1.

Looking beyond the current boom, and at the underlying market structure, how structurally attractive
is the market for expedition cruises? (30 pts)
I analyzed the expedition market based on the Porter’s five-forces principles.
First of all, in order to enter the market, one should invest on ship fleet. Even though building a ship takes
3 years and costly (($120m to build + $15m for polar conditions), buying a second-hand ship (for $10M
to $50M) is possible and financed by boutique merchant banks. Also, chartering is a common option in
the market. It is always possible to contract hotel operations to third parties as well.
In the context of preserving the natural habitat of the Polar seas, companies need to comply with
international regulations and polar conditions. On the environmental regulations side, restriction to the
number of the passengers who disembarked together in Antarctica and restrictions to the usage of most
polluting fuel oils are challenging and costly for the companies. We must add that Hurtigruten, using firs
hybrid ships among competitors, not using single use plastic and heavy fuel oils (add $20m to annual
costs), puts emphasis on the need for all cruise operations to improve their environmental performance.
This would make hard for other companies to balance such excessive costs.
On the other side, since 70% of the passengers are coming from travel agencies, hard investments are
made to travel agencies and due to the 10% commission taken from the realized price by the travel
agencies, companies also invest on online selling channels. The price sensitivity is not too dense, most of
the passengers are wealthy but they tend to trust on previous passengers’ comments or their own previous
experience (37% repeat passenger), so reaching to the passengers and persuade a passenger is not easy.
However only 5% of the passengers travel the same destination so to be able to benefit from loyalty, it is
wiser to be present on more than one route. The increase in demand from Chinese passengers (40%) -
20% of Antarctic passengers are Chinese) and the overall growth of expedition market (about 15% per
year through 2024) is appealing too.
There are several segments (high end luxury, mid-luxury, low luxury (premium)) in the market the price
competition is not high other than the discount (20%) applied in order to fill the empty berths and the
companies’ differentiation approach is based on luxury, different routes and services. The prices start
from $38.000/PCN (Ponant) and goes to $1000 (Lindblad), or around $629-$849 (Hurtigruten). However,
the potential growth of the market as mentioned above, may affect this, if new entrants come to the
market and try to steal new customers with their prices. Also, according to Exhibit 8 we may see the
booked ships and projected future market capacity. The increasing ship numbers and the growing capacity
together, the competition would be fiercer.
The dependency to the shipyards and ship-designers is a challenging situation on the supplier power side.
This dependency costed Hurtigruten to cancel a 2018 season and offer full refunds to guests who were
booked because of the late delivery of Amundsen. Also, it is difficult to find competent captains and top
officers which have big role on such a regulated area, alongside with the experts for lectures, labs and
natural activities which are also main activity drivers for the expedition market. The employees’ total
wages are 10% of the total cost (15% for Hurtigruten). It is not too much; however, it may be critical if it
increases.
Overall, the cost of entry may be supported in many ways and we may say that the market may be
competitive and is attractive due to the estimated growth, but have challenging sides. The market leaders
are in competition of luxury (like having helicopters and submersibles) but the possible segments cannot
be foreseen by the observers, so offering differentiation other than luxury may be threat to the market
leaders. In relation to the threat of substitutes, although we do not have information, I think an innovative
idea concerning the environment which is not as costly as the cleaner fuel expenses or the cost of polar
necessity additions to the ships, may be advantageous. Also, I want to add that the activities offered by
the expedition cruises are all similar and any other cruise company that find different needs of passengers,
(or create a scarcity by providing a different value), may have a competitive advantage in the market. I
think Hurtigrutean has a competitive advantage in terms of activities.

2. How does Hurtigruten’s cost structure in expedition cruises compare to the cost structure of a typical
expedition cruise company like the one shown in Exhibit 7? (35 pts)
I have made 4 different calculation to see the impact of 20% discount and the price tag of $1000 for the
most luxury berths.
1- AVG (629; 849, 1000) and 20% discount is applied to all tickets ($661).
2- AVG (629; 849) and no discount applied ($739).
3- AVG (629; 849) and 20% discount applied only to %15 of the tickets ($717).
4- assumed that 5% of the sale are for luxury berths, 85% are the average price is AVG(629;
849) and discount applied only to %15 of the tickets ($726).

The results are not too far from each other. But I would like to follow 4 th option, as the most probable of
the 4 options. Other than that, the information from the case along with the assumptions taken into
account, may be found in the attached Excel file. (see Exhibit 1)

If 5% of the sale are for luxury berths, 85% are the average price is AVG(629; 849) and discount applied only to %15 of the tickets
90%CAPACITY 90%CAPACITY 75%CAPACITY 30%CAPACITY 90%capacity 75%capacity 30%capacity
150 BED EXPEDITION CRUISE 500 BED HURTIGRUTEN CRUISE HYBRID SHIP ADJUSTMENTS for HURTIGRUTEN
Dollars per PCN
Item
Realized price 1463 726 726 726 726 726 726
Operating costs
Travel agent commission 146 73 73 73 73 73 73
All crew 103 57 68 170 57 68 170
Food and beverage 92 55 55 55 55 55 55
Fuel 89 33 39 117 26 31 78
Other operations 139 49 59 176 49 59 176
Marketing 151 50 60 179 50 60 179
General & administrative 332 120 143 430 120 143 430
Total operating costs 1052 435 497 1201 429 489 1162
EBITDA 411 290 229 (475) 297 237 (436)
Depreciation 250 125 150 450 125 150 450
EBIT 161 165 79 (925) 172 87 (886)
TOTAL(* # of beds) 24.150 82.654 39.401 (462.589) 85.911 43.310 (443.045)
EBIT/Sale 11% 23% 11% -128% 24% 12% -122%
EBITDA/Sale 28% 40% 32% -65% 41% 33% -60%

According to the results, the EBITDA/Sales are showing us the difference of the costs incurred when the
ship is 150 bed and 500 bed. The price of Hurtigruten is 50% cheaper than the 150bed expedition cruise’s
but it manages to be much more cost effective, by offering a certain portion of less luxury. The economies
of scale on the passenger number provides Hurtigruten to increase the costs per passenger. (According to
Exhibit 3, the EBITDA/Sales ratio of the whole company is 19,5% which is much less than the above
calculated one.) Even though when the depreciation is taken into account the EBIT/Sales incrementally
decrease, since the ship is bigger and the investment amount is more, the depreciation may not totally
reflect the cash situation of the company, which is very important and seems to be more at the end.

Also, we can see the ratios increasing when Hurtigruten is using hybrid ship, which would help the
company to be sustainable and the perception of the Hurtigruten cruises would mor positive in terms of
environmental concerns.

3. In the market for expedition cruises, should Hurtigruten continue to be a polar specialist? Or should
it expand beyond polar regions and operate extensively in warm waters? (35 pts).
Hurtigruten’s knowledge on the Polar expedition market is not comparable to warm waters. The Polar
area is still growing and there is also a growing passenger flow from China and this would be a good
opportunity to expand in the polar market. However as mentioned before, the growing market may lead to
new competitors or other competitors to expand. We can see from Exhibit 8 the current and projected
future expedition market capacity and number of total ships based on order book (Since building an
expedition cruise takes almost 3 years, the projection goes on until 2024). On the other hand,
Hurtigruten’s ability to conduct both land and on-board activities at the same time, which is a benefit of
having a 500bed ship than a boutique one, is providing an undeniable advantage to the company.
However, we must consider Silversea Cruises that are converting its ships to be ice-worthy, with 2 new
600beds and 2 new 1000beds ships. Different from other players, Silversea Cruises does not have loading
dock which enable the company to have more room for on-board activities and to differentiate its-self
from others and Hurtigruten. The casino may seem conventional but may be appealing for the
unpredictable segments and may be for growing Chinese passengers.
The company has invested hard on the sustainability and to reduce environmental concerns. $20m
additional annual costs to stop using heavy fuel oils and $7m additional cost to the total cost of building a
ship for polar necessities, granted a reputation over all. It would be a waste to leave all the previous
efforts and the reputation. Besides, because of the government independency due to the coastal
agreement, Hurtigruten would devote seven ships to the contracted route, through 2030. Also, this time it
was not the only player but the government has made another contract with another company which push
Hurtigruten to consider retaliating by adding more ships to the coastal routes in its own (independent
from the government), with 3 large ships without the condition to stop at every port (unprofitable ones).
That makes the company not to be able to go away for at least 7+3 ships and until 2030.
I think, the polar market is indispensable for now. The company has a great cost advantage and should
use it in the polar market. Meanwhile, the company should work on increasing its capacity, by benefiting
of the growing market but should improve itself considering that some others are investing on
technological developments and may replicate its cost-efficient strategy. (The company’s digital
developments on 2019 to perform maintenance more intelligently, to improve fuel efficiency, to have
stronger online connections are strengthen its strategy.)
Warm-water expeditions currently made up about 45% of the total market for expedition cruises and the
estimated growth on overall capacity of the expedition market is 15% per year until 2024. This makes a
great empty routes and excessive capacity to a new entrant. However, the prices per passenger cruise
night of warm waters are much lower than the prices of the polar market. Africa has the highest price tags
and According to Exhibit 6 in Mediterranean, apart from “others” with a capacity of 18%, Ponant has the
highest capacity with a share of 82%; but Ponant is not a comparable to Hurtigruten neither in terms of its
price nor the luxury segmentation. In the same area (Mediterranan) they could expand to Europe as well.
Actually, Europe seems much compatible when we consider the Scandinavian style and Nordic menus.
Asia/Pacific region may be also attractive because of the growing demand from Chinese passengers.
Ponant has the highest share in this region and Silversea and Lindblad comes with 19% and 9% share.
Even though the capacity is not too much, it would increase depending on the Asian passengers’ demand
and with the market growth.
Australia has few players again with Ponant and Silversea. However, the services or the prices are not
comparable and the company may create a competitive advantage by appealing passengers.
On the other side, Antarctica’s regulation restricting the number of disembarked passengers at once, does
not exist in warm waters and, may be advantageous if differentiative and special to the area activities are
offered to the customers.
Anyhow, some changes in the style, in the menu, the training of the crew due to the different cultures and
expectations of the customers would be inevitable. These would come with its cost but, without the
additional polar necessity expense, some ships may be dedicated to one or two areas. According to
Exhibit 5, the highest rate of capacity share, 22.2%, Hurtigruten is expected to have 101.340 passenger
capacity,
However, this would not be the only cost to bear. The management and still developing firm
infrastructure is specialized on polar area and Norway. The value chain of the company, should be
restructured and by keeping the cost advantage, the company must develop and deepen its strategy to be
able to catch healthy share to meet the costs and geographical and cultural expectations.