How do you pay for a cruiseship?

[sblahars]

I have a question that is more on the business end of the cruise industry. When a cruiselines places an order for a cruiseship, how do they pay for it? Obvioulsy I know they use money, but when you order something that costs the better part of a billion dollars, what is involved?

 

Are they paying for the entire ship to be completely outfitted, or just the hull, or the hull plus all the systems, etc?

 

Who is the ship designer, is it a collaboration between the shipyard and the cruiseline, or is it all the cruiseline?

 

Do they pay them right away, or little bit at a time, or is it like a car where they make monthly payments?

 

I wonder how much they have to give the shipyard just to begin. What happens if they back out, then what?

 

What kind of warranty is there, or is there even such a thing?

 

All of these questions have been brewing in my head for a while, and I just thought someone might know. Any thing interesting I didn't I would also like to know.

 

Thanks

[BobBeaSea]

An interesting question. I am going to make some guesses and assumptions here. For a cruiseline to buy a ship may not be much different than buying planes. There would be a contract let to the shipyard winning the business. The shipyard would be the prime contractor who in turn would sub-contract pieces of the pie. As far as designers, engineers etc. the cruiseline probably uses a combination of in-house staff as well as third parties. The project would have a total budget with allocations to various other parties, departments etc. included. Like any other contract for capital equipment there would be performance schedules, payment schedules (i.e. down payment, schedule of payments to be made, final payment upon acceptence, bonus payments and penalty payments for non performance as per the contract), mechanisms to handle "changes to specifications, materials used etc.", warranties, aftermarket services etc.

 

It is a huge project but the cruiselines and the shipyards have a pretty good handle on these projects. The cruiseline is contracting for a complete vessel.

 

From an accounting standpoint I don't know how the ships are written down (amortised). I am sure there is a ton of third party financing involved which is another matter itself.

[Arwenmark]

There are some excellent programs on the Discovery channel covering all of this. They are ordering the entire thing, it is done in various places usually it is a collaboration and there are some heavy fines in the contracts for being over time on the completion dates etc. or for Backing out as you put it, the line would lose a LOT of money by backing out if they even could back out.

[sblahars]

An interesting question. I am going to make some guesses and assumptions here. For a cruiseline to buy a ship may not be much different than buying planes. There would be a contract let to the shipyard winning the business. The shipyard would be the prime contractor who in turn would sub-contract pieces of the pie. As far as designers, engineers etc. the cruiseline probably uses a combination of in-house staff as well as third parties. The project would have a total budget with allocations to various other parties, departments etc. included. Like any other contract for capital equipment there would be performance schedules, payment schedules (i.e. down payment, schedule of payments to be made, final payment upon acceptence, bonus payments and penalty payments for non performance as per the contract), mechanisms to handle "changes to specifications, materials used etc.", warranties, aftermarket services etc.

 

It is a huge project but the cruiselines and the shipyards have a pretty good handle on these projects. The cruiseline is contracting for a complete vessel.

 

From an accounting standpoint I don't know how the ships are written down (amortised). I am sure there is a ton of third party financing involved which is another matter itself.

 

I guess it would seem different to me from buying an airplane because an airplane is a production product, meaning not one of a kind. Of course when an airline orders an airplane, they specify different features, paint, etc, but it is still from a production line. A cruiseship really is (or very nearly) one of a kind. Maybe they build a couple sister ships.

 

I guess it is probably similar to building a house (which is a process I just went through). I signed a purchase agreement in a development, gave them a payment, they then built the house with various contractors and I paid for the house (well, my bank paid for the house) when it was completed.

 

I guess I kind of answerd my own question, but I'm still somewhat interested in how long it takes to pay for it. Do they really go there with a check for 700 million dollars, or does it get paid for over time.

 

In other words, how much of the ship does the line actually own when they first start using it.

[springtxbill]

It would be paid for at delivery unless there is some amount of retention to cover any warranty problems that may occur. It is not paid in cash but is mortgaged the same as your house.

[hvsteve1]

I would imagine there could be use of outside funding. One popular method used over the years,have been limited partnerships,which is a kind of closed-end investment fund. Such are commonly used for large capital investments such as planes,bunches of Burger Kings and motion pictures. I would not be surprised to see similar arrangements for ships,otherwise cruise lines would be paying out amounts in excess of their annual profits every time they took delivery on a ship. An example of non-ownership is Radisson,which recently lost the Diamond when the "owners" decided to turn it into a casino ship in Hong Kong and the Paul Gaugin,which,while still on the Radisson roster,has been turned over to Grand Circle which may result in the PG no longer being Radisson in the next few years.

[kitty9]

I got some of this information from a Captain of a cruise ship. Ships are ordered and there is a design team who draws up the plans. There are exterior designers and interior designers. There seems to be a few rather famous interior ship designers who've done quite a number of ships for most of the cruise lines. Most of the building is done in France (Chantiers de l'Atlantique), Italy (Fincantieri), Norway (Kvaerner) and Japan (NYK).

 

Nowadays, most cruise lines are owned by conglomerates. Carnival owns Cunard, HAL, Seabourn, Windstar and Costa. RCCI owns Celebrity. NCL is ownd by a Hong Kong based company called Star Cruises. Crystal is owned by a huge Japanese shipping company called NYK. All these companies have huge amounts of working capital.

 

Payments are done in installments, such as a down payment, another amount when building starts, another when the ship is floated and then a final payment after sea trials. Ships don't have mortgages. Most things on board a ship have warranties. The biggest ones are for the mechanicals like the engines and electric power, computers and such.

 

It's interesting to watch a ship being built. Did you know the cabins are actually pre-fabricated? They look like a bunch of rectangular boxes that are fit into the sides of the ship. Once those are in place, the interior designers start their jobs with what's called soft surfaces. Those are things like mattresses, sheeting, carpeting and all of that.

[Nitemare]

I usually write a check. By the time they realize it's no good, I'm beyond the 200 mile limit and they can't do anything about it!

[Jim Gallup]

Cruise Ships are ordered, designed, built, delivered, and paid for just like large buildings.

The Cruise Line must make a down payment (10% - 20%) and finance the rest with a bank or group of banks. The loan is generally paid back over 10 to 20 years.

For those of you who think that the cruise lines are raking in sinfully huge profits. or who cannot understand why a coke on a ship costs $1.75 when they can buy it at K-Mart for .50, try calculating the interest and payments on a bank loan for half a billion dollars.