Head for the outports and sharpen the pencils! (Cruise Shipping).

The cruise industry is on a war footing. That means its deploying more ships to places you can drive to. And its sharpening the pricing pencil, again. In fact, it's continuing an approach that's been working for it reasonably well since 9/11.

Cruise shipping often seems to defy economic

logic. While many businesses struggled during 2002 to just keep their heads above water, cruise shipping had another record-setting year, carrying some 8.66 million passengers worldwide -7.6 million from North America. This was a 15.5% increase over 2001, according to Cruise Lines International Association (CLIA), whose members control about 160 cruise ships and operate from 1,800 ports worldwide. So how did they do it? Simple: By slashing vacation package prices and increasing the number of drive and cruise itineraries. This enabled them to keep their ships sailing at about 97% full, despite consumer uncertainty generated by an impending conflict with Iraq and growing concerns about air travel.

Last month, CLIA executive director Bob Sharak told delegates at the Seatrade Cruise Shipping Convention in Miami Beach that the 13 new ships introduced in 2002 were "a significant capacity increase in an uncertain market environment." Sharak made his comments during the annual convention's State of the Industry panel presentation, which included executives from Carnival Corp., Norwegian Cruise Line, Royal Caribbean, Crystal Cruises and Cunard. Sharak told cruise lines that by "maintaining current occupancy levels, we will have the opportunity to welcome 1 million more guests onboard in 2003--a potential of 9.6 million passengers worldwide, including 8.3 million from North America. Now it's up to us to make that happen."

THE PRICE IS RIGHT

But to make it happen, cruise lines will probably have to continue the trend of aggressively pricing cruise vacations and positioning ships in drive and cruise or "homeland" cruising markets. "We're giving away a phenomenal value at ridiculous prices," said panelist Bob Dickinson, president, Carnival Cruise Lines. "We're doing a poor job of demonstrating the value of cruising. A similar vacation on land would cost two to three times as much."

What's a phenomenal value? How about staying seven days at a luxury resort and paying less than $100 a day for your accommodations and meals. That's what it will cost per person on a seven-day cruise from New York to Florida and the Bahamas on the brand new Norwegian Dawn.

TAKING THE AIR OUT OF CRUISING

An to entice new cruisers, prices could drop even further. "The challenge now to grow cruising is to continue to lower the price point; there's a certain point at which the consumer will jump into the market," said Colin Veitch, NCL's CEO.

"We've broadened our base through a domestic cruising push," said Richard Fain, chairman of Royal Caribbean Cruises Ltd.

OF ORDERS AND YARDS

Orders have slowed considerably since 9-11. The current orderbook, while substantial with a value of about $10 billion (see accompanying table), is about half of what it was two years ago. Cruise lines will add 14 new ships in 2003.

"There's an awful lot of capacity that we'll have to digest," said Carnival Corp.'s vice chairman Howard Frank. "You'll see orders but not at the same levels we've seen in the past. These orders will have to reflect our business model. We're going through a very difficult period right now," said Carnival's Frank.

"Long term, we'll need more ships," said Veitch. However, he said that shipyards that currently specialize in cruise ship building are going to have to decide whether they want to stay in the business long term. This could spell tougher competition not only for cruise ship orders, but also for cruise ferry orders as shipyards look to keep their skilled workers and production facilities busy.

As of Feb. 28, based on the number of lower berths, Fincantieri held a 46% market share of the order book, Chantiers de l'Atlantique 15%, Kvaerner Masa Yards 13%, Mitsubishi 9%, Meyer Werft 7% and all others 10%. Only Fincantieri has orders extending beyond 2004.

Kvaerner Masa Yards believes long-term demand for cruise ships will be 1 million gross tons per year and the growth of the fleet about 8%. "We'd like to build one ship per year," Veitch said. "We're currently building one at Lloyd Werft (parts of the first Project America ship started at Northrop Grumman Ship Systems Ingalls Operations, Pascagoula, Miss. Veitch said NCL has also acquired "about 400 containers of parts and equipment for the second Project America ship, though no contract has yet been signed."

The first ship will begin sailing seven-day cruises in Hawaii starting in 2004. He said 3,000 U.S. maritime jobs would be created as a result of the project.

THE MOTHER OF ALL BOATS

Next year also marks the anticipated debut of Cunard Line's Queen Mary 2, which was recently floated out from its building dock to a finishing basin at the Alstom Chantiers de l'Atlantique shipyard in Saint Nazaire, France (see this month's Update section). The float out marks the final stages of construction of the $800-million liner prior to its maiden voyage on Jan. 12, 2004.

When the QM2 enters service, it will carry with it a list of superlatives--the longest, tallest, widest and most expensive passenger liner ever built. QM2 guest will be able to do almost anything they can imagine, from tantalizing their temporals with the world's first planetarium at sea to titillating their taste buds with the largest wine collection at sea.

In its inaugural year, QM2 will make 15 transatlantic crossings.

TAKING STOCK

Better days are ahead for cruise lines, according to Gary Cooper, an analyst for Banc of America Securities LLC. In a research report released Mar. 19, he raised the investment ratings on shares of Royal Caribbean and Carnival Corp. Shares of Royal Caribbean were raised from "sell" to "neutral" and shares of Carnival Corp. were raised from "neutral" to "buy" The reason for the upgrade is that the "cruise industry bookings and prices have been weak due to the uncertainty resulting from the situation in Iraq. We expect prices and bookings to rebound following the resolution of tensions in Iraq." Cooper also thinks that the end of the conflict will lead to lower fuel prices.

While the waters could be a bit rough for cruise lines for the remainder of 2003, on the whole, they are still optimistic about the industry's long-term growth prospects.

Carnival Corp. vice chairman Frank told delegates at Seatrade Cruisse Shipping, "If the situation in Iraq is resolved quickly, we could still have a strong third and fourth quarters."

Carnival chairman and CEO Micky Arison echoed those sentiments in announcing his company's results for the first quarter of 2003. "Although in the short term bookings have been impacted by [the Iraq conflict], we believe that the fundamental long-term drivers of the cruise industry's growth, such as favorable demographics and low penetration of the vacation market, remain intact. It is primarily because of these factors that we have entered into our proposed combination with P&O Princess Cruises plc. Now that we are within sight of the completion of this transaction, we are particularly excited about the future prospects for the combined group and believe that our 16-month effort to combine with P&O Princess will bring enhanced value and opportunity to the shareholders and employees of both companies." Time will tell.

CRUISE SHIPS ON ORDER

(as of 2/26/03)

LINE                    VESSEL                SHIPYARD             GT
                                                                   000s

2003

Aida                    AIDaura               Aker MTW             42
Carnival                Carnival Glory        Fincantieri          110
Costa                   Costa Mediterranea    Kvaerner Masa        105
Costa                   Costa Fortuna         Fincantieri          105
Crystal                 Crystal Serenity      Ch. de l'Atlantique  68
Cunard                  Queen Mary 2          Ch. de l'Atlantique  150
HAL                     Oosterdam             Fincantieri          85
Mediterranean Shipping  MSC Lyrica            Ch. de l'Atlantique  60
Princess                Island Princess       Ch. de l'Atlantique  88
Radisson Seven Seas     Seven Seas Voyager    T. Mariotti          50
Royal Caribbean         Mariner of the Seas   Kvaerner Masa        140
Royal Caribbean         Serenade of the Seas  Meyer Werft          88

2004

Birka Line              N/A                   Aker Finnyards       33
Carnival                Carnival Miracle      Kvaerner Nasa        86
Carnival                Carnival Valor        Fincantieri          110
Costa                   Costa Magica          Fincantieri          105
HAL                     Westerdam             Fincantieri          85
Mediterranean Shipping  MSC Opera             Ch. de l'Attantique  60
NCL                     (ex Project America)  Lloydwerft           81
Princess                Caribbean Princess    Fincantieri          116
Princess                Sapphire Princess     Mitsubishi           113
Princess                Diamond Princess      Mitsubishi           113
Royal Caribbean         Jewel of the Seas     Meyer Werft          88

2005

Cunard                  N/A                   Fincantieri          85
HAL                     N/A                   Fincantieri          85

2006

Carnival                N/A                   Fincantieri          110
HAL                     N/A                   Fincantieri          85

LINE                    Lower   Price     Delivery
                        Berths  ($ Mil.)

2003

Aida                    1,300   200          April
Carnival                2,114   510           June
Costa                   2,720   350            May
Costa                   2,720   400           Nov.
Crystal                 1,080   350           June
Cunard                  2,620   780            Dec
HAL                     1,848   410           June
Mediterranean Shipping  1,600   250          2nd Q
Princess                1,950   360           June
Radisson Seven Seas      700    215            Feb
Royal Caribbean         3,100   520            Oct
Royal Caribbean         2,000   350          4th Q

2004

Birka Line              1,800   154          3rd Q
Carnival                2,124   375          March
Carnival                3,000   510            Nov
Costa                   2,720   460            Nov
HAL                     1,848   410            May
Mediterranean Shipping  1,600   270         Spring
NCL                     2,100   350            N/A
Princess                3,100   460          April
Princess                2,670   450            May
Princess                2,670   450            Feb
Royal Caribbean         2,000   350           June

2005

Cunard                  1,968   410            Feb
HAL                     1,848   410            Nov

2006

Carnival                2,974   460            Jan
HAL                     1,848   390           June

Source: Marine Log, company reports

World cruise ship fleet capacity, based on lower berths, including ships
on order

Source: Kvaerner Masa Yards


Carnival                       29%
P&O Princess                   13%
Royal Carribean                20%
Star                           10%
Others                         27%

Total 323 ships, 350 000 beds