In This Issue

• The Business Of Cruising
• Buying Travel Insurance
• Staterooms And Upgrades

All About The Business Of Cruising

Globally the cruise business looks to be rapidly recovering from the economic disaster of Covid. Before the pandemic an estimated 15 million people took cruises each year on 23 ocean cruise lines whose businesses saw regular growth year over year. Business analysts saw no reason why this trend wouldn’t continue and the primary marketing emphasis has been to lure new customers to cruising rather than taking away market shares from the other companies.

As we near the end of 2022 the signs suggest that people are now booking cruises in numbers approaching the 2019 numbers. Cruising has a number of reasons for this success but the biggest one is the value. Dollar for dollar no other vacation option provides as much all inclusive benefits for as little cost. There are a number of reasons for this but it is the current business model that has evolved over time that best accounts for the success.

Because cruising operates in a unique environment outside of many national regulations it is an easy target for criticism. In todays business world many of these criticisms are inaccurate and are unwarranted. What follows is an attempt to set the record straight.

History

Cruise lines have avoided U.S., British and other countries laws and regulations for a long time. It started in 1920 with two U.S. ships, the M/V RELIANCE and the M/V RESOLUTE, that were ‘re-flagged’ in the country of Panama in order to avoid the U.S. Alcohol Prohibition that was hurting American bookings.

The world’s oceans are apart from the laws and regulations of individual nations with international treaties governing ships at sea under the jurisdiction of The International Maritime Organization, of which most countries are member. It requires all ocean ships engaged in international trade to have a country of registry in order to sail freely in international waters. Ships ar considered the territory of the country in which they are registered. The treaties wording of “country” pertains to any country, territory, either developed or underdeveloped making those ships the sovereign territory of its flagged country subject generally to its laws and regulations.

Over the past fifty years virtually all cruise ships have been “flagged” in smaller countries like Panama, Liberia, Malta, and the Bahamas. A vessel’s country of registration is commonly referred to as the “flag of convenience”, and that saves cruise companies taxes, avoids strict labor laws and provides them favorable court venues for adjudication of disputes.

The Overall Benefits Of Flags of Convenience

Cruising is a unique industry and using flags of convenience has actually been a benefit to a diverse number of people that include employees and passengers as well as the companies investors. The usual criticism is that flags of convenience is used to pay subsistence wages that are far below what is fair. There is also the issue that passengers are not protected by having the option to seek legal remedies in their home countries courts. In both of these the truth is much more complicated than it would seem.

The Wage Issue

The internationalization of business has been a huge benefit to people worldwide. Businesses in developed nations have benefited greatly from using off-shore manufacturing to reduce the labor component of their products. This allows them to reduce selling prices, benefiting their customers, while increasing profits. Labor in less developed countries has also greatly benefited with more jobs, improving wages and an increased standard of living. While there are always problems, trade-offs and abuse, overall the world has become a better place because of international business.

The cruise business does not sell a physical product but instead is based primarily on providing an all-inclusive service. In order to do that, one of their significant cost areas is associated with labor. Just like many western manufacturing businesses they also rely on less costly labor. Just like manufacturing industries the cruise business relies on less expensive labor from all over the world, the difference is you don’t see the people that make your televisions, shoes and clothing while on a cruise ship you get to talk to them face to face and get to know them. It is unfair to suggest that they are paid slave wages. The truth is cruise companies usually pay well above prevailing wages in the countries where they recruit staff and while work hours may seem excessive they are in fact usually better than work hours and conditions back home.

If you talk to cruise ship staff you will find people from well over fifty countries and a surprising number that have worked for their cruise line for many years renewing contract after contract. It is that flag of convenience concept that allows those employees to work at all. By Western standards they may seem to work long hours for little pay. Twelve hour days for $1,500 to $1,800 a month (with free room and board) is not uncommon but compared to wages and working conditions back home many consider themselves lucky to have these jobs.

It is this flag of convenience labor arrangement that allows for a reduced price of product. If all the cruise companies were required to flag their ships in a major Western country, the cost of an average cruise would probably more than double. That would act to reduce the number of potential passengers by more than half and seriously impacting employment and income in dozens of less developed and third world countries.

Legal Liability Arguments

With more than half of passengers being American the legal rights and remedies of U.S. passengers are, in truth, reduced because of flags of convenience. This is primarily because most ticket/passenger contracts are written under the registering country’s law and can include limited-liability clauses that are no longer supported in the United States and many Western countries. Under international maritime law, those clauses are usually enforced and regardless of the attempted litigation location, the majority of courts worldwide still relinquish jurisdiction under maritime laws to those nations of registration.

This may seem to be problem but there are two reasons why this isn’t as serious an issue as many critics will claim. First most major cruise companies are well aware of the potential public relations impact of seeming insensitive to perceived wrong doing and the media seems always out there waiting for a cruise ship tragedy story to emerge. Second, Western countries are always examining how cruise companies use or abuse that flag of convenience status. In the United States the courts have been stretching their interpretation of maritime law and jurisdiction in recent years and if the cruise companies flagrantly evade reasonable responsibility it could bring on governments rethinking those treaties of maritime law and the flags of convenience policies.

Much of the public criticism and media notoriety is actually driven by litigation law firms seeing cruise ships as a huge potential liability litigation opportunity. If ships were to start reflagging their ships in major western countries the cost of new civil litigation could be significant.

Safety, Regulations And Inspections

While there are a lot of critical claims about cruise companies and their ships evading laws, that is not the case in a number of areas. While cruise ships may be considered territories of specific countries and there laws, there ability to sail within the waters of major nations does bring them under those regulations in a number of areas. Ship safety, food safety, environmental requirements are all regulated by the governments of cruise ports frequented by cruise ships along with international treaties under those maritime laws. Lifeboat requirements and safety drills are required by a number of international laws and Coast Guard and port inspections are common. Food safety inspections are required for ships cruising in the waters of a number of countries along with environmental regulations. Often these regulations also cover the qualification requirements of specific crew positions starting with the Captain.

How the Pandemic Could Change the World of Cruising

The 2020 pandemic has turned the economies of most of the worlds countries upside down. Governments have forced whole segments of their economies to shut down. After weeks and months of being closed countless businesses could be devastated even if the governments offer assistance. In the United States the administration and government are promising to help major, important businesses but in the case of the cruise companies much of their operations have been outside of the country and its laws. There are arguments suggesting that if this industry wants to operate outside the reach of the government maybe they are outside the governments responsibility to offer financial assistance as well.

By 2021 a number of smaller cruise companies without large cash reserves have sold out or shut down. Others have been reducing the size of their fleets with most ships being sold for scrap. Going into 2022 the major cruise companies were already seeing market improvement and with their large cash reserves, credit history and past market performance and it looks like they will be just fine.

Considering the magnitude of the current financial crisis just how much financial reserves do these cruise lines have? Looking at the available financial statement for Royal Caribbean gives a hint:

2017 Annual Amounts (Monthly Amounts)

• Total Revenue $ 8,777,845,000 ($ 731,487,083,000)
• Total Costs $ 7,152,712,000 ($ 596,059,333,000)*
• Net Income $ 1,625,133,000 ($ 135,427,750,000)
• Total Assets $ 22,296,317,000** Includes Capital Leases
• Total Debt $ 7,539,451,000
• 2020 Cash Reserves $ 243,740,000,000***

*Without having access to more financial information this is only an approximation. At full operation monthly costs are around 600 million dollars. In a complete shut down by reducing fuel, provisions and furloughing employees that could be reduced by 40-60%. The company would still be faced with significant operating expenses like servicing debt, headquarters and ship maintenance and operating costs.

**The assumption has to be that a significant percentage of this amount is actually the current value of ships. In a market going forward where demand gets reduced by 50% (estimate) the asset value will be seriously impacted and selling ships would probable not be possible.

***This is a current dollar amount which indicates that in a total shutdown those cash reserves would last for one to three months. After that the corporation would be facing defaults on its debt.

A Cruise Industry Without Flags of Convenience

How serious would a loss of the flags of convenience be? In the world of cruising there is actually only one ship that demonstrates what eliminating that flag of convenience policy would look like. NCL flagged The Pride Of America in the United States in order to allow it to cruise around the Hawaiian Islands. This ship must meet a number of American laws and regulations and that means that the crew must work in accordance with American labor laws that restrict the number of hours they can work. Pay must also meet minimum wage and other U.S. payroll requirements and additionally the crew must meet legal requirements to work in the United States.

There are two major consequences of meeting the flag requirements of the United States. The first is the cost of the cruise. On average a seven day cruise on The Pride Of America costs about twice as much as other NCL seven day cruises. With those sort of price increases how much of the market will cruising as financially justifiable?

The second is level and quality of service. While this is a subjective measurement there are a number of metrics that suggest an answer. There are cruise ship surveys that regularly rate The Pride Of America’s service and the result is one to two stars lower than the whole NCL fleet average.

So what you get is a lower quality experience at a significantly higher price. Cruising’s success has been based on a number of factors but affordability is probably the biggest with the quality of the experience being the other. Vacation competition includes theme park destinations, all-inclusive resorts and land tours and dollar for dollar cruising has consistently been the winner.

Buying Travel Insurance

A recent incident and a conversation with a traveling friend highlighted the confusion and importance of international travel insurance. To begin most people consider travel insurance too expensive and on top of that they see it as very confusing and there’s truth in those beliefs.

Please note that this is written with a focus on American travelers but we are also aware of similar plans offered in Canada and other countries, but you will need to explore options based on your home country.

There are a number of different categories and types of travel insurance that apply to a number of travel plans and that can complicate the insurance decision. Generally, insurance is available to cover problems in five specific areas:

• Trip Cancellation and Interruption
• Theft of Property
• Health and Accident coverage
• Medical Repatriation
• Life insurance

In truth, most travelers we talk to are too casual in deciding on travel insurance. This article will focus on three main areas:

• First is a concern about having to cancel an expensive trip at the last minute and losing deposits and prepaid money.
• The second is travel interruption caused by missing air connections or a cruise sailing.
• Lastly are medical cost concerns while being out of the country.

One area that requires attention is exactly what are the conditions where the coverage takes affect and where it doesn’t apply. Insurance policies are very specific legal documents and all too often coverage we thought we had doesn’t apply in too many circumstances. Recently travelers were faced with giving up their travel costs or putting their health in jeopardy because of the Covid pandemic.

As the Corona virus started spreading around the world and countries started closing their ports, cruise ships and their passengers were placed in a difficult position. Initially cruise ships started adjusting their itineraries instead of canceling cruises. Passengers that were worried about their health and wanted to cancel their cruise or were even acting on the advice of the government, soon discovered that insurance companies were concluding that those concerns were not covered by the cruise cancellation insurance and were offered no refunds.

Even if the cost of insurance is significant, everyone should consider and evaluate what potential financial risks there are versus the actual cost of the insurance policy. With a long cruise the cost could be very high and while the insurance could be costly the loss could be even more significant if you have to cancel or should simply miss a sailing.

One area where many people leave themselves seriously in jeopardy involves international medical emergency insurance. Far too many people falsely think that their health insurance will cover them when they’re out of the country. In truth that is rarely the case. Unless your health insurance specifically indicates that it covers international travel you are risking a catastrophic loss. In one example we know about there was a retired couple traveling in Europe that believed Medicare and their supplement insurance covered them. They learned the terrible truth after a serious stroke left them with a quarter of a million dollars in medical bills. Another couple we know just made a one day trip over the border into Canada to visit with friends. Several days later the medical expenses after a heart attack added up to almost $100,000 with no reimbursement from Medicare.

When booking a cruise one option is cruise insurance. Because many cruises involve international destinations these cruise policies provide medical cost reimbursement (up to specific amounts) and property theft and loss protection. Some also, but not all, cover the cost of medical repatriation. While cruise insurance is convenient you do have other options for insurance that could be less expensive and provide more coverage.

Airports often have outlets for inexpensive short term air travel insurance but it is mainly focused on the life insurance component and not on medical costs or trip interruption which often is the airlines responsibility.

Specific Situational Considerations

Cruise Only Insurance – Say you are taking a Mediterranean cruise with flights into and out of the sailing port. A cruise insurance policy usually provides an appropriate amount of coverage for your cruise trip. Most cruise policies also cover medical expenses if you need care in a local clinic or hospital while a passenger on the cruise with some covering medical evacuation and repatriation. The same policy usually extends coverage while on booked cruise/land packages and the flights to and from the cruise port.

Cruise with an extended land itinerary – If you are taking that Mediterranean cruise but then plan to go off on your own for a couple of weeks in Europe, chances are that cruise policy will terminate on disembarking the ship. For that reason you need to understand that you will not be covered for medical emergencies above the international coverage and limits of your American health insurance policy. For retirees, Medicare does NOT cover international medical care. If you opted for one of those no cost Medicare regional groups you have no international medical coverage.

Frequent InternationalTtravel – If you are a frequent international traveler it is most important to analyze your risk and how much you are comfortable paying for insurance. You have options of buying a complete medical plan (Geoblue) , a medical evacuation plan (EA+) or a complete annual insurance policy (Allianz, Amex) that offer some coverage in virtually all areas. One caution is that most annual policies only provide coverage while on trips of less than 60 days each.

In our case we take a number of cruises and international trips a year and our biggest concerns are medical emergencies and evacuation, so we keep an annual MedEvac plan in place. Our Medicare supplement insurance offers adequate international (we hope) medical coverage for now and we will buy cruise policies on individual trips if it is a long and costly cruise.

Annual Travel Insurance Policies – There are complete annual travel policies, which should be considered if you travel internationally often. Generally they have lower limits of coverage, especially in areas like trip cancellation and property loss. For example, most annual policies limit cancellation protection to $2,000 per year. Pictured is a recent annual generic quote provided by Alianz for a typical retired couple.

Special Note: 26 European countries require health insurance to visit.

In early 1995 twenty-six European countries signed an agreement that abolished enforcing their borders between member states. As a result the area mostly functions as a single country for international travel purposes, with a common visa policy. Anyone from a country that requires them to apply for the Schengen visa to enter Europe must provide proof of international health insurance. Americans and Canadians along with a number of other nationals do not need this visa to visit and therefore do not need to provide proof of insurance.

The 26 countries in the zone are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

Technically a letter from your insurance company is required, and this needs to mention that you will be covered in Europe for any medical, evacuation and repatriation expenses during your whole stay. The medical expenses have to be covered for at least 30,000 Euros.

This article was prompted by a travel friend contacting me wanting to know what travel insurances we use. We compared notes and kicked around some scenarios and decided it was a good subject to explore in greater depth.

Also thanks to a visitor from Reviews.com  who directed us to their extensive article on buying travel insurance and if you have questions about specific recommendations I would highly recommend reading this article from Reviews.com HERE.

INSURANCE LESSONS FROM COVID-19

A number of recent travel articles about travel and insurance are now recommending “Cancel for Any Reason” Insurance but this may be a bad choice especially since most major cruise companies, in an effort to get bookings back, have offered last minute cancellations as part of their policy. In comparing “Cancel for Any Reason” insurance it seems that in many cases the premiums do not warrant the limited level of reimbursement so be sure and do the math before buying.

We have a 30 day cruise scheduled in six months across the Pacific and around Japan so we decided to investigate CFAR policy costs for that itinerary. Our current standard policy covering that cruise cost us about $350. We received a CFAR quote from the same carrier that would reimburse our “deposits” only should we cancel for any reason for a premium of $1,500 but would not offer reimbursement after two weeks before the trip. That exceeds our currently paid deposits by almost $800 with questions about the actual costs, in full, being covered making this a bad deal.

If anyone finds CFAR insurance that makes more sense we’d love to hear about it.

In addition most travel insurance policies will only reimburse you for canceling your cruise under specifically identified conditions. Most of those involve medical issues with you or immediate family. Some policies also provide for work related emergencies. Based on our experience with COVID-19 we now see a number of issues we hadn’t considered before when looking at travel insurance.

Our Recent Experience Involving COVID

We were recently booked on a pair of cruises that went from Singapore to Rome with 14 ports of call and had paid in full (inside 90 days). As coronavirus issues began to appear our cruising companions cancelled early on and after talking to the cruise company got full credit towards a future cruise. We waited and as things began to get worse we contacted the cruise line and they were no longer agreeing to issuing future credits. 48 hours later they cancelled the cruise, gave refunds along with future cruise credits at 125%. We also contacted our independent insurance carrier and were informed that they weren’t accepting claims involving coronavirus. We contacted the airlines and they gave us future credits to use within 12 months.

Insurance And Travel Advisories

It seems that under standard cancellation coverage, you cannot cancel due to travel advisories from the CDC, State Department or other government agencies. You can’t cancel because the cruise line changed the itinerary, or for fear of terrorism, or concerns about epidemics or natural disasters. Before booking a policy you should now investigate these issues for coverage.

Insurance Is Still Important

We still believe travel insurance should be an important part of your travel plan. Its benefits usually include trip interruption, emergency medical and emergency transportation, travel delay, lost luggage and more but we need to understand there are major exclusions like pandemics, natural disasters, insurrections and government actions.

You also need to understand that in order to file a claim you need to submit documentation. That can include proof of your property loss and its value like purchase receipts along with a police report of the incident. Health claims need doctor and hospital reports and bills.

The burden is on all of us travelers to educate ourselves on things like terrorism, tropical storms and disease outbreaks affecting our vacation destination. Also if you choose to buy standard coverage after an event becomes “known” even if you didn’t know about the situation, your benefits could be severely limited, making that travel insurance policy almost useless.

Because we frequently travel internationally our health insurance does have an international travel component that pays up to $50,000 for each of us with a lifetime cap of $50,000.

We carry an annual medical evacuation and repatriation policy that over the past number of years has seemed reasonably priced to us. The cost for the two of us has been less than $200 for the annual plan and offers $500,000 in coverage. It should be noted that this is not medical insurance and will not pay for doctors and hospitals except for expenses in getting you and your companion home. One of the largest is EA+ Emergency Assistance Plus

Staterooms And Upgrades

If you do more than a few cruises, chances are you will at times be offered an upgrade. Generally upgrades fall into a few categories:

• Upgrades at discounted rates
• A promotional offer
• Complimentary upgrade
• Last minute upgrade offer at time of sailing

Usually the first reaction when offered an upgrade is elation over your luck, but don’t jump at that offer right away. There are a few things to consider so be sure and ask some questions.

If you’re being offered a stateroom upgrade ask if the usual category perks are still included with the upgrade. They can include complimentary spa use, a special restaurant, preferred seating at shows, preferred boarding to tenders. Often the upgraded does not include those perks and you need to consider if the change in stateroom location alone is worth a little extra room?

Additionally, often the cabin upgrade is in a less desirable location. Could it be noisy being near to an area that operates late into the night? Is it still on one of your preferred decks? Be sure and check a ship map to see if it is next to a void where there could be machinery or elevator noise?

There is also an upgrade offer called “run of the ship”. What that means is you will be guaranteed a specific stateroom upgrade but you’ll learn about the location when you board the ship. That means the stateroom could be on a lower deck, a high deck, all the way forward or include an obstructed view. While you can save money in booking by accepting “run of the ship” staterooms, that is a decision you consider in relationship to your budget and if the savings is worth the possible inconvience. In the case of the upgrade there usually isn’t a reduction in fare.

If you’re looking for an upgrade there is really no way to understand how to go about getting one. Your chances do improve as your cruising status improves with a favorite cruise line and that is a function of the number of cruises you’ve taken. Also remember the cruise ship knows a lot about the desirability of specific staterooms onboard and they always expect to get some advantage out of the offer. Sometimes it’s increasing your loyalty to the cruise line and that’s the real win-win!

If you’re picky about cabin location, understand you usually cannot choose the location of your upgrade stateroom or suite and if you’re excited about the upgrade for the increased perks, you need to know that most cruise lines don’t offer those perks with free or discounted upgrades from standard class cabins. Make sure what that offer includes.

Just like all transactions, in upgrading the caution “buyer be ware” is good advice.