NCL in Stormy Waters

February: NCL Corporation Ltd. reported today a net loss of $130.9 million on total revenues of $2.0 billion for its year ended December 31, 2006…"The fourth quarter results continue to reflect the challenges we are experiencing from our expansion in inter-island Hawaii cruises on our NCL America brand U.S.-flagged, U.S.-crewed ships," said Colin Veitch, president and chief executive officer of NCL Corporation Ltd.

Last year at this time I was singing the praises of NCL. To quote myself: "… for the most part NCL really have been "thinking outside the box". They have become an exciting and innovative cruise line with a state-of-the-art fleet. They may still be in third place, but they now have the market leaders firmly in their sight."

Well, what a difference a year can make. You do not need to be an accountant to realize that the above press release reveals that NCL are not doing too well financially. Fortunately they are not likely to go 'bust' as they have the considerable financial backing of their owners 'Star' cruises.

NCL have been rapidly upgrading and expanding their fleet over the past six years. In fact they will have the youngest fleet in the industry by 2010. They currently have eight 'Libra' class newbuilds, with more to follow, plus two 150,000 gt mega-ships on order for delivery at the end of the decade.

NCL clearly needed new tonnage and their latest financial press release confirms that their older ships are not proving as profitable as the newer ones. All their newer ships are purpose built for their 'freestyle' dining system. In short, the ships feature up to thirteen dining venues, unlike the more traditional ships which have one large main dining room and two evening meal sittings. The freestyle restaurants offer a range of different cuisines and much more flexibility. Passengers can choose to eat when they like (between 5.30 pm and midnight) where they like (which dining room), and sit with who they like, subject to table availability. They can choose to be formal or informal. As NCL put it "You're free to whatever".

There has been some criticism from some passengers across the entire fleet about the efficiency of 'Freestyle' dining, yet other passengers have nothing but praise for it. From passenger feedback it is clear that the system certainly seems to work best on the newer ships, rather than the older tonnage which were not originally designed for 'Freestyle' dining.

In addition to expending their fleet, NCL also created the NCL America brand (NCLA) in 2004. For the uninitiated, NCL America is a dedicated brand that allows NCL to provide unique itineraries of the Hawaiian Islands with three American crewed ships: Pride of America, Pride of Hawaii and Pride of Aloha. Unfortunately it would appear that the NCLA operation is now struggling and pulling down NCL's performance as a whole.

One of the reasons for this is that United States government legislation dictates that NCLA must employ American labour onboard their ships operating Hawaiian inter-island cruises. Now nearly all cruise lines including NCL's regular cruises employ cheap labour from the less economically advanced nations, such as the Philippines and India. This presents a challenge to NCL because employing American labour is more costly and has necessitated NCLA to charge premium fares. Staff retention has also been a problem.

NCLA has generated many negative passenger reviews, since its ships began operation. The most frequent complaints include: poor service, mediocre quality of food and poor cabin cleanliness. I can't comment on the validity of these comments, as I have not cruised with NCLA, but many passengers have clearly not been impressed. In response NCLA initiated an aggressive training program to better prepare new-hire employees for life aboard a cruise vessel. However only last week I read a number of new negative reviews submitted by readers of our 'Cruise Talk' forum. Although NCLA have a virtual monopoly on Hawaiian Inter-Island cruising, they do face competition from other cruise line that sail to Hawaii from the West coat of America. Since these ships are able to use traditional, less expensive labour, they can charge lower fares. In turn this has forced NCLA's fares down and to compound the problem occupancy levels have been falling. To make matters worse, due to government regulations, NCLA's fleet is not allowed to operate Casinos while sailing on the Hawaii inter-island itineraries. This obviously represents a serious loss of onboard revenue.

Now I'm no management guru, but in hindsight, NCL's rapid expansion, especially into the Hawaiian inter-island market appears to have been financially and strategically over enthusiastic. They clearly wanted to exploit the Hawaiian market as quickly as possible and take advantage of their market lead. In retrospect, maybe they should have tested the waters more thoroughly with just one NCLA ship. Then they should have slowly expansion across the rest of the NCLA fleet, until the labour and quality issues were resolved and that they could better predict and mange demand.

Although NCLA's crew to passenger ratio is not dissimilar to other mass-market cruise lines, perhaps their 'freestyle' system of dining, with its multiple restaurants onboard each ship, is just too labour intensive, especially given the high costs of American labour. The problem is that this is their 'unique selling point'.

So what of the future? Obviously, NCL needs to stem the losses as soon as possible. I would not be surprised if one of two, of the three NCLA ships, are not re-flagged and redeployed to non-Hawaiian itineraries. Europe seems to be the 'in' destination. 'Royal Caribbean' will have seven ships deployed in Europe in 2008, for example. We Brits would certainly welcome a new NCL ship sailing regularly from our shores each summer.

It is not my intention to discourage potential passengers from cruising with the Norwegian cruise line. NCL have a large fleet, a wide variety of itineraries and their newbuilds are truly state-of-the-art. NCL's fares are aimed at the 'masses' so they can be very affordable and many passengers actually embrace 'freestyle'. Despite the negative reviews of NCLA, everybody seems agreed that Hawaii is an excellent destination and NCLA does offer unique inter-island itineraries. Looking towards the end of the decade, I'm sure that NCL's two big mega-ships currently on order which will offer 'third generation Freestyle' will be very exciting vessels indeed.

There is a sad epilogue to this story. NCL purchased the classic ocean liner the 'SS United States' in 2003. Built in 1952 and holding the record for the fastest Ocean liner, she is now a rusty laid-up shadow of her former glory. However, in a press release at the time, Colin Veitch NCL's CEO, said the United States would be modernized and returned to service to become the fourth ship in the NCLA fleet. However, he did make it clear that this project would be dependent on the success of NCLA. Few Industry insiders believed that the SS United States would ever return to service due to both the technical difficulties and the high costs involved. However, some of us ship fans at least hoped that it might be possible. However in light of NCL's recent financial news, the odds have unfortunately slipped from 'a million to one' down to 'zero'.