Despite healthy orderbooks and an upbeat sentiment in the cruise industry, cruise ship builders have faced strong headwinds recently due to rising costs.
By Kari Reinikainen
Shipyards and cruise ship owners have become very economical with the disclosure of financial terms of construction contracts. This raises the question of whether the agreed prices reflect the higher costs that the builders face.
Italian shipbuilder Fincantieri, in its first-half 2024 interim report, said that revenues from cruise ship building had decreased by 7%, to €1,832 million, in the first six months of 2024 compared to the same period in 2023. This resulted from the “redefinition of the production plans of some ships, agreed with the shipowners, which envisages a greater development of activities in the second half of the year”, the company stated.
Capital expenditure in the group’s shipbuilding business, which included cruise ships and naval vessels, increased by €14 million to €85 million, year on. The value of the orderbook had increased to €27.4 billion as of 30 June 2024, from €23.6 billion on 31 December 2023. The group reported an after-tax loss of €23.8 million for the first half of 2024, down from a loss of €36.4 million year on. The company raised €400 million in fresh equity during this period.
In Germany, the federal government and the government of Lower Saxony jointly acquired an 80% stake in Meyer Werft by injecting €400 million in equity to the passenger ship builder after it ran into financial difficulties. The Meyer family retained the right to buy back the shares at a later date, as the aim of this intervention was to revitalise the yard in the longer term.
Earlier this year, Alan Lam, CruiseTimes analyst calculated that the price of newbuilding contracts had risen by 8.1% per gross ton from 2013 to 2023, while the increase was 20% in per-lower-berth terms.
Source: World Bank
In the same period, inflation in the eurozone, where all the leading cruise ship builders were located, remained very low until a sharp increase in 2021–22. The 5.8% figure for 2023 marked a three-percentage-point reduction from 2022 but remained significantly higher than the levels of 2013–2020. Inflation has continued to ease in 2024, and central banks have started to reduce interest rates.
Price pressure
Shipbuilding costs in general have been rising much faster than the pace of inflation in the eurozone in recent years. Niels Rasmussen, chief shipping analyst at BIMCO in Denmark, reported in the summer that newbuilding prices had risen by 3% in the first five months of 2024. Compared to a recent low in 2020, they were 53% higher, and the size of the orderbook for all types of ships had increased by 72% in the same period. The size of the orderbook was last at current levels in 2012.
There has been little information about the recent agreed contract prices of newbuildings. When Royal Caribbean Group unveiled an order for the fourth Icon-class ship at Meyer Turku in the autumn, it gave no cost details besides noting that the contract was subject to finance. Also in the autumn, Meyer Werft in Germany won a four-ship order from the Disney group, and again no cost details were given. The yard said its orderbook value now stood at €11 billion. The same was the case with Carnival Group’s recent three-ship order at Fincantieri. The shipbuilder described the value of the contract simply as “very important”.
An official of a major cruise ship builder told CruiseTimes that newbuilding contract prices had not risen at all since ordering resumed after the pandemic, but they should be a lot higher to offset the rises in costs. Given the strong market, a major equipment supplier agreed to fix prices for deliveries only two years in advance, an official at another company told us. Both spoke on the condition of anonymity.
The large orderbook means there is strong demand for components and other inputs in general, which can add price pressures in shipbuilding. “This is a risk factor that a shipyard must take into account when pricing newbuilding contracts,” said Pentti Kujala, professor emeritus of marine technology at Aalto University in Helsinki. The entire maritime sector, everything from shipbuilding to end-user operations, is struggling with challenges in recruitment, which can also contribute to price pressures.
Cruise ship building is a small, highly specialised segment of the wider shipbuilding industry. This is an important consideration when looking into its future, according to Dr Martin Stopford, a renowned shipping economist. The threshold to enter this business is very high due to the complexity of these ships. It has high requirements for supply chains and project management skills.
This became clear some years ago when Mitsubishi Heavy Industries made two attempts to enter the cruise ship building market, both of which resulted in heavy losses. Genting Hong Kong’s attempts to build cruise ships in its newly acquired facilities in Germany also ran into trouble and led to the group’s ultimate liquidation in 2022.
Shipyards monitor newbuilding prices carefully, and doing this is part of their yield management. They do not necessarily sell all slots as quickly as they can in a firming market, because leaving positions open for contracts to be signed later, at higher prices, improves their profitability, Stopford said.
Demand drivers
Cruise industry’s post-pandemic recovery has been swift and decisive. Since 2022, leading cruise operators have not only posted successive improved results but also reported that demand and pricing have remained firm despite weak macroeconomic performances.
Jason Liberty, CEO of Royal Caribbean Group, said the strong demand was a trend that was not just about pent-up demand after the pandemic. In addition, inflationary pressures have not impacted cruise lines as badly as it has impacted land-based holiday operators.
CLIA has forecast that 46 million people worldwide will take cruises in 2030, some 45% more than in 2023, when the number already exceeded 2019 levels, the last pre-pandemic year, by 7%.
In principle, at least, an improving financial position of cruise ship owners would allow them to accept higher prices for their newbuildings than had been agreed in contracts signed before the pandemic for similar ships, Stopford said. On the other hand, apart from privately owned MSC Cruises, the major cruise groups’ debt loads increased sharply due to the pandemic. Reducing that remains a priority.
Finance burden
The pictures of demand and costs of newbuildings are complicated by inflation and financing costs.
Slower inflation and lower interest rates should help the cruise ship building industry by reducing the cost of financing. A particular concern in this area, at least in the past, has been the fact that the yard has usually received only 20% of the contract price while the ship is under construction and the remaining 80% on delivery.
As the yard needs to pay wages and purchases from various suppliers and contractors during the construction phase, it is forced to raise large sums of working capital. In the case of Royal Caribbean’s Voyager of the Seas, which entered service in 1999, its builder had to sell the contract to a consortium of banks to raise the required working capital.
More-flexible payment terms would facilitate the position of the shipyards, but CruiseTimes has been unable to find out whether the companies that have contracted newbuildings since the pandemic emerged have agreed to such terms with the yards. Obviously, paying the contract price in stages as the work progresses would be a financial burden to the shipowner.
It should be very much in the cruise industry’s interest that the four leading cruise tonnage builders remain in business. There is past example of a major shipyard failure: Wärtsilä Marine Industries, owner of the shipyards in Helsinki and Turku, had the first three Fantasy-class ships plus several large cruise ferries on order when it collapsed in autumn 1989. The various parties involved decided to establish a new company called Masa Yards through converting debt into equity. The new company then renegotiated the building contracts at much higher prices than the original ones had been. It also made the shipbuilder’s customers its shareholders.
Wärtsilä Marine Industries failed despite having a strong orderbook: escalating costs and building contracts agreed at prices that turned out to be too low led to its demise. It can be said that Meyer Group has been in a similar situation recently.
Lead times
The leading cruise ship builders of today have strong orderbooks: Fincantieri currently has cruise ships, including ones under option, contracted up to 2036; Meyer Werft’s orderbook extends to 2031; Meyer Turku is due to deliver the fourth Icon-class ship to Royal Caribbean Group in 2027 and has two further units on option with no delivery date disclosed; and Chantiers de l’Atlantique has cruise work up to 2028.
These facts do not paint an exact picture, because yards may have slots available before the years mentioned. However, long lead times may become longer still, given the encouraging demand outlook and the need to replace ageing ships.
The entire shipping industry faces the challenge of switching to clean energy sources. This can mean that ageing vessels of all types will have to be replaced, perhaps sooner than some owners might have wanted to, by new, more efficient tonnage.
Fincantieri noted in its first-half 2024 interim report that tightening environmental legislation would accelerate the phasing out of ageing vessels, thus strengthening the demand for newbuildings.
Assuming this will be the case, the demand for equipment and components will remain strong from the wider shipping sector as well. This could mean upward price pressure and longer lead time.
