When you read the word ‘Cruise Ship’ in the title, for a moment, you must have thought about ‘The Titanic’, and when one thinks about this legendary ship two things pop up in his mind: one that it sank and the other is that it was known for its luxurious services. And these luxurious services must have cost a fortune in 1912, but what if I tell you that today for just $60 to $70 a day you can live the same extravagant and luxurious life on a cruise ship in the USA. If you were not surprised enough already, these cruises on an average cost about $600 million to $700 million and last for about 25 to 30 years and over their life they require a substantial amount of maintenance, fuel, food and cleaning. This raises a serious question about the profitability of a cruise ship company considering that the fare they charge from the customers is so small and the cost involved in buying and running a cruise is so huge.

To answer this, we need to explore the concept of ‘cost-cutting’. The primary reason why cruise ships are able to earn profits – and such large numbers – is that they manage to cut the costs at every nook and corner. They are able to optimise their journeys with so much precision that it leads to minimised costs and maximised profits. No one is more creative and innovative than these companies when it comes to cutting costs. To give you an example, the most significant cost for a cruise ship company comes in the form of the cruise itself, and when the lifespan of such a cruise comes to an end something needs to be done with it. It cannot be discarded since that would lead to a huge loss of capital investment. So what these companies do is that they refurbish it and either hand this cruise over to one of their subsidiaries with lower standards (serving middle-class customers) or they sell it to another company across the globe.

Another example to show how cruises are experts at cutting cost is that they never stop travelling and keep carrying passengers from one place to another. Moreover, a cruise never travels empty between two destinations. This is because every second that a cruise ship spends ‘on the deck’ or ‘travelling empty’ accounts for lost revenue and losing revenue is the last thing that these companies want. Even airlines these days are lowering the boarding time for their passengers because they know that every extra second they spend on the ground translates to lost money.

However, cutting costs is not the only tool which helps them earn profits. They also utilise the principle of sales maximisation over profit maximisation. Cruises adopt the model of razor-thin margins coupled with huge volumes of customers resulting in multiplied profits. But what do razor-thin margins and multiplied profits exactly mean? Let us understand this through the example of the budget smartphone market in India. So most budget smartphone brands like Xiaomi, Realme sell their devices at unbelievably low margins, but at the same time, their sales numbers are astronomically high. So although the per-unit profit is low, their sales volume makes up for low margins. Your general Cruise ship follows a similar strategy where they sell the tickets for low profits, but make up for it through the large number of passengers they get due to the affordable price.

Yet sometimes cruises even fore-go this small margin and sell tickets at a loss. But why would anyone with a sane mind sell tickets at a loss? Well, they assume that the passengers coming on board will bring money and will spend it on expensive supplementary services. If you have ever purchased popcorn at a cinema hall, which cost twice the normal price, you would understand exactly what I mean. They cover this lost profit by charging more for the supplementary goods like eatables (casino, spa and shopping in the case of cruises).

If the customers on board do not spend cruise lines will run out of business, it’s as simple as that. However, given that they are in the middle of the sea and do not have many options, extra purchases are almost guaranteed.

Now, rather than just relying on such basic assumptions, cruise ships make every possible attempt to induce customers to spend more while they are on board – to ensure profitability. One of the tricks they use is setting up the bars, lounges, casinos and shopping areas between the rooms and the dining place. Given that the passengers will pass this area at least twice a day, for lunch and dinner, this setup persuades them very well to expend.

However, not all cruise ship companies follow the same strategy to turn a profit; while some follow this razor and blade model, other premium sellers make money upfront through high ticket prices, serving the elite segment of the market. Luxury cruise lines carry only 500 passengers on an average as compared to 3,000 in the classic cruise but charge about four to five times more in comparison to the classic cruises. Thus the strategy varies depending upon the strata of customers which the cruise intends to serve.

But by far the biggest loophole which they exploit is the variation in labour laws across countries. Although most of them serve American or British consumers, they are registered in countries like Panama and Liberia. When cruise ships are in international waters, they are subjected to the laws of the country whose flag they are sailing, rather than that of the country in which they operate. This allows them to evade the stringent American labour laws like the minimum wage of $7.25 per hour and the maximum 40 hours-work weeks and enjoy the loose regulations of other countries. So in these cruises, the employees are subjected to lengthy and stressful working hours at low wages for a major part of the year. Besides they have to reside in the quarters allotted to them, which usually have deplorable living conditions.

So the ships register themselves in the country whose labour laws they prefer to save millions and millions of dollars in labour costs each year. This also helps them to bypass high amounts of taxes, which they would have been subjected to if they were registered in the USA. Although being registered in such countries has its benefits, it poses some problems one of them being the applicability of the ‘Passenger Vehicle Services Act’ or the ‘Jones Act’ of the USA which makes things difficult for such foreign cruises. This Act does not allow cruises registered outside America, i.e. almost all of the cruises, to take passengers directly from one American port to another. This forces the cruises to take stoppage in a foreign country before returning to the same or another American port.

Theoretically, this law should have a significant impact on the profitability of the business because instead of going directly from point A to B, cruises have to first travel to point C and then from there to point B, translating to a longer journey. But, stubborn as they are to make profits, cruise companies even found a way around this. Since they cannot go directly from one American port to another, they take stoppage at Ensenada, a Mexican city meagre 50 miles away from the USA, but nevertheless a foreign port. This way, they are not going directly from one American port to another, but from an American port to a Mexican port and then returning back to an American port. This ensures that they do not violate the Act, but at the same time allowing themselves to reap the benefits of cheap labour, low taxes and also access to the wealthy American customers. Even on trips to Hawaii, a US state and a popular cruise destination, they evade the rules laid under this Act. They got creative to deal with this; they take a four-day detour to Fanning Island in the Republic of Kiribati near Hawaii, along with the passengers to ensure that they step foot on a foreign port, i.e. Fanning Island in this case, so that they do not violate this Act.

All of this compels us to believe that cruise ship companies are very clever and can go to any lengths to ensure that their business remains viable and profitable. Cruise ships sell to passengers convenience more than anything — the convenience of good food, gambling, shopping and everything else they could imagine under one roof. And in the end, they manage to cover the cost of all the services they offer. But is it always done in an ethical manner?

By Himanshu Chhabra