Cruise Terminal Investment Evaluation Methods


Cruise Terminal Investment Evaluation

Cruise lines and specialized cruise terminal operators, have started investing more consistently in port facilities, either in concessions or with greenfield projects. The goal is to cope with the constant growth of the cruise industry and to efficiently support the development of the fleet operations, the core of the business. Ports and terminals, part of the cruise itinerary, must be equipped with appropriate facilities and infrastructure able to offer to cruisers and ships all the services they need. It is necessary to constantly maintain high standards of service provided by the terminal and by the activities in the surrounding areas which benefit directly from the cruise business. Hence, a combined effort and synergie with local economy has to be considered as one of the primary key factors in developing a successful business plan

Main Terminal Facilities and Features

As per the World Association for Waterborne Transport Infrastructure ( terminal development shall cope with specific infrustructure requirements and functional design. Terminal infrastructures and services provided to cruise lines could vary according to the location and types of ports: home port (turnaround), port of call (transit) and interporting; and according to the dimension of the cruise vessels berthed at wharf or dock.: mega cruises (>5,000 pax), super cruises (3,000 – 5,000 pax), big cruises (1,500 – 3,000 pax), mid-sized cruises (500 – 1,500 pax) and small cruises (< 500 pax).

Main terminal features and infrastructures include:

Waterside drivers design. Aspects to take into consideration:

  • Vessel characteristics such as dimensions, tonnage, overhanging decks, mooring and fender systems
  • Navigation and berthing (channels, turning basins, prevailing winds, sea level in port-tides, weather conditions, wave and current, berth length, etc.).

Terminal premises. Building features based on their use, longevity, adaptability and relationship within the local context.

  • Temporary terminal with minimal needs where a building is not required
  • Convertible building with other primary uses of the building itself
  • Purpose-built terminal which addresses the full needs and functionality of a cruise vessel
  • Mixed-use terminal which adds other uses like shopping and commercial areas.

Apron area. Space for operations of stevedoring (line-handling, baggage movement, processing of wastes), provisioning, emergencies, etc.

Utility services. Features with considerable impacts on the wharf design such as: potable water, communications, bunkering, sewage & biosolids, garbage and ballast water.

Ground transportation area (GTA). Space next to the terminal and the quay operational area where passengers arrive from all modes of transport. Following spaces are required:

  • Coaches Park for shuttle and tour buses
  • Taxi ranks with walkway for pedestrians
  • Kiss and ride: short stay parking area for people accompanying the passengers
  • Parking: for employees, ship agents, porters and all people working.

Security facilities and standards as per International Ship and Port Facility Security Code.

Spaces inside a Cruise Terminal. Embarkation and Disembarkation

  • Entry: some will have a pre-queue for security (e.g. back-to-back passengers)
  • Bag drop and withdrawal: includes area for compartmentalized baggage access and conveyors
  • X-ray luggage scanners
  • Check-in area: linear arrangement of counters.
  • Waiting area: ample seating and circulation area
  • Boarding corridor: separate the embarking & disembarking flows.

Gangway. Critical link for passengers between ship and terminal There are several alternatives designs for gangways:

  • Fixed gangway: cost effective solution with a limited number of passenger doors
  • Fixed telescoping gangway: fixed at the building and adjustable to match vessel doors
  • Mobile adjustable gangway: not fixed either the building or vessel
  • CIQP: Customs, immigration, quarantine and police spaces. Each country has its own regulatory criteria.

Meet & greet place: the last space in the terminal before exiting.

Cruise Terminal Investment Evaluation Methods

Investing in a terminal is a complicated and rewarding endeavor. To be successful investors must determine the financial interests of all the stakeholders involved. Debt and equity balace shall be estimated carefull through a reliable cruise terminal investment evaluation.  The lenders (from commercial, investment banks to real estate investment trusts) target a reward for the risk of landing through a high ROI: cash flows shall be significantly higher than the debt service and the value of the terminal significantly greater than the loan amount. The owner of the terminal, on the other hand, targets a high ROE based on significant income return (operating cash flow) or appreciation return (an increase in the value of the terminal).

The annual cash flow calculated to analyze the profitability of a terminal real estate investment, is the net operating income (NOI) which is equal to all revenue generated by the terminal, minus all operating expenses.

Main streams of revenues

  • Cruise passengers head tax/tariff
  • Direct revenues from retailing
  • Harbour dues and fees
  • Revenues from providing ship services like water, collection of sewage and waste, etc
  • Licenses for buses, taxis, water taxis, booths and shops
  • Renting of land for shops and food and beverages
  • Crew facilities including phone and internet services
  • Security fees per passenger.
  • Parking fees (particularly at a home port)

Main sources of costs

  • Operating costs
  • Maintenance of the building, the GTA , the waterside facilities and infrastructure
  • Fees to operate under government concessions to third parties

For the ROI investment model, used mainly by the lenders, the cash flows produced by the terminal on annual basis, are discounted at a weighted average cost of capital that includes the required returns to both debt and equity. The discount rate is the minimum required rate of return (hurdle rate). Positive cash flow, are discounted at the defined hurdle rate, from year one through the end of the holding period of the terminal. Then the negative value of the investment (debt and equity) at year zero is added to the positive discounted cash flows. The final sum is the net present value (NPV) of the project. If the NPV is greater or equal to zero it indicates a positive investment.

In the ROE model, used by the owners for cruise terminal investment evaluation, the primary concern of the equity investors is the return on their equity investment. Hence, they don’t look at the cash flows of the entire terminal, rather they look at the cash flow to equity after considering the debt service. In other words the annual cash flows after debt service is the NOI used in the ROI model, less the obligation to the mortgage lenders, the annual debt service. It’s recommended to discount equity cash flows at “after tax equity hurdle rate”. In the ROE model, investors shall also take into consideration while calculating the profitability of the investment, the equity reversion gained at the end of the holding period of the terminal. To estimate the market value of a terminal, out of the three possible methods (market comparison, cost and income approaches the market comparison approach is the most useful and applicable to the needs and the logic of the investments. The method is based on researches of terminals with comparable physical characteristics to determine reliable value indicators of the real estate. When the subject terminal and comparable properties differ, the selling price shall be adjusted according to the market reaction to those differences.