Strategies Shifting for Cruise Sales

Lines say they remain committed to agents, but one study predicts agencies' booking marketshare will drop from 90 percent to 60 percent in three years.

By: Theresa Norton Masek

Major cruise lines say they remain committed to travel agents, but signs are growing that they are exploiting newer means of selling berths to keep up with the growth in capacity.

And that means the shrinking travel agency community, which has long counted on selling 90 percent of all cruise bookings, is slowly becoming less dominant in cruise distribution, according to recent studies and interviews.

While few in the industry believe the current agent base commission and override structure will be reduced in the immediate future, they say changes are imminent.

One study predicts that the share of cruise business booked by traditional travel agents will plummet from 90 percent to 60 percent in the next three years.

The 65-page special report by analyst Scott Barry of Credit Suisse First Boston predicts that cruise lines will increase their direct-to-consumer business to 25 percent by 2006, and that online sales will grow to between 12 percent and 15 percent.

“The traditional agency channel will shrink from 85 to 90 percent to 60 to 63 percent by 2006, while supplier-direct (online and telephonic) will expand to 25 percent and online intermediaries will reach 12 to 15 percent,” Barry predicts in his report titled “Changing the Channel: A White Paper on Shifting Cruise Industry Distribution Dynamics.”

But how to explain travel agents’ predicted 33.3 percent drop in market share in three years?

Even though agents have maintained 90 percent marketshare of cruise sales during the cruise industry’s era of explosive growth capacity grew an average of 8.3 percent from 1981 to 2002 growth is expected to be about half that over the next five years.

One answer is that there are fewer travel agencies.

“The future will be impacted by fewer numbers of folks going into the travel agency business,” a trend attributed to airline commission cuts and accelerated by the struggling economy the past two years,” said consultant Jay Lewis, of Market Scope Inc. in Miami.

“Whether they want to believe it or not, an enormous segment of the industry was in the business to get cheap travel for themselves and their friends and were marginal producers,” Lewis said. “We’ve probably washed out all the wannabes and hobbyists.”

Few would argue that there is some truth to that, but Barry’s report takes it further.

“Historically, the industry has been underserved by the traditional agency community, which we believe has served more as a transaction-processing function than a retail sales force,” the report states.

“We acknowledge that there are exceptions, but the pyramid structure (for example, 15 percent of agents doing 80-percent-plus of the cruise industry’s volume) and the number of agencies that have willingly shut their doors since the elimination of base commissions on air business support our stance.”

Others think Barry’s report overstates any impending drop in agents’ share of cruise sales.

“I think there’s a little more gray and texture in the distribution system than Scott Barry alluded to,” said Bob Dickinson, president of Carnival Cruise Lines.

For example, Dickinson said, many traditional brick-and-mortar agencies also operate Web sites. And many owners and agents from the brick-and-mortars are now working out of their homes; some affiliated with host agencies. Those that aren’t can book directly with cruise line res departments.

So some of that growth by online intermediaries is going to some sort of travel agency.

As travelers become more at-ease with using the Internet for research, a growing number will eventually start booking online, especially among the Generation X and younger users, the Credit Suisse study predicts.

Among the “Big 3” online travel sites Expedia, Travelocity and Orbitz Travelocity ranks among the Top 5 cruise sellers with over $100 million in sales in 2002, according to PhoCusWright’s “Online Travel Overview: Market Size and Forecasts 2002-2005.”

While many have long argued that cruise bookings are a more complex sale than a commodity like an airline seat, the Credit Suisse report notes that online agencies are employing tactics like offline customer-service and booking capabilities “in an effort to drive more complex travel.”

The report predicts online sales will grow from 2 percent in 2001 to 12 percent by 2006.

Dickinson recently changed his company’s pricing system, eliminating preferential pricing for online agencies.

“When we had preferential pricing, we basically said these 300, 400 or 500 agencies got special deals, and we made it very difficult for the 30,000 other agencies to compete,” Dickinson said. “Now it’s a level playing field, and we’re letting the customer decide from whom and how he wants to buy a cruise.”

Still, Dickinson doubts direct bookings by cruise lines will reach 25 percent in three years.

“Supplier direct bookings at 25 percent is hefty. Some suppliers may be able to achieve that, but I don’t think the average will,” he said. “I would be amazed if the industry would be as high as 20 percent.”

Carnival sold 13.7 percent of its business directly to the consumer in 2002, and Dickinson said it could rise to 16 percent this year.

“If we didn’t have the 13.7 percent last year, the prices of cruises would’ve been that much lower to stimulate demand to make up the difference,” he said.

While supportive of agents, Dickinson is a businessman who will sell cruises wherever he can. Still, Carnival pays the most commission dollars in the industry.

“Ten years ago we had no capability to take direct bookings, so we’re more set up today, but the cost to do that isn’t significantly different than the costs we’d spend on commissions,” Dickinson said. “We’re just trading one cost for the other.”

However, the Credit Suisse study notes that cruise lines stand to save money on direct bookings in the long run, as the process migrates to lower-cost channels from telephone calls to GDSs to the lines’ own electronic res systems.

“We estimate migration to a 25 percent direct model by 2006 would reduce commission costs alone by $138 million for Carnival and $75 million for Royal Caribbean,” the report states.

Reducing distribution costs, a cruise line’s single-largest expense, is always a goal, according to Credit Suisse.

“Cruise operators will always try to reduce the amount they pay on commission, provided they can get away with it,” said consultant Peter Wild of G.P. Wild International Ltd. in London.

“At the end of the day, however, most realize that travel agents play an important part in the distribution process. “Renaissance Cruises tried to circumvent the agency system and, although an over-ambitious expansion program was probably the root cause of their demise, their unpopularity with the ‘middle men’ certainly didn’t help,” Wild said.

The debate doesn’t bother travel agent Steven E. Shulen of Strictly Vacations in Santa Barbara, Calif.

“I’m not too worried,” he said. “We do mostly high-end travel, and my clients need pre- and post-cruise stays, personalized excursions, dinner reservations. “Now Mr. and Mrs. Middle America wants to do a Carnival cruise out of Miami for seven days, sure, why not call direct? They’re going to think they got a better deal. That 40 percent that calls direct thinks they’re saving money or doing themselves a favor, but I think they’re doing themselves a disservice.”

Credit Suisse also points out that cruise lines continue to pay 5 percent commission on air fare purchased along with a cruise. Eliminating that would save Carnival $10 million and Royal Caribbean $6 million next year, the report estimated.

“That this has not already happened is further evidence of the cruise lines’ support of the traditional agency community,” the report states.

And that fact remains even if travel agents only book 60 percent to 63 percent of cruise sales in 2006, that two-thirds will still be more total dollars.

The Credit Suisse report and others conclude that the cruise industry will continue its support of agents.

“Although market share may fall,” Wild concluded, “the likely expansion of the market, with the likelihood that there will be 10 million cruise passengers per year by 2010, should ensure that agents will have a reasonable slice of the cake.”