Business is booming for two European ship builders that have cornered the market for cruise ships
The world’s top shipbuilders are reeling from years of heavy losses, but two European companies are making big money by cornering the lucrative cruise business.
Italy’s Fincantieri S.p.A FCT -1.68% and Germany’s Meyer Werft GmbH are fully booked for the next four years, according to the companies and marine-data provider Clarksons. Orders for luxury cruise ships last year came in at $19.5 billion, more than double the value of such orders two years earlier.
“They are the only ones that can do cruise ships and this keeps the industry sustainable,” said Pierfrancesco Vago, chairman of Swiss-based MSC Cruises, the world’s fourth-largest operator by capacity. “The yards are full, and the more ships we get, the bigger the demand from passengers. It’s a good place to be in shipping.”
Japan, Korea and China emerged as the primary shipbuilding nations starting in the 1970s, developing lower-cost yards that churned out tankers, bulk carriers and container vessels as globalization took hold. But the 2008 financial crisis dealt a serious blow to global trade, creating a glut of ships that forced many yards to close.
The survivors, mostly part of giant groups like Hyundai, Samsung and Daewoo, are coping with stagnant orders and razor-thin margins. Many have gone through painful restructuring programs or been bailed out by state creditors.
The industry’s Europe-based cruising sector took advantage. Starting in 2014, Meyer Werft and Fincantieri acquired the European yards of failing Korean builder STX Offshore and Shipbuilding Co., further tightening their hold on the market. At the end of 2017, the two yards had 53 of the 59 large cruise-ships under construction.
Many orders are for 1,000-foot-plus leviathans that accommodate around 6,000 passengers. They each cost around $1.3 billion and take more than two years to build.
“The cruise sector is experiencing a steady and continuing growth,” said Antonio Autorino, a spokesman for Fincantieri, which has a current order book of around 18 billion euros ($22.3 billion).
Cruise operators project they will have 27.2 million passengers this year in 2018, up 5.4% from 2017 and up 10% from 2016, according to data from Cruise Lines International Association, a trade body.
Carnival, the world’s biggest cruise operator with nine brands, currently has 18 ships on order. The company orders three to four ships a year on average.
“We would like to have more but there is only so much the shipyards can deliver,” said Roger Fritzell, a Carnival spokesman.
Fincantieri has four yards dedicated to cruise-ship building in Italy and in early February bought a majority stake in an STX yard in Saint-Nazaire, on the Atlantic coast of France. Meyer Werft bought an STX yard in Finland in 2014.
The consolidation has given the two companies a virtual duopoly in cruise shipbuilding. Genting Hong Kong Ltd. is also capable of putting together large cruise ships in three yards it owns in Germany, but its output is relatively limited.
Part of the reason there are so few builders dedicated to cruisers is the size and complexity of the process.
Ships are customized to cater to global travelers’ diverse tastes, from casinos geared to American travelers to rows of high-end boutiques that tend to be a draw for Chinese.
It takes months to design a ship with the tailored work done by a network of specialized suppliers. “It’s like custom fitting a Rolls-Royce but at a much bigger scale,” Mr. Vago of MSC Cruises said.
Fincantieri, which also makes warships and offshore rigs, generated 2016 revenue of 4.4 billion euro ($5.39 billion), with 44% coming from the cruise business. The previous year it generated 4.2 billion euro in revenue, with 39% coming from the cruise business. Meyer Werft doesn’t disclose financial results.
About 80% of overall cruise capacity is controlled by three U.S. giants—Carnival, Royal Caribbean Cruises Ltd. and Norwegian Cruise Line . But yards also get orders from smaller operators and new entrants like Virgin Voyages, a joint venture of Richard Branson’s Virgin Group and Bain Capital that will start sailings in 2020.
China is expected to become a bigger player in the cruise-ship building sector. The Beijing government in 2015 declared a five-year plan to build its own cruise ships as part of a shift toward advanced manufacturing.
China State Shipbuilding Corp. (CSSC) has brought in Fincantieri in a joint venture at a Shanghai yard to help it build cruise ships for the Chinese market. The yard aims to deliver two 4,000-passenger vessels starting in 2023 with options for another four.
“It will not be easy for Chinese yards to build such vessels, and it will likely take a long time,” Fincantieri’s Mr. Autorino said. “However, it would be foolish to ignore their determination.”