference and International Expo that ran between November 1 and 3, the cruise industry downturn is only a temporary transitional period, but it nonetheless will require a restructuring of Chinese lines to promote growth.
2018 has been rough for the Chinese cruise industry, but executives are insisting it’s nothing more than a temporary transition period for the market
So what changes need to be made to find success? One issue is the current pricing structure of the Chinese cruise industry. Cruise lines are hoping that new pricing agreements will help create price stability in the market. Price wars between already over-capacity cruise lines have practically eliminated profits for companies in the China market.
But perhaps the biggest challenge for cruise lines is managing sales channels. Cruise charters—large groups or companies that book an entire ship or a large portion of a ship for a trip—saw a steep decline this year according to some cruise lines, although executives were coy about sales decline specifics. “This year we did not have many charters and next year it will be zero,” said the chief port operation officer of Royal Caribbean International, Tong Jiangfeng. “We are working hard to acquire more distribution channels… the sales channels have to be diversified.”
Cruise companies need to establish more robust channels to reach smaller tourist groups, particularly families, in order to achieve a turnaround. Most companies currently receive these kinds of bookings through more traditional travel agencies. A stronger presence on online travel agencies (OTAs), however, should prove to be the most stable source of revenue for cruise companies in the long term.
Still, several executives at the conference echoed the sentiment that quality over quantity in terms of cruise offerings in China is the most important short-term shift needed. The market in China is simply not large enough to be profitable off of large numbers of low-cost, lower-profit bookings.
Lack of diversity in destinations for cruise routes originating from China have already damaged profits, diversification in the years to come will hopefully provide some much-needed stability
Another problem with China’s cruise lines that executives noted was the lack of port diversity in the industry, a problem that has existed for several years. Most cruise lines out of China travel along the country’s coast to make port calls in South Korea and Japan, and one big factor that contributed to this year’s decline was when Beijing banned the sale of tour group travel packages to South Korea. This effectively forced cruise lines to shift more towards Japan or cut certain routes altogether.
One way of addressing this would be to add more ports in Southeast Asia. In fact, stops in tropical getaways like Vietnam and the Philippines could prove more popular than Korean and Japanese ports and would more closely mirror the Caribbean offerings of North American cruise routes.
But geography is challenging in this regard. Cruises originating in Shanghai or Tianjin will find it harder to create itineraries that include the Philippines or Vietnam. Those ports are best served via cruises that originate from Hong Kong. Moreover, cruise lines will have to aggressively pursue new agreements with ports in Southeast Asia, which will take time to finalize. Therefore, it will likely be a few years until the Chinese cruise industry will be more diversified in terms of destinations.