course material

1. Case study 1. what global forces have contributed to the growth of
Read the case and answer the questions … Carnival Cruise Lines: Exploiting a Sea of Global
Opportunity I must go down to the seas again, for the call of the running tide Is a wild call
and a clear call that may not be denied –– John Masefield, The Seekers In recent years, the
call of the sea has spurred the cruise business. 67 Sea voyages, of course, have had an aura
of mystique for centuries, but only in recent decades has the experience of the open sea and
exotic ports of call been available to a mass market. Historically, the recreational sea voyage
was an essentially elitist endeavor. Certainly, members of the lower classes occasionally
found themselves on the open sea, but usually as displaced job seekers or crew members
aboard ships. In recent years, however, the cruise industry has undergone a sea of change of
sorts, and the demographic groups it now targets include the working middle class as well
as the idle rich. What’s a Cruise, and What Happened to the Cruise Industry? A “ cruise” is a
sea voyage taken for pleasure ( as opposed to, say, passage on a whaling ship, an assignment
in the navy, or a ferry ride to get you from point A to point B). Typically, passen-gers enjoy
cabin accommodations for the duration of a fixed itinerary that brings them back to their
original point of embarkation. There was a time when ships ( called passenger liners)
transported people across oceans and seas for business or pleasure, but the advent of
transoceanic air service after World War II offered a speedier and less expensive
alternative, and airlines captured passengers from ocean liners. The competitive balance
tipped decisively in the 1960s, when advances in jet technology made air travel a viable
option for a growing mass market of budget- minded international travelers. Converting
more shipboard space to low- priced accommodations, shipping lines countered with the
reminder that “ getting there is half the fun,” but one by one, they retired the great luxury
liners that had plied the seas for decades. The Contemporary Cruise Industry Today, the
cruise industry is dominated by three companies— Carnival, Royal Caribbean, and Star—
which command a combined 91 percent of the market. By far, the largest of the three is
Carnival Corporation, which operates a number of lines that it calls brands. Map 1.2 shows
the headquarters of these brands. Carnival offers cruises to every continent on the globe,
including Antarctica. Carnival Corporation was born when Ted Arison, a former partner in
Norwegian Cruise Lines, saw an opportunity to expand mass- market sea travel by
promoting the idea of the “ Fun Ship” vacation— an excursion on a pleasure craft designed
to be a little less formal and luxurious than the traditional ocean liner. The timing was right.
Sea travel still projected a cer-tain aura, and Arison found that he could buy a retired liner
at a good price. Moreover, there were more people in the world who could afford an ocean-

2. borne vacation. On top of every-thing else, a lot of these vacationers gravitated to
holidays— group tours, theme- park visits, and sojourns in Las Vegas— that were
compatible with the Fun Ship concept. Arison bought a secondhand ship, refurbished it in
bright colors, rigged it with bright lights, and installed discos and casinos. On its maiden
voyage from Miami in 1972, the Mardi Gras ran aground with 300 journalists on board, but,
fortunately, neither the ship nor Arison’s business concept was severely damaged.
Embarking from Miami to such destinations as Jamaica, Puerto Rico, and the U. S. Virgin
Islands, the Mardi Gras soon became successful. Over time, Arison added not only ships but
also whole cruise lines to his fleet. Today, each brand operates primarily in a designated
area of the world and is differentiated from other Carnival brands in two ways: ( 1) in terms
of geographically pertinent themes ( based in Italy, for instance, Costa boasts a
Mediterranean flavor); and ( 2) in terms of cost per cruise (the cost per night on Cunard and
Seabourne cruises is much higher than that on Carnival cruises). Doing Business in
International Waters Given the nature of its business, it should come as no surprise that
Carnival— indeed, the whole cruise- line industry— is international in scope. Take the
nationality of competitors. Companies can obtain so- called flags of convenience from about
30 different countries. Here’s how the process works. By registering as, say, a Liberian legal
entity, a company can take advantage of lower taxes and less stringent employment rules.
Legally, Carnival is a Panamanian company, even though it’s listed on the New York Stock
Exchange, has operating headquarters in Miami, and caters mainly to passengers who set
sail from the United States. Although cruise- line revenue is subject to neither Panamanian
nor U. S. income taxes, Carnival does have to pay substantial “ port fees” wherever its ships
drop anchor. Only a few cruise- line offerings— such as excursions along the Mississippi
River, around the Hawaiian Islands, or among the Galapagos Islands— can be characterized
as purely domestic. Even trips from the U. S. West Coast to Alaska are “ international”
because they stop in Canada. By far the most popular destination for cruise passengers is
the Caribbean/ Bahamas, largely because the area boasts balmy weather year round. During
summer months, Carnival shifts some of its ships from Caribbean/ Bahamas to Alaskan and
Mediterranean routes. Obviously, cruise ships go only where there are seaports, but
Carnival cooperates with ( and owns some) tour operators who provide almost 2,000
different onshore excursions ( for additional fees). Carnival estimates that half its
passengers to the Caribbean take shore excur-sions to such sightseeing attractions as the
Mayan ruins in Belize. Passengers on Carnival’s Princess Lines, which serves Alaska, can
helicopter to a glacier for a little dogsledding. What It Takes to Operate a Cruise Line Ship
Shopping Not surprisingly, ships constitute the biggest investment for cruise lines.
Shipyards in several countries— including Finland, France, Germany, Italy, Japan, and South
Korea— are capable of building ships that meet cruise- industry needs. To add to its global
fleet, Carnival secures bids from all over the world. Because shipbuilding employs so many
people and uses so much locally produced steel, governments often subsidize the
industry— a practice that works to the benefit of the cruise- line industry by offering less
expensive prices for ships. For instance, the Italian government awarded the shipyard
Fincantieri about $ 50 million in subsidies to build five ships sold to Carnival for $ 2.5 billion
for a 2010 and 2011 delivery. Where to Find Able- Bodied Seamen Shipping companies—

3. including cargo and cruise lines— scour the world for crew members who not only can
perform specialized tasks but who are properly certified ( by international agreement, a
registered crew member can enter virtually any port in the world). Cruise lines, of course,
have special staffing needs— notably, crew who can interact with passengers. About a third
of all the world’s ship crews are from the Philippines, not only because of reasonable labor
costs but because Filipinos are generally fluent in English. On a typical Carnival ship, crew
members hail from over 100 countries, and Carnival maintains a range of employee-
training programs, including instruction in English as a foreign language. Casinos and Other
Amenities Although Carnival has thrived with the concept of informal cruises for a mass
market, each of its cruises offers one or two formal nights per week; theme- based dinners
centering on national cuisines; a variety of musical entertainment, games and contests; and
spas and athletic facili-ties. Because cruises operate outside the jurisdiction of any national
authority, they’re not sub-ject to any national laws restricting gambling. Casinos, therefore,
are onboard fixtures. Passengers can also shop for merchandise from all over the world.
Indeed, art deal-ers occasionally hold shipboard auctions and seminars, and one dealer sells
about 300,000 pieces of art per year on cruise ships. As you might expect, the pricier the
cruise, the pricier the average objet d’art. The Overseas Environment Because Carnival
operates around the world, it has the advantage of treating the whole world as a source of
both customers and supplies. In addition, because its chief assets are ocean borne, Carnival
can ship capital and other assets to places where they can best serve the com-pany’s needs.
However, it’s also vulnerable to a wide range of environmental disturbances. Let’s take a
look at a few of these. Political Issues After terrorists seized a cruise ship in the
Mediterranean in 1985, the major cruise lines insti-tuted a policy of strict security checks
for boarding passengers. Even before 9/ 11, then, the cruise- line industry has had in place a
security protocol that the airline industry didn’t estab-lish until afterward. In the wake of 9/
11, when cancellations started to exceed bookings, Carnival increased the number of U. S.
ports from which its ships embarked so that passengers with a height-ened fear of flying
could reach points of departure by land. Carnival also redeploys cruises to avoid areas in
which passengers might face danger from political upheaval or crime, such as suspending
cruises to St. Croix in the U. S. Virgin Islands because of its high crime rate. Further, Carnival
does not stop in Cuba, a popular tourist destination, because the U. S. gov-ernment limits
travel there by U. S. citizens. Health Issues In 2006, almost 700 people on a Carnival
transatlantic cruise were stricken with a virus that caused diarrhea and vomiting, a type of
outbreak that had occurred sporadically in the past. Cruise operators have found these
outbreaks hard to control because of the close contact among people on board a ship. More
than once, Carnival has had to take an infected ship out of service to eradicate all traces of
the virus; the process involves sanitizing every object on board, down to the poker chips.
When the H1N1 flu ( swine flu) hit Mexico in 2009, Carnival modified itineraries
temporarily to avoid Mexican ports. Economic Issues Buying a cruise is generally
considered discretionary rather than priority spending. During recessions, people are more
apt to take shorter cruises and to embark from nearby ports rather than flying to faraway
points of departure. Interestingly, however, in comparison with other segments of the
tourist industry, cruise lines have fared well during economic down-turns. Why? This is due

4. in part to their all- inclusive per diem prices that are often bargains when compared with
the cost of travel to major cities and popular resorts. In addition, fixed cruise- line prices
spare passengers the added risk of encountering unforeseen unfavorable exchange rates.
Nevertheless, in 2009, Carnival offered discounts because of the global recession, which
attracted more passengers but lower profits. But there is some concern in the industry over
uncertain gasoline prices and mortgage interest rates, which might leave more households
with too little discretionary income for tak-ing cruises. In addition, oil price increases have
upped Carnival’s fuel costs at a time when many potential passengers want lower prices.
The Weather Whenever there are hurricanes, Carnival may have to cancel trips, switch
embarkation points ( e. g., from Galveston to Houston for six weeks in 2008 because of
Hurricane Ike), or change destinations. Typically, passengers on canceled trips received full
refunds and those on short-ened cruises partial refunds. Concluding Remarks Overall, the
outlook for Carnival and the cruise- line industry is sunny. With prospects for grow-ing
incomes ( despite a global recession) in many countries ( such as China), more people will
have discretionary income to spend on tourism. Only 16 percent of the U. S. population has
yet to take a cruise— a potential two- edged sword. On the one hand, this number indicates
growth potential. On the other hand, people who have taken a cruise continue to be repeat
customers, and the percentage of first- time customers is in fact declining. On the downside,
then, industry observers worry that experienced cruisers will tire of visiting one port that’s
pretty much like another and that noncruisers will still prefer such destinations as resorts
to ports of call.QUESTIONS 1. What global forces have contributed to the growth of the
cruise- line industry? 2. What specific steps has Carnival Cruise Lines taken to benefit from
global social changes?3. What are some of the national differences that affect the operations
of cruise lines? 4. Although most cruise- line passengers are from the United States, the
average number of annual vacation days taken by U. S. residents is lower than that of
workers in most other high- income countries ( 13 days, compared with 42 in Italy, 37 in
France, 35 in Germany, and 25 in Japan). How might cruise lines increase sales to people
outside the United States? 5. What threats exist to the future performance of the cruise- line
industry and, specifically, of Carnival Cruise Lines? If you were in charge of Carnival, how
would you ( a) try to prevent these threats from becoming reality and ( b) deal with them if
they were realized? 6. Discuss the ethics of cruise lines regarding the avoidance of taxes
while buying ships built with governmental subsidies.