Staying Afloat in Troubled Waters

The challenges of running a cruise line in this unstable economy.

May 26, 2009 -- Portree, Scotland – Aboard the Seven Seas Voyager: The worst part of Regent Seven Seas Cruises President Mark Conroy's job is when the phone rings in the middle of the night. It happened at 1 am this past March 19th.

"Mark? This is Dag," Conroy recalled the conversation beginning. The head of the highly rated small luxury cruise line knew it wasn't going to be good news. Captain Dag Dvergastein was on the bridge of the line's premier cruise ship the Voyager as it was departing Singapore on a segment of its world cruise.

Dag told Conroy that his ship had accidentally run over some unmarked fishing line which became caught in one of the propulsion pods. Later, Conroy would relate that the $12 worth of fishing line would cost his company $20 million.

An accident like that could have bankrupted other small cruise lines. But Conroy worked tirelessly to keep his customers satisfied and his cruise line above the water.

It's not uncommon for boats to run over fishing lines. Ships like the Voyager that use propulsion pods instead of fixed propellers have special cutters to break the lines before they do any damage. But Conroy said the cutters were scraping the propellers so when the Voyager went into its regularly scheduled dry dock in December, the cutters were modified and spaced farther apart. It turned out to be a costly decision.

The newly modified cutters didn't do their job. The fishing line took one of the Voyager's two propulsion pods out of service, reducing the ship's speed to only 13 knots, and forcing long and expensive repairs which would have to be done soon in a dry dock. The world cruise would end early and the disappointed passengers who had paid a minimum $50,000 each had to be put at ease.

The ship was on its way from Singapore to Dubai carrying 265 world cruisers, the company's best and highest paying customers, plus almost another 300 passengers. Conroy personally took charge of damage control. He authorized a full refund to all cruisers on that segment, "Otherwise, they'd kill me," he feared. Conroy personally flew to the ship to explain the problem to the passengers. And he supervised dealing with the logistical nightmare that was to follow.

Conroy had to come up with alternatives for the passengers on board and those scheduled to join the ship in Dubai. He also had to figure out how to get his crippled ship safely through the pirate ridden Gulf of Aden. "It's like putting up a sign that says 'Hijack me,'" he said.

It was decided the Voyager would detour to Rome where it would end its world cruise early and go into dry dock for repairs. The $3-4 million repair bill would be the least of Conroy's problems. Getting the passengers home, keeping them happy, canceling a month's worth of cruises and offering compensation would cost about $15 million more.

Conroy and his staff made flight and hotel arrangements to send some passengers home early and others to Hong Kong where they could join another Regent ship and finish out the world cruise days they would have spent on the Voyager. Another big problem was the luggage. World cruise take a lot of luggage for 100 days at sea and their fare includes free shipping of their bags from home to and from the ship.

Conroy had to manage that considerable expense. He had 1,000 bags to ship back to passengers' homes. When their usual luggage handling company wanted $300 a bag, Conroy found someone to do it for $125. "I think that guy's got a future with us," he said later.

One issue Conroy won't discuss in too much detail is security in the Gulf of Aden. He hired supposedly unarmed Israeli security agents to be on board and had fire hoses and ear-piercing sound weapons at the ready. The slow moving Voyager traveled in a convoy and made it through safely.

After almost a month of repairs, the Voyager went back in service on May 21, 2009 sailing a 10 night cruise from Reykjavik, Iceland to Southampton, England. Conroy made sure he was on board to welcome passengers back.

Regent is a small top rated luxury line that carries 56,000 passengers a year and has about $500 million in sales. It's all-inclusive, meaning liquor, wine and tips are figured in the cost of the fare. Regent makes up less than 1.1% of the cruise business. All of the passengers on all four of Regent's ships would not fill one Carnival mega-liner.

Fares on Regent range from $900-4,000 per cabin per day. That's a lot of money for most cruisers. Regent has a loyal following but Conroy acknowledged that in this bad economy he had to reward that loyalty with more value.

Conroy remembered the day last year when Regent's promising financial future almost ran aground. He called it the financial terror crisis. "It was September 29th, the day the stock market dropped," he said. Cancellations occurred, bookings fell and business was $30 million behind the previous year, the company's most profitable.

Conroy had to do something to get business up. He was determined not to lower prices. "It changes the mix of passengers," he said. So he decided to add value and offer free shore excursions on most cruises, worth about $100 a day to each passenger. Bookings went back up. Alaska and Mediterranean cruises are almost sold out for this summer, Conroy said. But Baltic cruises are still lagging.

Conroy expects Regent to sail at a respectable 80% capacity in 2009. But that doesn't leave much money to be made on board. Regent makes 90% of its revenue from the cruise fare and only 10% on board. Most regular cruise lines earn a substantial amount from liquor sales, spa services, merchandise and shore excursions once the passenger is on the ship. The other lines' cruise fare to on board revenue ratio is closer to 60/40. Regent now has to make almost all of its money up front on the cruise fare.

One of the things passengers like about Regent is access to senior management when there is a problem. The first thing Conroy did when he held a town hall meeting with passengers on the current Voyager cruise was to give everyone his personal email address. He receives and answers up to 300 emails each day and has a reputation for personally dealing with passenger complaints. When on board, Conroy is always available to passengers. He is willing to engage in frank, straightforward discussions of the cruise industry. And he doesn't shy away from admitting the company's own mistakes.

Conroy began his cruise line career in 1973 working on the pier for Norwegian Cruise Lines directing disembarking passengers to their luggage. He's been with Regent since 1992 when it sailed as Radisson Seven Seas Cruises. The company changed its name because Regent sounded more upscale than Radisson.

In 2007 Apollo Management bought Regent for $1.1 billion. Regent needed the infusion of new capital to refurbish its ships and chart new growth. Plans for a new ship are now on hold. "I have to prove we can sell the cabins we have," he says.

One issue that initially cost some business is Regent's tough smoking policy. Literally overnight, Regent went from having one of the most liberal smoking policies to the most restrictive of any cruise line. You can't smoke in your cabin or on your balcony. Smoking is allowed only in a few specifically designated areas.

Conroy decided to make the change after a town hall meeting on the world cruise two years ago. "I got slaughtered," he remembered. The non-smokers were quite vocal in expressing their feelings that second hand smoke was dangerous and they had had enough. Besides, Conroy said, there were two fires on board from cigarette butts that landed on balconies and he got tired of having to pay to keep changing rugs and draperies in smokers' rooms.

The initial response to the change was cancellations from smokers. "I lost about $4 million in business," Conroy figured. But in time, he felt, additional bookings from non smokers made up for the loss.

Conroy is positive about the future of cruising, but he doesn't believe it will keep growing quite as fast as it did in the past. "We built them and they came," he said of the newer and larger cruise ships. "Now, supply has outreached demand."

But he pointed out that cruising is still a good value. When Conroy started with Norwegian Cruise Lines in 1973 an outside cabin without a balcony sold for $1,400 per person for a one-week cruise. Now, he said, even with inflation that same cabin sells for $800 and you get a lot more.

Convincing someone to pay $800 a day for a cruise when they can pay $800 a week is what makes Conroy's job a challenge.

And those cutters on the Voyager that were supposed to keep fishing lines from jamming the propellers, they've been modified again to make sure they work the next time.

Editor's note: ABC News producer Tom Giusto has cruised six times with Regent and is currently on the Voyager where he spoke with Mark Conroy. Mr. Giusto always pays full fare and receives no special consideration from Regent.