Why aren’t there more small cruise ships?
“It is our view that in the race to build enormous ships, some cruise lines have lost sight of the destinations to which they sail.”
Torstein Hagen, Founder of Viking Cruises
Most travelers have limited choice when it comes to a cruise. Mass-market cruise lines exclusively build huge, Las Vegas style ships, and they can only visit large ports. Small ships visit many more destinations, but they are exclusively built for luxury (wealthy) travelers. In this post, I look at why there are no small-ship cruise lines aimed at the mass-market. Is there an opportunity for a new kind of cruise company? To answer this, I look at how cruise lines design and operate their ships.
Note: I define small ships as those carrying 400–800 passengers.
The Four Types of Ships
When designing a new cruise ship, there are two primary variables that affect capital and operating costs: ship size and space per passenger. As ships become larger, economies of scale reduce the per ton cost to build and operate a ship. Separately, the more paying passengers that can be packed onto a ship of a given size, the less money each passenger costs. This gives us the following four categories for cruise ships:
The Traditional Ship Design Process
Traditionally, cruise lines think about building a new ship like this:
- What is my target market? What will they pay for a vacation?
- Based on what they will pay, what operating and capital costs can I bear?
- Based on my cost constraints, how much space per passenger should I allocate? At the extremes, does everybody get a tiny cabin or a suite?
- Based on my cost and space constraints, how big should my ship be? The lower the costs, the bigger my ship needs to be. Conversely, if I have a luxurious product, I’ll prioritize access to small ports.
I want to suggest that the fourth step, ship size, should be a separate consideration from density in the design process. Right now, they are linked in an inverse relationship. If you look at all cruise ships built or on order from 2009–2020 (below), you see that ships mostly fall into two of the four categories. Ships are either small and spacious, or large and dense.
Is the cruise market irrational?
There are two possibilities:
- The market is rational. Ships cluster into these two categories (small and spacious or large and dense) because that is where there’s product-market fit.
- The market is irrational. Companies have not identified large, spacious ships or small, dense ships as an opportunity.
In the luxury market, the market has already proven irrational. In 1989, Crystal Cruises rejected conventional wisdom that luxury cruises required small ships. For the past 25 years, they’ve operated large, luxurious ships and they recently announced three huge newbuilds. Once these new ships are built, Crystal will control about 30% of the luxury market. While there may be space for another large-ship, luxury product, the overall market size is small.
But what about the much larger mass-market? What prevents a small, dense ship product from existing?
Why is there no small-ship cruise line for the mass-market?
If you ask cruise executives why they don’t build small ships, they’ll give a simple answer: economies of scale. Conventional wisdom is that only luxury cruise lines can charge prices that justify the added costs of operating a small ship. But this conflates two variables; small ships are also luxurious and spacious. If we assume a small, dense ship — how big are these economies of scale? Do they justify offering an (arguably) inferior product?
To answer those questions, I’ll quantify economies of scale accross cruise companies’ four largest costs, and bold my conclusion. Warning: companies only publish aggregate data, so these are estimates.
A good proxy for payroll costs is the passenger/crew ratio. Specifically, we compare the ratio difference between a company’s largest and smallest ships, which gives a proxy of the per-passenger payroll cost difference, normalized by product. For example, the Holland America product is theoretically the same, regardless of whether you’re on the small Prinsendam or the large Koningsdam. However, their smallest ship has 35% more crew per passenger than their largest ship. It’s clear that there are different ways of staffing small ships, but a smart cruise company could probably cap payroll costs at 10–20% higher.
In the cruise industry, capital costs are the cost of building a ship. Let’s take a look at how those vary over sizes.
While, on average, small ships cost more to build than large ones, I think it’s better to think of the 33% cost difference as an upper bound. Current small ships are exclusively luxury designs, while large ships are usually mass-market. This means their build-quality is likely different. Build quality, along with the ability to build several small ships in parallel (rather than one large ship), would reduce the large ship advantage. With these efficiencies, building a small ship would probably cost as little as $7,000 per gross ton, a 17% cost premium.
Fuel is the largest single expense affected by economies of scale. Physical properties of hull forms mean there will always be a fuel-cost advantage for large ships. However, what’s an upper bound on the difference? Carnival’s aggregate fuel costs for the first half of 2015 were $17 per passenger day, while Lindblad Expeditions’ were $51. This is a 3x differential. However, that’s an extreme upper bound. Lindblad’s ships operate in remote environments, where fuel is significantly more expensive, and their ships are particularly old and small. A ship of, say, 500 passengers would have a significant cost advantage over one of Lindblad’s 62-passenger ships. Lastly, it’s important to note that fuel is a function of itinerary designs, which could be optimized significantly more than Lindblads’. I think it’s safe to say that small ships’ fuel costs would be, at most, twice those of a large ship.
Sales, Marketing, Admin, and Logistics
Selling and administering cruises on many small ships can be a challenge. However, Viking River Cruises’ operations in Europe demonstrate that it’s possible to manage and sell vacations on many small ships. They have two secrets:
- With 45 identical “longships” and counting, Viking markets, sells, and manages their many small ships like a cruise line with a few larger ones.
- Because multiple identical ships operate on a given itinerary, they can be managed in much the same way as a single, large ship on the same route.
In other words, it’s possible to gain the same economies of scale by having many small ships rather than a few large ships. Here, I assume no difference in costs.
The Advantages of Small Ships
Using the numbers above, it’s safe to say that a small ship would cost at most 50% more to operate, and probably closer to 30% with efficient staffing and itineraries. Even 30% is a significant cost disadvantage if a product is undifferentiated, which largely explains why container ships keep getting bigger. But cruise ships are different, and small ships have advantages that justify higher prices for passengers. The three primary advantages are:
- Destinations- Small ships can access much more interesting destinations. Just look at itineraries from Silversea or Seabourn to see the amazing places mass-market can never go.
- Community- The sense of community among passengers and crew is much stronger than on mega ships. Passengers more often recognize each other, become friends, and often keep in touch after their vacation.
- Flexibility- Like southwest airlines’ fleet of small planes, a small-ship cruise line could offer frequent departures of popular itineraries, rather than a single weekly departure on a large ship. Furthermore, it would be much easier to target niche markets. It could serve niche whole-ship charters, small homeports (like Baltimore or San Francisco), and smaller international markets. Rather than Costa or Royal Caribbean’s multi-lingual ships, imagine a Chinese-language ship deployed to Europe.
Better destinations alone would motivate many cruisers to pay more money for a small-ship experience. It would be important for itineraries to not compete head-to-head with large ships. But with good marketing, imagine the popularity of affordable cruises to less-visited Caribbean islands, Antarctica, the Amazon, Iceland, and Mediterranean yachting ports.
So why doesn’t a small-ship, mass-market cruise line exist?
As I see it, there are three possibilities:
- I’m wrong about the cost disadvantage of small ships. They’re actually much more expensive to build and operate.
- While there may be interest in small ships cruises, passengers are unwilling to pay higher fares that justify higher costs.
- Mass-market cruise lines have drifted. They’ve all evolved to have large-ship experiences. Some companies, like Royal Caribbean, have purposefully gone big to create unique, immersive environments. Others, such as Princess, seem like they’re chasing slightly lower costs with little product motivation for increasing size.
I strongly suspect the third reason is the best explanation. There’s an opportunity for a new entrant.
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