Slump catches up with megayacht sector

Despite growth in the very high end, orders for the segment as a whole were down 25 percent in 2009

After nearly two decades of stellar growth, the world’s megayacht industry finally experienced a comeuppance of sorts in 2009, joining the rest of the recreational marine industry in what undoubtedly has been the worst economic downturn since World War II.

The megayacht sector suffered a 25 percent decline last year, according to Showboats International magazine’s recently published Global Order Book 2009 report. The GOB counts all power and sailing yachts 80 feet and up that were on order or in production as of Sept. 1, 2009.

The magazine, which last September was purchased by the British megayacht magazine publisher Boat International Media, says the total order book fell precipitously to 762 units. That decline comes just a year after the 2008 GOB report showed a record 1,016 units on order or in build.

Not surprisingly, the so-called “production” side of the megayacht market – yachts 80 to 100 feet that more often are built for dealer inventories, not end-user orders – was hit hardest. Orders in this category fell 31 percent to 278 units from 403 in 2008. However, orders for superyachts over 200 feet held up surprisingly well, actually increasing 16 percent to 71 units from 61.

GOB’s tally is based on information submitted voluntarily by more than 140 yacht makers around the world. The information also is checked against a database of yachts compiled by Boat International Media.

Failing businesses

The megayacht slump led to the same kind of upheaval that has beset the rest of the boat industry, with several major megayacht builders either filing for bankruptcy, rushing to find infusions of capital or shutting down altogether. As was the case in the smaller-boat categories, megayacht builders that carried large amounts of debt and/or were poorly capitalized suffered most.

Even the world’s second-largest yacht builder, Italy-based Ferretti SpA, wasn’t spared. The builder of nine yacht brands received roughly $855 million in emergency funding from outside sources to help it stay afloat. That figure includes more than $90 million proffered by company chairman Norberto Ferretti alone. The investment, according to Ferretti, has strengthened his company for what he predicts will be a return to growth in 2010.

“We’re extremely satisfied … and we think that the bulk [of the downturn] is behind us,” he says.

The list of builders that shut down includes such well-known names as Broward Marine, in Fort Lauderdale, which suspended production in fall 2008 and, according to a company spokesperson, remains dormant while awaiting improvement in the economy. Royal Denship, the Danish megayacht builder, shut down production last April after entering bankruptcy. And New Zealand’s Sensation Yachts also ceased production last August after entering bankruptcy liquidation in Auckland, New Zealand.

These are but a few of the nameplates that have disappeared.

Lost wealth

What led to such a sudden reversal of fortune for the segment that had seemed immune to the overall marine industry downslide? Experts say a number of factors were to blame – chief among them the mid-September 2008 failure of U.S. investment bank Lehman Brothers. The Lehman collapse triggered a global financial crisis, spooked wealthy buyers and led to a massive wave of order cancellations. In some cases, customers walked away from deposits totaling millions of dollars.

It wasn’t just that these buyers got conservative with their money in the face of difficult times. For many of them, the banking crisis and ensuing decline in asset values around the world cost them dearly.

The world’s wealthiest individuals suffered huge declines in wealth in 2009, which has dramatically reduced the base of buyers qualified to purchase yachts over 80 feet, according to Anton Francesco Albertoni, chairman of the Italian marine industry group UCINA. In fact, Albertoni cites figures showing the number of individuals with investable assets (financial assets not including primary residence) in excess of $1 million fell by 14.9 percent, while the number of individuals with $30 million in investable assets declined by 24.6 percent.

A turn to brokerage

The industry’s stunning growth in the years leading up to the downturn also was a factor, making a correction inevitable, some say. “The last five years saw a boom … that was, perhaps, unsustainable,” says Showboats International editor Rebecca Cahilly. “The economic crisis has very quickly weeded out companies that were not financially stable or were too highly leveraged.”

That rapid growth – the worldwide megayacht fleet exceeded more than 5,000 in 2009, according to a Camper & Nicholsons survey – also led to a huge increase in the number of brokerage boats on the market. Growing competition with this fleet of existing yachts has cut deeply into orders for new megayachts, industry watchers say.

“In my opinion, the decision to buy a brokerage yacht versus build these days is in favor of brokerage,” says Bob Saxon of Bob Saxon Consulting Services in Fort Lauderdale. “Although the bottom hasn’t fallen out of the market from a pricing perspective and we don’t see widespread fire sales, there are a great number of recent vintage, pedigree yachts with very attractive pricing on the market and that can’t help the sales efforts of builders.”

Jim Ruffolo, president of Burger Boat Co., in Manitowoc, Wis., agrees, claiming the long lead times on megayachts (often two years or more), encourage many buyers to turn to the brokerage market.

“People have choices and, perhaps because of their uncertainty in the economy and a longer lead time to build new, some do talk about having more instant gratification,” says Ruffolo. “That said, we believe there will always be people who want to build new, regardless.”

A call for innovation

While admitting that competition with brokerage yachts will be a challenge for yacht builders, Ferretti says that places a challenge before builders to differentiate their products through new designs and innovation. “It is exactly in this period that builders need to invest as much as possible in innovation, new technologies, design, research and, very important, service to the client in order to be competitive in the market, which is what our group is doing,” he says.

Given the wealth of the typical megayacht buyer, the world’s credit crisis had a minimal impact on the market, according to experts. “It’s not been raised as an issue for us with perhaps a few exceptions,” says Ruffolo.

That may be true for builders serving the megayacht industry’s upper end, where boats are priced at $15 million or more and buyers have access to vast financial resources. But it’s not so for buyers at the lower end of the spectrum, says Saxon. “I think the tight credit market is affecting the $3 million to $10 million buyer much more than the individuals in the 50-60-meter market,” he says.

While megayacht industry watchers acknowledge the challenges builders face, many are decidedly optimistic about the future, especially as they look toward 2011. Obviously, the usual caveats apply and presage an economic recovery that, by early February, appeared to be gaining strength.

“I think overall it would be wrong if I didn’t say it’s still slower than it was in better economic times,” says Ruffolo. “That said, the encouraging thing for us is, over the past six weeks, there’s been a real nice uptick in inquiries that have come from new sources, not to mention people following up on things that we’ve been working on that may have been parked for a while.”

Given the long lead times involved in building megayachts, many manufacturers still are completing yachts that were ordered two or even three years ago. What concerns many of them is that new orders had all but disappeared by the middle of 2009.

“The order book has not quite yet felt the effects of the recession hangover,” says Saxon. “But it’s coming.”

Hopeful trends

There are encouraging signs, however. The fall boat shows suggested potential buyers are returning to the market, although new orders have yet to rebound significantly. One predictor of new and brokerage yacht sales – the yacht charter market – has been showing signs of renewed strength. “Research shows that 70 percent of all [brokerage] yacht purchasers or new-build clients have chartered at least once before making the big decision to buy or build,” says Saxon.

Still, no one expects an immediate return to the heady days of 2007 or early 2008, when the megayacht market peaked. “We think the worst is behind us but still believe we all have a tough 2010 ahead of us,” he says, adding that he’s more optimistic about 2011.

Economic uncertainty remains a huge concern for many in the industry, as markets around the world adjust to the impact of the banking crisis and economic effects of government stimuli by some of the world’s leading economies.

“I believe the megayacht market is strictly linked to the international economy, which like the American market seems to be on an upswing,” says UCINA’s Albertoni. “However, particular attention needs to be paid to emerging markets, such as China and Brazil, which could be pleasant surprises.”

Megayacht builders also say the spoils will go to those builders who innovate and give special attention to that core group of buyers who simply can’t live without their yachts.

“After the challenges of 2009, we now find ourselves facing a market that is deeply different from that of the past few years,” says Ferretti. “The market is returning to how it was four or five years ago – namely as a market of clients who are lovers of cruising, very keen, skilled and, consequently, attentive of both quality and on-board comfort.”

This article originally appeared in the March 2010 issue.