The fast-growing cruise industry is facing one of its biggest tests in years after the Costa Concordia disaster off the coast of Italy. Many Wall Street analysts, travel agents and other longtime industry watchers are bracing for at least a short-term slump in bookings as questions about the safety of cruise vacations swirl. The longer-term fallout is less clear, they say.
"With the tragedy still fresh, it is difficult to know what the impact on future bookings may be," UBS analyst Robin Farley said. "There are not many examples of incidents comparable to this." Ms Farley slashed her 2012 earnings estimate for Costa Cruises' parent company Carnival to $2.03 a share, about 26% below the level she was expecting before the accident.
She says the new forecast takes into account the impact of costs related to the accident, the Costa Concordia coming out of service and an expected slowdown in demand.
The five-year-old ship partly sank last weekend after hitting rocks near Giglio, a tiny island about 18 miles off the Tuscany coast. The death toll so far is 11 with another 21 missing after what survivors are saying was a chaotic and at times terrifying event that evoked scenes from the movie Titanic.
The cruise industry has proved resilient in the face of high-profile accidents in the past. A much-publicised fire aboard the 3006-passenger Carnival Splendor in 2010 that left the ship adrift without power for days had no noticeable long-term impact on bookings. Nor did the 2007 sinking of Louis Cruise Lines' 1500-passenger Sea Diamond, which, like the Costa Concordia, ran into rocks. Two people died in that event.
Still, the Costa Concordia disaster could be different, some say. In downgrading Carnival stock from a buy to neutral, Rachael Rothman of Susquehanna International wrote the significant negative media attention on the accident and loss of life could produce "a severe headwind" for bookings in the months ahead.
Ms Rothman also downgraded Carnival's main rival, Royal Caribbean Cruises. Together the two publicly-traded companies dominate the industry, with about an 80% market share.
Longtime industry watcher Mike Driscoll, editor of Cruise Week, notes the media is awash with first-hand accounts that leave the impression the crew reacted poorly or even irresponsibly during the event - not the sort of image that builds confidence among consumers.
The response by Costa Cruises and parent Carnival in the days after the accident also is being criticised.
"Beyond the visual of a large modern megaship on its side, that's what really stands out as being different from prior industry disasters, which do happen occasionally," Mr Driscoll said.
In the case of the Splendor fire, Carnival "acted immediately to minimise the collateral damage, not only with the media, but with passengers," he said. "It was managed very well to the point when people getting off the ship were interviewed, many were thanking Carnival for their handling. This, in contrast, is seen as a total mess."
Indeed, Brunswick consultant Anna Liisa Van Mantgem (37) and her mother had been talking about taking their first cruise for Mother's Day. But the Concordia disaster "has us kind of spooked", especially since her mother cannot swim.
"We thought it was a safe industry. I think we are leaning away from cruising at this point."
The disaster also "could not have occurred at a worse time", Tim Conder, an analyst at Wells Fargo, said. It is the height of "wave season," the January-to-March period when cruise bookings are at their highest.
Until this incident, the wave season had been off to a solid start, but like others, Mr Conder is expecting a near-term slump as bookings drop at Costa and to a lesser extent the industry as a whole. Still, Mr Conder predicted that longer term, "the impact of the accident to [Carnival] and the industry will be likely to be negligible as consumers look past the tragic, one-off nature of the event".
Miami-based Carnival already has said the loss of the Costa Concordia this year will reduce its earnings by $85 million to $95 million, or about 11c to 12c per share. Tens of thousands of holiday-makers who already have paid for cruises on the vessel will have to be refunded.
In addition, Carnival faces costs associated with personal injury liability and the cost of damage to the ship, though the company expects to be covered by insurance in both instances. The company said it has insurance coverage for damage to the vessel with a deductible of about $30 million as well as insurance for personal injury liability subject to an additional deductible of about $10 million for the incident. That is, if the insurance companies pay.
"While management believes that insurance will cover these items in the case of negligence, we would not totally rule out a potential challenge by underwriters," Mr Conder said.
Mike Eidson, a Miami lawyer and former head of the Association of Trial Lawyers of America, says that if investigators determine the accident was caused by improper actions by the captain, as Carnival is suggesting, the company could be absolved of responsibility. To win punitive damages in a lawsuit against Costa or its parent Carnival, a litigant would be likely to need to prove gross negligence by the company and not just the captain.
"Under Florida law, where this case could be brought, you need to have some negligence by the company in order to prove punitive damages," he said.
Costa CEO Pier Luigi Foschi acknowledged at a press conference on Monday that lawsuits may be filed against the company and said the company would try to talk with whoever brings a case.
"Costa cannot prevent any lawsuit against us," Mr Foschi said. "But if that is the case, we will analyse the [suits] and respond."
He too, is expecting a slowdown in cruise bookings in the wake of the accident but not a long one, arguing that "the industry is extremely safe, and the customer knows that." And, so far, travel agents are not reporting a huge downturn in business.
Bookings actually rose. The largest cruise franchise, in the United States, CruiseOne, said on Tuesday that it actually saw a 5.9% rise in bookings over the just-ended three-day holiday weekend compared with the same weekend a year ago. The company has more than 750 locations nationwide.
Carnival has not yet decided whether it will try to salvage the Costa Concordia, which cost about $570 million to build. But even if it does, the ship will be likely to be out of commission for at least the rest of the year.
Carnival is the world's largest cruise company, with more than 100 vessels spread among nearly a dozen brands (including Carnival, Costa, Princess and Holland America), and the permanent loss of a single ship would have only modest repercussions for its overall sales. The Costa Concordia accounts for just 1.6% of the company's total capacity.
That said, Costa is an increasingly important part of Carnival, and any long-term damage to its reputation is a blow. - USA Today.
• World Focus, Monday: Implications for the US cruise industry.
