by Ashley Kindergan The Financialist

Like makers of luxury watches and handbags, cruise ship operators are setting their sights on a growing market of newly wealthy customers in Asia, particularly China.

The strategy seems like a solid one, thanks to an anticipated surge in the number of Chinese citizens eager to travel abroad in the coming years and new high-speed rail links that promise to make traveling to port cities easier for residents outside the wealthy coastal areas. But trying to break into the Chinese market, in particular, poses plenty of challenges.

“It’s the $64,000 question that they’ve been trying to solve,” Credit Suisse analyst Joel Simkins said. “They all see a very significant opportunity in the long run, but this is a much more complicated process than opening up a Starbucks.”

Simkins expects the number of cruise passengers in the Asia-Pacific region could shoot up to 5.5 million by 2020 from just 2 million in 2010, assuming the Asian market grows as quickly as the European market did between 2000 and 2010.

At this point, cruise vacations are much better established in North America and Europe than in Asia, Simkins notes. There are about 3.3 cruise passengers for every 100 people in North America and 1.1 in Europe. Asia, on the other hand, has only 0.2 cruise passengers per 100 people.

The cruises Chinese customers have traditionally been accustomed to are often little more than gambling junkets, Simkins said. Getting consumers to think of a cruise as a family-friendly vacation option, or a high-end indulgence, is a critical part of growing the luxury cruise market.

“You have to really develop a marketing awareness,” Simkins said. “This is a completely foreign concept to the consumer in China.”

Two of the biggest cruise companies, Carnival Corp., parent company of Carnival Cruise Lines, and Royal Caribbean International, first began stepping up their presence in Asia in 2006. Carnival plans to open a Singapore office soon, while Royal Caribbean opened an Asia-Pacific headquarters in Shanghai in 2007 and quickly followed with outposts in Beijing and Guangzhou in 2008.

Carnival dedicated a ship with larger capacity to China last year and recently announced plans to add a second large ship this year, the Costa Atlantica. Royal Caribbean is also putting a second large ship in Asian waters this year.

“Although in the early stages of development, we believe the cruise segment of the Asian vacation markets, such as China, Japan, South Korea, Singapore, Indonesia,

Thailand, Malaysia and India, have significant long-term potential for expansion,” Carnival said in its recently released annual report. “Accordingly, we view the Asian region as an important part of our global strategy.”

But so far, the Asian market does not seem to be a key driver of either company’s profits. Simkins called China a “break-even proposition” for Royal Caribbean, and company executives similarly said only that Carnival Cruise’s new larger ship would likely break even last year.

One obstacle facing cruise companies is that Chinese customers are often used to paying far less on land to obtain the types of on-board services, such as massages and spa treatments, that are so critical to the profitability of a cruise operation.

“That’s a big part of the business model in the West, the ancillary spend on the excursions, the amenities on board, paying up for premium dining,” Simkins said. “This is sort of a razor and blade model:  You give away the base business of a vacation, and you hope that you make it up on the ancillaries.”

To that end, Carnival has added more casino space and mahjongg tables for gambling, a greater variety of luxury brands and Chinese food and drink to appeal to local tastes.

Still, for now, major cruise operators are focused on trying to get their names established and work through regulatory challenges in China. Profits have not been enticing enough to build a new ship specifically aimed at the Chinese market.

“They’re taking American-style, Western-style product and putting it in that market,” Simkins said. “We’re in the very early innings…It doesn’t make economic sense to develop something specifically for China yet.”

But there are signs the calculus could change. For one thing, high-speed rail links to port cities promise to make accessing cruise departure points easier for Chinese customers than their American and European counterparts, who often fly to a cruise departure port. Port terminals, such as the one in Shanghai, are also adding capacity to serve a growing market.

But perhaps most importantly, the number of Chinese tourists heading overseas for vacations has skyrocketed in recent years. Chinese travelers are expected to make 100 million international trips by 2020.

Put it all together, and the cruise companies seem wise to keep an eye on China and the Asia-Pacific region.

“They’re bringing on newer ships to the market, bigger ships, and I think it’s getting from that point where they’re just getting their feet wet to now trying to seed the market and make this a profitable endeavor on a standalone basis.” Simkins said. “We’re really at that tipping point where the ball game has really begun.”

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http://www.thefinancialist.com/setting-sail-in-asia/