Carnival Corp. to spend up to $700 million on fleetwide upgrades
04/17/2013 9:14 AM
04/17/2013 9:20 PM
Carnival Corp. on Wednesday announced the extent of fixes needed to ensure its 101-ship fleet avoids the kind of problems that have caused high-profile headaches for the world’s largest cruise ship company over the past few years.
The price tag, to be spread over the next two or three years, is steep: As much as $700 million, or more than half of what the company reported in annual profits last year.
Upgrades to Carnival Cruise Lines alone — which address emergency power, fire safety and operating redundancies — are expected to cost more than $300 million.
In February, the Carnival Triumph was disabled in the Gulf of Mexico with thousands of passengers aboard following an engine room fire. For five days, the ship was powerless at sea as passengers dealt with uncomfortable and unsanitary conditions including a lack of air conditioning, hot water and working toilets.
That followed a crippling fire in late 2010 on the Carnival Splendor.
“We’ve had two cruises that have not been good experiences for our guests; that’s two too many,” said Carnival Cruise Lines President and CEO Gerry Cahill in an interview Wednesday morning. “We’re making this effort because we are the biggest cruise line in the world. If we’re not going to lead the way and say we’re going to provide a great guest experience every time, I don’t know who will.”
Cahill emphasized that the cruise line is safe and that the upgrades are targeting comfort. No one was injured in either fire, but the Triumph ordeal generated intense media coverage that led to jokes on late-night talk shows and negative chatter on social media.
The situation had a “short-term impact on some of our pricing,” Cahill said, but added that some ongoing promotions are not unusual.
Last month, the company lowered its earnings forecast for 2013, in part due to lower prices and higher costs from the Triumph fire.
The announcement was made Wednesday morning before parent company Carnival Corp. held its annual shareholder meeting in London, which executives including Carnival Corp. Chairman and CEO Micky Arison attended. At the meeting, Vice Chairman and Chief Operating Officer Howard Frank discussed the upgrades.
Doral-based Carnival said just over a month ago that it was conducting a fleetwide review, and announced initial repairs on March 19. But the full costs were not clear then. Earlier, executives had detailed $80 million for expenses related to the Triumph and a further $40 million in 2013 for repairs related to the review. A spokeswoman said the tally of $600 million-$700 million released Wednesday includes about $100 million a year beyond what the company had planned to spend on maintenance.
The announcement was received well by some industry observers.
“It doesn’t appear that they’re going to be cutting corners on this project,” said Jaime Katz, equity analyst for Morningstar in Chicago. “I think it shows the goodwill that they really want to fix whatever problems may be out there.”
She said the investment could also pay off: “If they could avoid having these incidents, then ultimately it allows them to raise prices and improve profitability.”
Every Carnival ship already has one backup generator to run safety systems in case of power loss, but to ensure there is enough power to operate toilets, water and elevators an additional emergency generator will be placed on each of the line’s 24 ships over the next several months. Carnival will eventually replace those temporary generators with permanent ones, which should also provide power to store food, cook and run communications systems. Fire prevention, detection and suppression systems on each Carnival Cruise Lines ship also will be bolstered, specifically with improved water mist systems.
One major problem revealed in both the Carnival Triumph fire and the blaze on the Carnival Splendor involved redundancies in engine rooms.
Both ships had two separate engine rooms that were supposed to operate if the other was disabled.
But in both cases, cabling that ran between both rooms was damaged, leaving the entire ship without power.
Cahill said the review revealed that vulnerabilities that could cause one engine room to affect another vary among ships in different classes and built in different years.
“We looked at every potential point of failure,” he said. Electrical systems in engine rooms on an unspecified number of ships will need to be reconfigured with custom-made parts, which is expected to be a long-term fix.
The cruise line also said it will form a safety and reliability review board with outside experts.
Parent company Carnival Corp., which owns nine other brands including Princess Cruises, Holland America Line and Costa Cruises, said that based on the review findings, enhancements would be put in place “on the remainder of the fleet where they are not already present.”
At Wednesday’s shareholders’ meeting, Frank said all ships will have expanded emergency power, enhanced fire systems and improved engine room redundancies.
“Understand these are very safe ships to begin with,” Frank said. “It’s a belt and suspenders program to make sure our ships are doubly safe.”
A spokeswoman said later that “a number” of ships will get an extra generator. All ships will have an upgraded water mist system and modifications to engine rooms will be based on individual ship needs.
A broader industry review, announced by the Cruise Lines International Association after the Triumph fire, is ongoing. The industry group commended Carnival for its “robust and comprehensive initiative.”
Sen. Jay Rockefeller, a Democrat from West Virginia who chairs the U.S. Senate Committee on Commerce, Science & Transportation, released a less complimentary statement.
“It’s unfortunate that it has taken a series of terrible cruise line failures, and the scrutiny that followed, for Carnival to respond with some improvements for their passengers’ safety,” said Rockefeller, a frequent critic of the industry.
Bill Leider, a management consultant who works on brand strategies, said Carnival’s image has suffered.
“Many people are now fearful about sailing on a Carnival ship,” he said. “I’m not going to say that that’s a universal image, but it’s an image held by many people that previously did not hold that image.”
He said Wednesday’s announcement could just raise a new question: “What systems and procedures did they not have in place to create a $700 million problem?”
But Andrew O. Coggins, Jr., a clinical professor of management at Pace University’s Lubin School of Business, said he thinks the company is taking the right steps to rebuild confidence — and profitability.
“I think, if anything, it would just be a hiccup for Carnival,” said Coggins, a retired Navy commander who studies the cruise industry. “They can use pricing to stimulate demand, and so once they get the people on the ship, they spend money.”
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