War has broken out in the cruising industry - and to the victor will go leadership of one of the fastest-growing parts of the holiday market.
Battle commenced before Christmas, when Carnival, undisputed king of the market, launched a bid to sink the merger agreed between smaller rivals P&O Princess and Royal Caribbean the previous month.
So far, the fight has been restricted to verbal skirmishes but the battle is about to get serious. On 14 February, P&O's shareholders are due to vote on the merger, before which the onus is on Carnival to come up with a decent offer, without the preconditions and get-outs that hedged its initial approach.
Even the most hard-bitten gamblers would be reluctant to bet on the outcome. Carnival would certainly prefer the merger not to go ahead. RCP, as the merged company is provisionally known, would leapfrog Carnival to become the biggest operator, measured by number of berths. That is not a slot Carnival will give up lightly.
Carnival can take credit for creating the market in its current form. Its strategy of targeting ordinary Americans has fuelled the spectacular industry growth in the US - an average 8.4 per cent a year for the past two decades - and Europeans are now taking to the seas with equal enthusiasm.
Carnival has grown even more rapidly. Over the past decade, it increased its berths by an average of 11 per cent a year and now carries more than 2.6 million passengers a year. Earnings growth over the same period has averaged 15 per cent a year.
P&O Princess and Royal Caribbean have both been significant beneficiaries of the growth in the market. In 2001 alone they added five ships between them but both were still reporting bumper occupancy levels. At least until 11 September, that is. Like the rest of the travel industry, cruising suffered a big drop in demand in the wake of the terrorist attack. P&O alone immediately lost around 20,000 bookings.
There are now signs of recovery, although only at the cost of big price cuts. Earlier this month, Carnival said bookings in the last weeks of 2001 were running 45 per cent ahead of the previous year but total bookings were still below last year's level. Occupancy levels for the first quarter are expected to be 92 per cent, compared with 99 per cent this time last year.
All three companies are confident this is just a temporary blip in the otherwise smooth progress of the cruising market.
They had better be right: P&O and Royal Caribbean have 14 ships, with 30,000 berths, on order over the next three years while Carnival is to take delivery of a further 14, offering more than 34,000 beds.
While some deliveries have been delayed after the terrorist attacks, for the industry as a whole there will still be 63 new ships on order over the next five years, increasing the number of beds available by 7 per cent a year.
One thing all three companies are agreed on is that the increases in capacity will quickly fill up. They may be right: only 12 per cent of Americans, and less than 2 per cent of Europeans, have been on a cruise but more than half would like to. It was those growth prospects, rather than thoughts of cutting costs or shedding jobs, that prompted P&O Princess and Royal Caribbean to get together.
When the deal was announced, the two companies pointed to the great geographic fit. As its name suggests, Royal Caribbean's strength is in the tropical islands while P&O operates more in the destination cruising market to places like Alaska. Royal Caribbean is relatively stronger in the US and P&O in Europe. A joint venture, agreed at the same time, was designed to address the relative weakness of both companies in southern Europe.
That joint venture has now become the key point of contention between Carnival and RCP. If the merger is wound up - say because Carnival acquires P & O - it could cost as much as $400 million. That is a sizable poison pill for a bidder to swallow.
P&O last week made it plain that the charge can be avoided if the bidder simply delays the completion date for a takeover until after 1 January 2003.
That was part of its campaign to persuade Carnival to put a decent, unconditional, bid on the table. It has set Carnival a deadline to comply by Friday, which would allow P&O time to consider both offers and make a recommendation to shareholders before the February meeting.
Carnival may prefer not to abide by such an artificial timetable but the onus is on it to move before 14 February.
Whether it makes a move or not, the industry is in for a long spell of stormy weather.
