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Cruise Lines: Friend Or Foe? Shape Up Or Ship Out

Puerto Rico has lost a significant portion of the cruise-passenger income it garnered in the past. Is their business still profitable for us?


February 14, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Shape up or ship out: Puerto Rico sails the rough seas with the cruise lines. Will the island have to say bon voyage?

The Caribbean is the most popular cruise destination in the world, hosting over 12.3 million cruise passengers a year.

Puerto Rico claims to be the cruise ship capital of the Caribbean and has worked hard to attract cruise lines so those on board could get acquainted with the island and possibly extend their stay–resulting in additional revenue for shops, restaurants, hotels, and nightclubs.

And in the next four years, more than $85 million of local tax dollars will be invested to construct, maintain, and rehabilitate piers as well as dredging the San Juan Harbor.

The government has also implemented a series of initiatives to improve cruise ship passenger experience by adding tourism information centers at piers and port areas, as well as expanding its Bienvenidos (Welcome) programs–which provides information about transportation and tourist attractions in Old San Juan and the Luis Muñoz Marin International Airport.

Other government initiatives have included providing maps and brochures that highlight the island’s attractions and entertainment.

In return, some merchants, transportation & tour companies, and hotel casinos in Old San Juan have been able to clutch $67 million in total cruise passenger expenditure from the 1.3 million cruise passengers who visited the Old City in fiscal year (FY) 2001. This represents an average spending of $51.60 per passenger during a port of call and homeport visit, a whopping 67.3% drop from the $158 per passenger expenditure reported in 1995.

The government charges an average $7.50 passenger head tax (after deducting a rebate given to the cruise lines by Puerto Rico Tourism Co. from the existing $10 tax as an incentive for passenger volume) that every passenger must pay to arrive and depart from the island. This tax, combined with the port service and dockage fees charged to the cruise lines, brought in $13.9 million to the local government in FY 2001.

However, despite having the best airlift in the Caribbean as well as countless beaches and historical sites, Puerto Rico is losing the battle to grasp cruise ship passenger dollars to nearby competitors.

For example, the average cruise ship passenger spends $173.24 during a visit in St. Thomas; $131.40 in Cozumel, Mexico; and $86.81 in Antigua. According to a PricewaterhouseCoopers passenger expenditure study conducted in 2000, Caribbean cruise ship passengers spent the least amount of money in the Port of San Juan.

On the other hand, Puerto Rico ranks as the No. 2 destination for crewmember expenditure, which averages $87.64 per visit. Crewmembers spends $108.40 in St. Thomas, $66.90 in Cozumel, and $50.70 in Antigua

"We have established a program by which we send hospitality vans to pick up crewmembers that want to play in the casino at the Wyndham Old San Juan," said Richard Cortese, vice president of Wyndham Hotels and Resorts in Puerto Rico.

Show me the money?

Besides investing local government revenue to capture the cruise market, what else can Puerto Rico do to add cruise passenger tourist dollars to its economy?

According to cruise executives interviewed by CARIBBEAN BUSINESS, the answer seems simple enough. Just create a festive ambiance in Old San Juan during the time cruise lines are in port, and the passengers will be lured off the ships.

But complex problems don’t have simple answers.

Unfortunately, Puerto Rico–as opposed to other Caribbean destinations–has a major disadvantage. Cruise lines make San Juan their first port of call in the Caribbean, en-route from homeports in Ft. Lauderdale or Miami. As a result, ships arrive late–some at 5 p.m.–and only stay a few hours before leaving for the next Caribbean port. This means passengers can't enjoy leisurely tours as they do in destinations where they arrive in the morning. They can only get to know Puerto Rico–and spend money–if they stay here before or after the cruise.

On the other hand, St. Thomas (which overwhelmingly leads the Caribbean destination league for cruise-passenger expenditures), serves as cruise-ship host for as long as 11 hours during their visit. An industry source said that an agreement between the St. Thomas government and the cruise lines establishes hefty incentives for ships that stay in port for eight hours or longer.

St. Thomas received 1,148,126 passengers from January through July 2001, compared with 1,007,407 for the same period in 2000, a 14% increase. The cruise industry’s impact on the U.S. Virgin Islands economy in 2001 was $696 million, an increase of $85 million over the same period in 2000.

"The fact the ships get in late from Miami poses a challenge for Old San Juan that can't be changed," said John Tercek, Royal Caribbean Cruises Ltd. vice president of commercial development. "A solution for San Juan is to modify the way it conducts business and create a more party atmosphere in the evenings that entices passengers to spend money and make them want to come back. I can’t guarantee this initiative would work, but it's worth a try."

Local industry sources doubt Tercek’s idea would help much.

"Passengers arriving in San Juan at 5 p.m. already have dinner reservations for one of the cruise line seatings (either at 6:30 p.m. or 9 p.m.)," the source said. "They aren’t going to miss dinner, and they won’t have time afterward, to visit San Juan."

Although the number of cruise ship visits to San Juan has been declining steadily for the past 10 years, the number of passengers has grown. In fiscal 1990, cruise ships made 906 visits to San Juan, by 2001 the number dropped to 674. However during that same period cruise passenger visitation increased from 866,000 to 1.3 million passengers. This is partly due to the recent introduction of larger megacruise ships that carry more passengers.

Plans abound…but will they work?

The billion-dollar Golden Triangle redevelopment plan originally presented by the former Rossello administration that would have transformed the Old San Juan and Puerta de Tierra piers to an area that catered exclusively to cruise ship passengers was scratched.

The Calderon administration now plans to use the area between Piers one and six in Old San Juan, the Frontier pier in Puerto Nuevo, and the Pan American dock in Isla Grande solely for cruise ship activity, instead of relocating cargo activity from Puerta de Tierra to Isla Grande and Puerto Nuevo. Piers 8 through 14 will still be used for cargo.

Thus, the unattractive cargo activity will remain a daily sight along the San Antonio Channel in Puerta de Tierra. This ruins the possibility of creating world-class, inner harbor tourism, limiting the residential and commercial development anchored in the vortex of the Puerta de Tierra, Condado, and Isla Grande axis.

Some suggestions offered by cruise executives to improve cruise passenger experience in Old San Juan include establishing continuous trolley service touring Old San Juan, getting traffic off the streets, opening Fortaleza St. shops until late on key nights, closing streets and hiring bands or throwing nightly carnivals, displaying fireworks at El Morro, offering discount nightclub shows at hotels, and promoting these initiatives on the ships.

"People are spending less money in San Juan because there are less tours in place and there is no nightlife compared to 10 years ago," said Michele Paige, president of the Florida-Caribbean Cruise Association.

Why leave the boat if I’m having fun onboard?

Cruising is said to have become more popular than land-based resorts, theme parks, and excursions. Newer and bigger ships have increased amenities to keep passengers entertained. For example, Royal Caribbean's Voyager of the Seas offers an indoor ice skating rink, a rock-climbing wall, a nine-hole golf course, a 1,350-seat theater for Broadway-style variety shows and movies, a casino, an inline roller-blading rink, a basketball court, a 450-foot-long entertainment boulevard with souvenir and clothing shops (mostly duty-free), and eight restaurants for dining, among other conveniences.

"That's why San Juan has to be creative. It must offer cruise passengers an enhanced experience that grabs their attention during the short period of time they are in port," Tercek said. "The way the San Juan waterfront area looks today is very uninviting."

Tercek pointed out San Juan’s waterfront area lacks attractive lighting. Its bus terminal and parking lot looks frightening at night. There is even an unsightly condo-project that is boarded up in plain view.

Peter Sahora, general manger of the Inter-Continental San Juan Resort and Casino, believes there is another element that has affected cruise passenger spending.

"After Sept. 11, passengers have become pore price conscious. This means they are less willing to disembark and spend money at the different ports, especially if they have already paid for all of the amenities included onboard," Sahora said.

But Lucy Iriarte Viera, president of the United Merchants Association in Old San Juan, has another complaint. According to her, cruise lines detain their ships from arriving earlier to the Port of San Juan on purpose. This way, they can increase their income from their passengers in the onboard casinos and bars.

"They [cruise lines] aren’t allowed to open their casinos when they're close to a port," Iriarte said. "And the owners of small and mid-size stores in San Juan can't keep their shops open past 6 p.m. or work 12-hour shifts because they have families to attend to."

But the situation of ship arrivals may be a bit more complex than is apparent.

"San Juan has very thin offerings for transit call cruises. Since ships have to leave Florida at 4 p.m., you will rarely see an arrival before 10 a.m. If a ship arrives at 11a.m., for example, passengers will stay onboard to take advantage of the prepaid lunch, which means they would be disembarking at 2 p.m. Unfortunately, this does not provide an ample enough window for them to go to El Yunque because of the distance. Furthermore, El Morro closes at 4 p.m. We have tried to negotiate an extension of the closing hour with federal and local authorities, but have been unsuccessful," said Giora Israel, vice president of strategic planning for Carnival Corp.

Other sources simply say that because Puerto Rico’s economy doesn’t depend on tourism, island residents feel they don’t need to cater to tourists.

Despite differences of opinion, Paige made it very clear that Puerto Rico is an important destination for cruise lines that are members of the Florida Caribbean Cruise Association as well as being an important homeport.

"There has been an ongoing commitment by the local government to improve its port facilities and we are looking forward to a bright new future," Paige added.

To be competitive in the cruise industry, a destination must make a significant investment in building piers and terminals. Once that is completed, cruise executives say there are no incremental costs involved for the destination to host cruise ships because they pay for their own costs.

Instead, the destination gets exposure and a chance to make an impression on passengers. The Port of San Juan–which has been described as being unique–is no newcomer to causing an impression.

"San Juan is the only stand-alone port in the Western Hemisphere. This means it serves as a homeport and a transit port. The ports in Florida are homeports and the ones in the Caribbean are all transit ports. This makes San Juan unique," said Israel.

The elusive pre- and post-

For years, the local government has been trying to maximize pre- and post-cruise room night production to increase the time cruise ship passengers spend on the island and the economic impact left by these visitors. It makes sense considering the cruise industry generates $7 billion a year worldwide and expects to increase total passenger capacity by 57% in the next two years.

According to Cruise Lines International Association (CLIA), only 11% of the U.S. population has cruised, while another 56% of adults are considering it. Interest is even higher–68%–for travelers who have cruised before.

Almost nine out of 10 vacationers have some interest in taking a cruise in the next five years. The key factors in deciding on a particular cruise are its destinations and which offers more bang for their buck. Convenience of getting to the cruise is more important to cruise prospects than to past cruisers, while past cruisers attach greater importance to amenities, the CLIA Cruise Prospect study added.

One way the government had attracted more cruise ship passengers to San Juan was by providing incentives to travel agents and travel wholesalers, rather than to cruise lines, to include an additional stay in the cruise package they offered clients. This initiative was scratched due to budget limitations.

Since 1986, the Puerto Rico Ports Authority had given incentives to cruise lines for passenger volume. This action was temporarily stopped beginning this year because the original contract with the cruise lines has been expired for more than a year.

The Ports Authority just handed over that responsibility to the Tourism Co., which plans to provide $3.3 million in incentives possibly this July to help sell land-based service and change the present passenger movement criteria into room nights in the form of pre- and post-cruise stays.

According the Tourism Co., the new pre- and post incentives contract was completed in December and is being negotiated with the cruise lines. An industry source said that the new contract will require cruise lines to keep their ships longer in San Juan and will give more incentives to cruises that include pre- and post-stays in their package.

"Right now, we are touching the tip of the iceberg as far as passengers we can convince to extend their stay in San Juan," said Milton Segarra, executive director of the Tourism Co. "We need to be more proactive by entering into more cooperative advertising agreements with the cruise lines and developing special packages with the local hotels."

"We [Wyndham] send representatives top Miami to negotiate pre- and post- packages with cruise lines for our Condado Beach and El San Juan properties. This represents between 1,500 and 2,000 room night annually at each hotel," said Cortese.

But incentives can only do so much.

"An incentive works only if you want to stay. In this case, I would say that Puerto Rico is wasting its time trying to entice cruise lines with incentives. Instead, it should concentrate on beefing up its product offerings," said Israel.

On average, passengers that arrive by air the day of the cruise in San Juan spend $11.16 locally during their visit, while those who stay or plan to stay overnight as part of their cruise vacation spend an average of $104.58 per day, according to the PricewaterhouseCoopers study. The average length of stay, including pre- and post-cruise stays in San Juan is 1.4 nights. Of the crew visiting San Juan as a homeport, these crewmembers spend $92.50 while in San Juan.

Jose Morales Crosas of A&A Tours, representatives of Royal Caribbean and Celebrity Cruises in Puerto Rico, remembers 10 years ago when the cruise lines were the No. 1 enemies of hotels.

"Nowadays, instead of fighting against the cruises, hoteliers have decided to join them and try to convince passengers to stay overnight," Morales said. "In the early 1990’s, pre- and post-stay cruise packages were working. Then, the government program was dismantled. Today, the Tourism Co. is working to redesign an incentives program to help boost the island’s number of room nights."

However 30 years ago, hotels loved receiving cruise ships because the passengers visited hotel nightclubs–which featured first-rate acts–and restaurants because the ships didn’t have all the amenities the newer and bigger ships have.

"What used to be a major attraction for tourists were the fabulous nightclub shows in San Juan’s hotels. Ships would even back up their departure schedules so that passengers could disembark and take in a show before leaving. The offerings now are disgraceful, so cruise lines no longer consider it an option to market them," said Israel.

Hoteliers say the challenge of attracting cruise ship passengers for overnight stays is compounded by the fact that cruise passengers, who spend little or no money locally, continue to occupy precious airline seats coming and going to the island, often displacing potential hotel guests.

To resolve that problem, the Ports Authority is going to invest $40 million to construct a new terminal (Terminal A) at Luis Muñoz Marin International Airport to increase passenger capacity. Slated for completion in 2004, Terminal A could have up to six gates to handle flights.

On the other hand, airlines make decisions about levels of service for the leisure market partly based on reliable cruise ship passenger projections.

"The problem with airlift into San Juan is that it is very expensive. At one point this year, it cost us less to take passengers from New York to Barcelona that New York to Puerto Rico. Because of this, our company has decided to pull out one of our homeport ships from San Juan and transfer it to New Orleans, where U.S. residents can either drive, take a train, or find an inexpensive flight to," Israel said.

Provisioning in San Juan

Another untapped, potential benefit to the island’s economy from the cruise industry is for local distributors to provide provisioning to these cruise lines.

Cruise lines do little provisioning at San Juan. For example, Royal Caribbean ships that homeport in San Juan spend a mere $1 million annually to buy odds and ends in Puerto Rico. What’s more, many cruise ships that use San Juan as a homeport do their provisioning in St. Thomas, where they have a storing port and don't have to deal with dock unions.

While cruise lines do not buy their supplies from St. Thomas, they do pay harbor fees and salaries to move the cargo containers there. Products purchased in bulk on the U.S. mainland are shipped to St. Thomas to load on the vessels.

"Before the new Pan American dock was built, it was difficult to provision in San Juan because there was lack of space," Tercek said. "We’ve given the local Department of Agriculture our provisioning requirements and in return the agency is supposed to provide a list of items produced in Puerto Rico that will meet our quality, quantity, pricing, and reliability standards."

Royal Caribbean is currently negotiating with the local Ports Authority to carry out another joint venture–to build a second Pan American dock south of the San Antonio Canal, which will be used to accommodate the Eagle-class ships (carrying over 3,000 passengers). As part of the deal, the Ports Authority is requiring Royal Caribbean to provision in San Juan.

"The monetary offer made by Royal Caribbean to build a second dock is too low," said Jose Baquero, interim executive director of the Ports Authority. "So we are trying to reach an agreement by which they will commit to provision their ships in San Juan."

Baquero pointed out that Royal Caribbean’s executives are worried about the quality and reliability of the product provided by local distributors. The cruise line executives have also said that provisioning in San Juan would not make much of an impact on the economy. Furthermore, an industry source said that many U.S. tourists would feel uncomfortable knowing that provisions came from Puerto Rico instead of the mainland because they fear the local quality standards may not be up to par with the federal requirements.

However, the difference in expenditure between provisioning in San Juan and St. Thomas can be substantial.

"Provisioning in San Juan is very expensive for us. The cost difference is estimated to be between $1.3 million and $1.5 million for us. This is due to various excise taxes that exist in Puerto Rico and the higher cost of labor on the island," said Carnival’s Israel.

Some products under preliminary discussions that could be provisioned locally are milk, eggs, pineapples, and chicken products.

Even if local provisioning is attained, the current administration will have to scrutinize the pros and cons of the cruise line’s role in Puerto Rico’s economy and devise creative mechanisms that will increase this source of revenue.

. Local pier improvements

Planned investment at the Port of San Juan amounts to $43 million this year. Priority has been given to the following projects: maintenance dredging of the piers in Old San Juan, Puerta de Tierra, and Isla Grande North; rehabilitation to the concrete platform underneath Cruise Pier 1; new terminal building at Pier 3 to be used for in-transit cruise ship operations; and conversion of Pier 4 internal structure to build interior connectors to permit passengers to board and disembark at a higher floor level.

The $43 million investment also included the $17.5 million Pan American dock expansion and improvement project, which had been recently completed. The work included the remodeling of the existing terminal, construction of a pre-engineered building for the handling of baggage, and the reinforcement of sheet piling in front of the pier.

Also, the Ports Authority completed the maintenance dredging for deepening the east side of Pier 4 needed for the operations of the Eagle-class ships that carry over 3,000 passengers.

The remodeling of Pier 4, which consists of adding a second floor to the existing homeport cruise ship terminal, should be completed by the summer of 2002.

In August 2001, Carnival Corp. signed a 20-year contract with the Ports Authority to extend the cruise line's presence on the island, allowing the agency to generate over $54 million in new revenue. As part of the deal, Carnival must invest $8 million to upgrade the terminal, generating nearly 100 direct jobs.

This Caribbean Business article appears courtesy of Casiano Communications.
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