Steady as she grows: number of annual cruise passengers to double by 2020, says report.

Steady growth over the next 15 years will double the number of annual cruise passengers to 27 million by 2020, according to a new report.

The report, "The World Cruise Shippng Industry to 2020, A Detailed Appraisal of Prospects," projects cruise market and shipbuilding demand worldwide

The OSC report estimates that 13.6 million passengers will cruise in 2005, climbing to 18 million in 2010, 22.6 million in 2015 and 27 million in 2020. North America is expected to account for about 64% of the total in 2020 and Europe about 26%.

Over the next five years, OSC estimates an annual cruise passenger growth rate of 5.75% per year until 2010, a little over 4.5% per year in the first half of the next decade, and around 3.75% until 2020.

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BIGGER SHIPS

Cruise ships aren't really ships at all. They're all-inclusive resorts that just happen to float and move around. Onboard amenities and activities include everything from rock climbing, ice skating and water skiing to shopping, gambling and dancing. The trend has been to cram more activities onboard and revenue-generating berths. This has led to a dramatic rise in the number of large passenger capacity ships in the fleet.

According to the OSC study, since 1995, the total number of berths for ships with 1,000 to 2,000 passenger capacities has increased by about 120%, and by over 30% since 2000. The most dramatic rise, however, has been for cruise ships with more than 2,000 berths. Since 1995, the berth capacity of ships with more than 2,000 passenger capacity has jumped by over 600%, from about 17,000 to 126,000 berths. Most of this expansion has occurred in the near term, with around 45,000 berths since 2000.

Over the last 10 years, the total number of berths in the world cruise ship fleet has nearly doubled from around 160,000 at the beginning of 1995 to over 310,000 in 2005.

NEED FOR MORE SHIPS

Based on the current orderbook, it appears that the trend towards larger capacity ships will continue. About 91% of all vessels on order are above the 1,500-berth capacity. Currently, vessels of over 1,500 berths represent just 27.5% of the existing fleet.

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Overall, the current orderbook represents 18% of the fleet's total number of berths.

Excluding further orders, the overall fleet is set to increase from the 313,000 berth total of 2005 to over 352,000 by 2009. This represents an increase of about 12.5%. With no vessels currently on order with a delivery date post-2009, the minimum fleet level is expected to decline to around 334,000 berths by 2015 and 321,000 berths by 2020.

According to OSC, there will be a requirement for an extra 72,000 berths for newbuilding deliveries by 2010, rising to about 179,000 berths by 2015 and 280,000 berths by 2020. These levels are the equivalent of an extra 29 vessels of 2,500 berth capacity by 2010, 71 vessels by 2015 and 112 vessels by 2020. To place these levels in an historical context, newbuilding delivery volumes have varied within a 19,000 to 30,000 berth range since 2000, with an average level of just under 24,000 berths--equivalent to around ten 2,500-berth capacity ships per year.

The overall implication is that the slowdown in new vessel ordering in recent years is set to see a strengthening cruise ship market over the next 5 years. Even with relatively poor future demand growth, there is likely to be a requirement for around 11 large vessels by 2010 in addition to those currently on order.

In the longer term, the requirement for new tonnage is expected to average around 8 to 9 large vessels (2,500-berth capacity) per year.

THE BIG THREE

Thanks to consolidation over the last decade, cruise shipping is now dominated by three major cruise ship companies, Carnival Corporation (NYSE: CCL), Royal Caribbean Cruise Ltd. (NYSE: RCL), both headquartered in Miami, and Hong Kong-based Star Cruises Limited. And based on the current orderbook, don't look for this dominance to change anytime soon.

Here's the present profile of existing capacity (lower berths) ownership:

* Carnival Corporation: 133,500

* Royal Caribbean Cruise Ltd.: 62,200

* Star Cruises Limited: 26,000

Together, these three groups account for 71% of the world's total existing capacity (313,000 lower berths)--and for almost 89% of capacity on order.

The Big Three dominant the large vessel sector, accounting for a combined 93% of all the cruise ships with capacities in excess of 1,500 berths, and for all of the ships with more than 2,000 berths.

NORTH AMERICA: DEMAND TO REMAIN STRONG

North America generates the lion's share of the world's cruise ship passengers. Not surprisingly, the report forecasts that cruise demand in North America will remain strong over the next 15 years.

By 2010, says OSC, almost 12 million passengers are expected to cruise, climbing to 14.5 million by 2015 and 17.2 million by 2020. This translates to an annual average expansion rate of about 4.25%.

Post-9/11, cruise lines' strategy has been to create more "drive-to" as opposed to "fly-to" ports of departure. According to statistics compiled by the U.S. Maritime Administration, there were 4,463 cruises from North America in 2004, a 9% increase over 2003. MarAd reports that 9,417,000 passengers departed from these ports, a 12.8% increase. The statistics are based on 17 major brands operating from North American ports.

What's just as interesting are the emergence of such ports as Galveston (Texas), New Orleans and Baltimore, Md., on MarAd's Top 20 Departure Ports.

Thanks to capacity increases in five U.S. homeports, new year round programs from Mobile, Ala., and Jacksonville, Fla., and its first ever Mediterranean cruises, Carnival Cruise Lines expects to carry a record 3.3 million passengers this year.

Carnival successfully deployed several newer, larger cruise ships at U.S. homeports, including 2,052-passenger Fantasy Class ships in New Orleans and Galveston.

In the first quarter ending February 28, Carnival Corporation & plc reported net income of $345 million on revenues of $2.4 billion, up fromnet income of $203 million on revenues of $1.98 billion for the same quarter in 2004.

Commenting on the company's first quarter performance, Carnival chairman Micky Arison said, "Stronger than expected pricing coupled with a 15% increase in capacity more than offset higher fuel costs, enabling us to achieve a very healthy 70% increase in net income."

Royal Caribbean reported record occupany levels and healthy revenues as well, posting net income of $135.3 million for the first quarter of 2005 as compared with $95.8 million for the same quarter in 2004. Occupancy was at 105.7% for the quarter as compared to 104.2% for the same quarter in 2004.

THE U.K. & EUROPE

The European market is becoming increasingly more important for cruise lines. This year, the cruise passenger total is forecast to reach 3.2 million. By 2010, some 4.5 million passengers will cruise from Europe, growing to almost 5.9 million in 2015 and over 7.1 million in 2020. This translates an annual growth rate of 5.25%.

The U.K. cruise market is expected to grow at an annual average rate of about 6.5 to 7% over the near-term, slowing in subsequent years. The OSC study forecasts the U.K. market to grow from 1.1 million in 2005 to 1.5 million by 2010, 1.9 million by 2015, and almost 2.3 million by 2020.

The German cruise market is relatively small in comparison to North America, but should grow rapidly over the next 15 years, accorrding to OSC. Bolstered by the addition of new tonnage, the German cruise market is expected to post an average annual growth rate of about 10% over much of the remaining decade, with some moderation to around 7% by the middle of the decade, and further to around 4.25% by the end of the study period. Overall passenger volumes are expected to climb from 0.66 million in 2005 to 1.05 million by 2010, to over 1.5 million by 2015 and almost 2.0 million by 2020.

Meanwhile, Italy's cruise market is expected to increase from the estimated 0.42 million passengers this year to 0.58 million in 2010, 0.72 million in 2015, and over 0.87 million in 2020. Significant growth is also expected for the rapidly developing Spanish cruise market.

ASIA: THE EMERGING MARKET

In Asia, Japan's cruise market is expected to grow at an average annual rate of 3.25% over the next 15 years. This year, an estimated 0.23 million Japanese passengers will cruise, rising to over 0.27 million by 2010, almost 0.32 million by 2015 and over 0.36m by 2020.

Several other East Asian markets offer massive cruise potential as both new destinations for Western cruise passengers and sources of cruise passenger growth. Countries cited by the OSC report as offering the most potential are China, Taiwan and South Korea.