Italy disaster could hit cruise industry

MILAN Sun Jan 15, 2012 2:21pm EST

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MILAN (Reuters) - The spectacular cruise liner accident off the coast of Italy is not just a disaster for the ship's owners, but could inflict wider damage on an industry already facing stiff headwinds.

The Costa Concordia, with more than 4,000 people on board, flipped on its side after hitting a rock on Friday night close to the beautiful island of Giglio, off Italy's west coast.

At least five people died in the accident.

The luxury 114,500-tonne ship was operated by Costa Crociere, a unit of Carnival Corporation & Plc, the world's largest cruise company. The stricken vessel was one of the group's main assets in the lucrative European cruise market.

"This is a PR (public relations) nightmare for the Costa brand," said Jaime Katz, equity analyst from investment research company Morningstar in Chicago.

"The question is, when that's been stripped out, whether the Carnival brand will be tarnished."

The accident could hardly have come at a worse time for the group, with the global economic crisis already making potential cruise customers nervous about their jobs and finances.

"I think the important factors are that this adds insult to injury, with struggling economic markets in Europe and all the unrest you've seen in the Middle East," Katz said, noting that the accident came at the peak season for the industry.

"Carnival still books a large portion of their bookings at this time of year. What company, in the middle of the busiest season for their business, wants to be weighed down with that sort of PR?" she asked.

Costa Crociere has been fully owned by Carnival since 2000, when the Miami-based company bought the half it didn't already own. At that time Carnival, which makes about 40 percent of its revenues in Europe, said Costa Crociere would be its primary platform for expanding in this part of the world.

In December Carnival, which accounts for about half of the global cruise line business, lowered its prices for 2012 voyages because of weaker demand in crisis-hit Europe.

SAFETY ISSUES

Sharon Zackfia, a research analyst with William Blair & Co, a global investment services company, said it was too early to know the full costs for Carnival but they would include passenger refunds, potential litigation and repairs.

There is also the problem of consumer attitudes souring on the industry as a whole because of safety concerns - a mindset that, along with consumer fears over the sluggish U.S. economy and the European Union debt crisis, could freeze some people's plans for overseas travel.

"Any time you have something like this happen, there is worry that it will have an impact on how the public views the safety of the industry in general," she said, adding, however, that the industry in general had a good safety record.

In a statement on Saturday, Carnival Corp said it was deeply saddened by the tragedy and was working to discover the causes.

The Costa Concordia was sailing on a Mediterranean cruise from Civitavecchia near Rome with scheduled calls at other Italian ports, Marseille, Barcelona and Palma de Mallorca.

Italian newspaper Il Sole 24 Ore, citing an insurance broker, said on Sunday the price of the cruise ship, about 450 million euros, was covered by insurance with further coverage of about $3 billion for liability to passengers and crew.

Assicurazioni Generali, Italy's biggest insurer, said on Sunday it was one of the insurers involved but added that due to its reinsurance policy any impact would be very marginal.

Another potential problem for the shipowner and insurers is environmental damage.

Local officials have expressed concern that the ship's fuel, a full load as it had just begun the cruise, could spill into the pristine waters of the island, which is in a marine reserve. However, by early Sunday there was no sign of pollution.

Italian reports said salvage operations were being held back until all passengers were accounted for.

FAST-GROWING INDUSTRY

The world cruise industry has seen exponential growth over the last 40 years. According to the Italian Cruise Watch report of tourism think tank Risposte Turismo, the number of people taking cruises rose from 500,000 in the early 1970s to about 5 million in 1990 and about 19 million in 2010.

A study by the Cruise Line International Association, the world's biggest grouping of cruise companies, said 50,000 North Americans want to take a cruise in the next three years.

To attract customers the industry has changed face since the 1970s, offering liners with more space, comfort and entertainment - creating scale economies in an effort to cut fares.

As a result ships have grown in size with swimming pools, restaurants, movie houses, discotheques and much more - floating cities like the 290-metre-long Costa Concordia, the biggest of the Costa Crociere fleet.

The worry now is that the tragedy off Italy's coast could slow the growth of the super cruiser in favour of smaller vessels where, among other things, managing passengers on board can be simpler.

"These floating apartment blocks that try to offer emotions to tourists are becoming a problem. I think we have to intervene fast and decisively to stop these big ships entering areas too delicate to run these risks," Italy's environment minister Corrado Clini said on Sunday.

While the Caribbean is still the most popular destination, business in the Mediterranean is growing.

Some 11 million passengers are expected to embark, disembark and transit in Italian ports in 2011 compared to 9.6 million in 2010, Risposte Turismo said, and revenues generated in the cruise sector have been estimated at 4.5 billion euros.

But some in the tourism business are concerned growth rates are slowing as the economic crisis takes its toll.

"Certainly the big groups from Royal (Caribbean) to MSC Cruises to Costa have seen limited growth or even a fall to October 2011," said Luca Patane, chairman of the Uvet group, which owns over 900 tourist agencies.

"The reasons may be more than one: the effects of the crisis on a tiring market," he told Italian newspapers on Sunday.

(Additional reporting by Edward Taylor, PJ Huffstutter, Phil Wahba; Editing by Barry Moody and Dale Hudson)

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