Why Cruise Lines Keep Cutting Their Ships in Half (economies of scale)

By Fran Golden of Bloomberg.

Economies of scale means the average cost of production falls as output increases (or as the size of your factory or ship increases). Quantity (or number of passengers) increases more in percentage terms than total cost. The article mentions that this process does not increase fixed costs very much and the add variable costs are also low.

Excerpts:

"In a process called “stretching,” the Star Breeze is getting pulled apart to make room for a new, 84-foot, 1,250-ton prefab midsection addition. Think of it like unsnapping (or unwelding) two Legos and putting another block in between. But with a boat.
After four months of surgery, the all-suite Star Breeze will be bigger, more luxurious, and more profitable. When she debuts again in February, she’ll have 50 new suites to house 100 additional guests, a 50% increase in passenger capacity, and command higher rates for her shiny new cabins. Delaney says it should add at least 20 years to the ship’s life span.

Stretching, it turns out, is so good for Windstar’s bottom line that the company will similarly expand two more ships by the end of 2020, spending a total $250 million to increase its overall capacity by 24%.

"Stretching cruise ships is hardly a new idea. Teijo Niemela, editor of CruiseBusiness.com, says the concept was borrowed from Scandinavian ferries that were sliced to add cargo space. He sailed on his first stretched ferry in Finland in 1972."

"Last year in Palermo, ultraluxury line Silversea added a 49-foot midsection to its Silver Spirit at a cost of $70 million, increasing the ship’s capacity from 540 to 608 passengers by adding 34 suites. It took 500 workers and about 450,000 man hours to complete the stretch.

“For cruise lines, it’s a quicker way to expand capacity compared to building a new cruise ship,” Niemela says. “A new cruise ship takes about 22 months or more [to build]. Add a new midsection, and it’s only a few months that the ship is out of service.”"

"With estimates of about $175 million to build a 300-plus passenger vessel, stretching the older ones made more sense, Delaney says, especially when each project costs an average $80 million.

By lengthening its ships, Windstar will add 150 suites that will go for an average $450 to $550 per person per night. With those 300 additional passengers, the six-ship line, owned by Denver billionaire Philip Anschutz’ Anschutz Corp., could add more than $49.2 million in annual revenue.

There are also benefits downstream. While the guts of the ships are open, Windstar is replacing seven outdated engines with four new Wartsila engines that will meet the International Maritime Organization’s tougher emissions standards.

“Not only do we get to leverage the fuel against more people, we’re putting in much more fuel-efficient, energy saving, state-of-the-art engine technology,” Delaney says. “We get the benefit of that and reduced repairs and maintenance with the new engines.”

Fixed costs don’t change much when a ship is stretched. Build a new one, and you have to fully staff it; expand an old one, and it’s a matter of a few extra hires to maintain the same crew-to-guest ratio. (That, and a slightly longer shopping list to stock the kitchens.)

“The flow through on the extra hundred guests, that revenue, almost 90% goes to the bottom line,” Delaney says. “It’s significant. The return on the investment was much, much higher on the stretch.”"