The Startling Economics of the World’s Largest Cruise Ship

With its seven pools, six waterslides and dozens of places to eat, drink and gamble, Royal Caribbean’s Icon of the Seas brings new meaning to the phrase ‘economies of scale’—and it’s better for the environment too.

By Spencer Jakab of The WSJ. Excerpts:

"most cruisers these days are middle-class Americans or Europeans looking to be fed, pampered and entertained on a floating version of home. Many bring their children. The hyper-efficient industry has made that possible by building megaships that resemble floating theme parks, and even its own islands.

Using tax havens and employing thousands of workers from developing countries has helped keep the cost of cruises down. Their real secret formula, though, has been the economies of scale of modern vessels and cruise ports."

"In 1980 . . . there were 1.4 million oceangoing cruise passengers."

"Next year, CLIA expects 36 million passengers and for the industry to surpass 300 oceangoing vessels—more than most navies."

Many cruises aren’t expensive, and sometimes—for example when operators were luring passengers back from the Covid-19 pandemic that shut it down—they have been outright bargains. Mass market operators keep ticket prices low enough to reach full occupancy even during recessions because a substantial part of their cost is the vessels themselves, and their fuel. Once people are on board, more than a third of revenue can come from onboard spending such as drinks, spa treatments, specialty restaurants and gambling.

Next month will see the launch of the world’s largest passenger ship, Royal Caribbean’s Icon of the Seas, with a maximum capacity of 7,600 people, not including 2,350 crew members. Its incredible size is a selling point in and of itself, but it also highlights the pursuit of savings.

“You only have one captain, only one bridge team, only one engineering team. The same thing happens in other parts of the ship,” says Bill Burke, the chief maritime officer of Carnival, the world’s largest cruise company. Carnival launched the first passenger ship exceeding 100,000 gross tons 27 years ago. That was more than twice the size of the Titanic. Icon of the Seas is as big as five Titanics."

"bigger ships have downsides, such as where they can sail. “At some point you begin to limit your ability to get into certain places.”"

"To get around that, and also to save energy and boost revenue, cruise lines have even leased their own private islands a short sail from Florida cruise ports, giving them new names like Castaway Cay and Perfect Day at CocoCay. Often featuring docks that can accommodate megaships, they offer a sanitized version of the tropics where every dollar spent accrues to the cruise line."

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

Related post:

Will Economies Of Scale Bring Down The Cost Of Producing Electric Cars? (2010)