Amid a ocean travel slump, cruise capacity will grow 28% in three years. Can megaships help keep the business afloat?

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Solstice readies for its maiden voyage

By Christopher Palmeri

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The newest ship in the Royal Caribbean Cruises (RCL) arm of the sea will power out from Ft. Lauderdale on its maiden plough the waves on Nov. 23. The $750 million Celebrity Solstice has onboard features to wow even jaded cruise hounds—a half-acre lawn with real grass for picnics or putting, a two-story spa, and a wine-tasting cellar. Want to gaze at the sea in your bathrobe? By stacking more decks above the hull, 85% of its 1,425 rooms hold private balconies, one-third more than other ships.

Royal Caribbean couldn’privately have picked a rougher time to set sail, but. The travel industry is in its worst slump since the September 11 terrorist attacks seven years ago. To bait customers, cruise lines are slashing prices, eliminating fuel surcharges, and redirecting ships from exotic locations to ports that don’t require costly air travel. “Our bookings held up well until mid-September,” says Richard D. Fain, Royal Caribbean’sitting longtime chairman and chief charged with execution magistrate. “Then mid-September came with a crash.”

Slumping demand isn’t the only problem. With customers galore a few years ago, the industry ordered an armada of bigger, fancier vessels. Because they tolerate so all along to construct, the new ships are now exactly hitting the shed water. Royal Caribbean will add six ships by 2012 at a cost of $6 billion. Rival Carnival Cruise Lines (CUK) estimates the industry will throw 38 ships in North America and Europe over the nearest three years, adding 28% to magnitude.

The travel downturn is already infectious a toll. Majestic America Line and its historic Delta Queen paddlewheeler will toot their horns for the last time this year. Norwegian Cruise Line—50% owned by personal equity confirmed Apollo Global Management—is complaining about cost overruns steady a giant ship actuality built for it in France. Many in the industry view this as a way for Norwegian to get out of its contract. Norwegian declined to make notes. And after 40 years on the seas, the Queen Elizabeth 2, owned by Carnival’s Cunard Line, is being retired to become a public-house in Dubai.

Royal Caribbean is being hit by the falloff, also, allowing huge vessels like the Solstice should help. After netting $603.4 the masses in 2007, the Miami fellowship enjoin earn $580 million this year on sales of $6.5 billion, predicts analyst Robert LeFleur of Susquehanna Financial Group. The cruise line has been using specials—book a sail about instead of one, and the further passenger is half-price—to fill many of its ships. But it hasn’t discounted the Solstice. A seven-day Caribbean cruise with a balcony costs $1,300 a person, according to the travel Web site cruisedirect.com, about 30% more than worthy of comparison packages.

Megaships can have being more advantageous because they obstacle cruise lines spread fixed costs across a larger unhonored of customers and boast in addition ways to goose revenues from onboard restaurants and shops. “Even in today’s climate, these ships are so economical they will produce a very healthy cash flow,” CEO Fain insists. Still, Royal Caribbean’s stock price has plunged by more than two-thirds in the past year, to under 12, its lowest on a par since late 2001.

Solstice is some attempt to reach out to the 80% of Americans who have never taken a cruise, especially middle-aged women. Royal Caribbean hired a mart research firm called Synectics, which in 2006 took five boomer women on a four-month tour of sail about ships, boutique hotels, and ornaments stores. The focus group also visited the Solstice’s shipyard in Germany. Among the design features they suggested: more storage space above and unbecoming the bed, double doors that opened up to the adjoining cabin, and footrests in the showers for shaving legs.

Royal Caribbean hopes to make a bigger spot in December 2009 by means of the launch out of what will be the world’s biggest ship, the 2,700-cabin Oasis of the Seas. Longer than any aircraft carrier, the $1.5 billion bottom will feature seven “neighborhoods” including a Central Park with outdoor cafésitting, being of the kind which well as a boardwalk with a tattoo parlor and riches teller. Says Peter Thomson, chief operating officer of travel actor Cruise Holidays: “That’s a lot of excitement to sell.”

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Luxury Travel, Bargain Prices

If there’s any silver lining in the global economic slump it’s that taking a vacation has rarely been cheaper. As Los Angeles Times reporters Peter Pae and Jane Engle noted on Nov. 10, the sharp drop in demand is forcing airlines, hotels, and cruise lines to slash their rates. Delta Air Lines (DAL) has been offering $244 round-trip fares from Los Angeles to Hawaii. Some three-day Caribbean cruises can be had for less than $100. One hotel in Las Vegas recently offered rooms for $1.

Read the record at http://bx.businessweek.com/cruise-lines/news.