Cruise Industry Conversations: Pierfrancesco Vago

If you look at the cruise industry as a whole, as big as it is, it's still really in its infancy, isn't it? Yes, of course, Peter. I mean, we definitely see there is a change. I call it the second republic of cruising in the sense that cruising as we understood before, the Love Boat type, where in the general thinking it was for old, rich people where you have to put a black tie every night, extremely boring — all that is changing. I mean, we've seen the new prototypes, the new tonnage, the new hardware, which is of course three times the size of what the old ships used to be, and they offer so much choice, so much entertainment, so the ship is becoming a destination. The ship is actually no longer seen as a cruising vacation per se, but is actually a vacation, an alternative choice to other types of holidays. And of course, with the value for money and the five-star level of hotel that the cruise experience offers, the new type of ship offers you value for money that makes cruising so attractive. The budget, the bottom line is so much better than any other resort or even hotel land-based. And then if you look at the sheer percentages of how many people have actually cruised, it's still so small, very small. I mean, a cruise, if we look at the whole world passenger-wise, we're talking about 25 million. If we look at Europe, we're talking about 6.5 million out of a 500 million potential population. I mean, we're talking about a couple of points. And then China, of course, there is the potential of China. China, again, they love to travel, they love duty-free, they love shopping, they love to see foreign countries, and the ship gives them the opportunity of living their experience like a foreign food, foreign entertainment. And of course, with Europe being harder and stricter on visa issues, it becomes very attractive again to have cruising as a holiday, as a foreign experience per se. So great potential there to penetrate the market. And of course, the great resilience of the cruise line industry is that if there's a problem somewhere in the world, you can literally move your assets. Geopolitical issues are important nowadays all over the world, especially in Europe. We saw a couple of years ago, last year, the Arab Spring in Northern Africa. Ships used to go to Northern Africa, they stopped going, so they guarantee — there is planning to be done, but at the same time, ships can be moved at the last minute, and that guarantees in the public opinion, in the consumer perception and understanding that ships are an asset that moves and therefore avoids all those geopolitical issues. You're somewhat protected that way. Of course, I always say that on top of it, ships have double the protection even of planes, because you go through a terminal which is like the port, the airport, so you have a first screening of security there, and then you have a second one naturally as you enter the ship, so double the security, which of course guarantees a certain environment, a sealed environment. Then ships move and we offer holidays, we are here to entertain, you know.

Well, the demographic — I call it a 0 to 100 demographic, as far as age potential client and also pockets. Cruise ships operate 365 days a year, they go through seasons, they have varied lengths of itineraries. And of course, with all the offering that the ship gives and the experiences it offers, you reach really all types of ages. So we've seen the demographic coming down tremendously, to young couples, newlyweds, families, young children, and of course people of a certain age who can afford much longer itineraries. Nowadays, people at work don't have much time, so it's the seven nights, and that is where you really hit the larger demographic potentially going experience.

Well, MSC first of all is an industrial brand. We have a long tradition of seafaring, in the family, and we have over 500 cargo ships, so that is our real soul: commercial shipping. We've been in this business for 300 years. And also we are very different because we are privately owned, so there is a family that owns the corporation. And we just built the largest cargo ship in the world? Yes, actually quite a few of them. You know, a container, it's called TEU, is the size that identifies a container, so we have the latest ships that have been christened, they're in excess of 20,000 TEUs. And of course the advantage is that you can leave them under the sun and they don't complain, so that's exciting, and they don't eat a lot. Not at all. So we have this tradition of shipping. We are the second largest shipping company in the world. We are a family that understands shipping, that eats and sleeps and breathes shipping. And of course we've been attracted many times to enter different fields, but that's what we know, we stick to what we know. So shipping under different forms: whether it's ferries, whether it's fast ferries, whether it's bulk carriers, whether it's containers. And 10 years ago we decided to develop the cruise division. We started with an old ship called Achille Lauro. It was — I know the news, it sank, yeah, it sank. We bought that company as it was about to go bankrupt, we saved the company. And then we came in 2003 to the realization that the business had changed, and that's when we decided that if we wanted to stay in this business, if we wanted to grow, if we wanted to build a brand, then we needed to invest. And that's how we invested tremendously, the first six billion euros, so in excess of seven billion dollars, to build the first 10 series of ships, three different prototypes. And we grew from 40,000 passengers to 1.7 million passengers. So we grew in Europe, you're correct. So this is our tradition, this is where we are from. We also wanted to offer a different type of experience. We control the product from A to Z in-house, so we have the capacity and capability to fine-tune the product in the areas where we operate: French, German, Latin, or of course Anglo-Saxon. Now that we have grown, now that we have 12 ships, we want to take MSC Cruises with the brand, the industrial brand of the cargo division, to the next level and become global. And that's when we feel we're ready to enter the North American market and bring a different style, different hardware, but of course a different software, so a different experience to the North American passengers. And we'll be doing that starting — we're already doing that with MSC Divina sailing every Saturday from Miami. But we actually built a new ship, new prototype, and her name is MSC Seaside, and she will start operating out of Miami in November 2017. And I think with that ship we will make the MSC brand known in North America for the itineraries and the experiences that we offer that are still European but attractive to the American market. Absolutely. So we will adapt our Mediterranean common denominator to the North American market. I'll tell you a funny story. When I had my first ship sailing out of Miami in 2003, MSC Lirica, I came and I was very proud, very Mediterranean, very Italian, and I brought these oranges from Sicily, and I offered my passengers fresh-squeezed oranges from Sicily, blood red. And of course, you know, I almost got sued because nobody ever saw such a red orange juice. So, are you still serving Sicilian orange juice on this ship? No, no, no, no. So we understood that we have to fine-tune to appeal to the North American taste, and we've done that, but always with an international flair, with the European flair.

11. So we have more than any other cruise line. Yes, because we are the youngest, and so we need more tonnage than our peers. So we have 11 ships, and that will mean that we'll double the capacity of MSC Cruises within the next six years. We've ordered so many cruise ships that if I wanted to order a cruise ship at a shipyard now, they'd tell me I'd have to wait five years. Thanks to you. But that's what makes this business and this industry very healthy. You are correct, Peter, in saying that all the yards are fully booked and there are lots of ships coming on stream every year. But if we look at the penetration of the market, so we say 25 million, which in the five billion potential customers in the world is nothing. And when we're looking at all the yards being fully booked, we're talking about three yards mainly, because these are very complex ships. The know-how is European, so we have a German, a French — where we are today — and Italian. And even when they're fully booked, that means they can deliver four to four and a half ships a year, which again the growth is very sustainable because it's a maximum of 2%. So that's what makes it so viable, this industry, with the growth and the years we have had. So what you're really saying with all due respect to that movie Field of Dreams: if you build it, they will come. That's it. We saw that demand is stimulated by the offer. So every time there is a new ship being put on stream, we see that it fills up and everybody wants to be on it. There are so many features. We are designing today a ship that will have to be attractive in 10 to 15 years time, so you can imagine the innovation, not only for the environment but also for the entertainment, for the food, for the experience, for the holiday-making. So very advanced, lots of technology, lots of different things that make it very attractive to the consumer and to the holiday-makers.

Well, we just signed a partnership with a very important brand, Cirque du Soleil, and we have an exclusivity with them. So we actually designed the feature on the ship with the volumes. It's a lounge at the end of the ship, so we have these huge windows and these huge volumes and height of the ceilings, which is a peculiar and difficult engineering task for a ship. So that we can offer an attraction like a Cirque du Soleil salon on board of a ship, which is unique. And that will be quite something. But there are so many others, of course, and innovation is what drives us in the experience that MSC wants to offer.

Well, I look into details, and sometimes details are what drive my passion and my team's passion. So sometimes I walk on other ships and I don't see the same details, and that drives me crazy, because it's important to give the wow effects to the passengers. But that shouldn't distract attention. The holiday, the experience, the hotel, the comfort is also being given by the materials, the style, what is offered. And of course, details are a big common denominator in the experience.

Well, infrastructure is a limitation to the size of ships. We are building ships that maybe can only operate in a part of the world because you have to build a port that can handle that size of a ship, but that limits the operation, the capability of a new itinerary, because that ship can only operate there. Or you can build big ships that are wider, taller, with a certain length constraint, so that you can operate more commercially everywhere in the world. And that is my vision, because of course you go to Europe, you can't just extend the port; there are old cities, there are a lot of political problems or issues that cannot facilitate such infrastructure developments overnight. So I think ships are big, yes, you're correct, but we somehow reach the limit of what we will be seeing in the next few years. And you're happy? And I'm extremely happy because they're big enough. I mean, we're talking about a ship that can host in excess of 8,000 souls, so they're big ships — passengers and crew. So they're big. And we look at a new prototype that will go up to 10,000, so it's enough to handle that? Nothing? Yeah, that's a small town. That's it.

Thank you very much. Thank you. Thank you.