Economies of scale in cruise shipping

The cruise industry has evolved rapidly over the past decades, with the building and operation of ever-larger cruise ships being a key factor in this growth. This study examines whether the observed increases in vessel size are supported by the fundamentals of economies of scale, as allegedly occurs with container ships; in other words, we inquire whether increases in ship size imply decreases in the average costs per passenger. We attempt this by developing a detailed cost model for cruise ships, distinguishing among three types of costs: capital costs, operating costs and voyage costs. The quantification of these costs allows the determination of potential savings due to the presence of scale. In parallel, we analyse the sensitivity of each cost category to parameters such as sailing speed and distance travelled. The research provides an assessment of the direction the cruise industry is heading, as regards the scale of vessels in operation: our findings suggest that economies of scale are realised only up to a certain ship size, which today stands at 120,000 gross tons. For larger cruise vessels, average costs (per passenger) increase and dis-economies of scale start to set in.