Archive for February, 2002

Posted on February 2, 2002 - by Ralph Grizzle

Building A Hawaii Product

Special to The Denver Post

Three years ago, Captain Gunstein Langset and a tiny crew set out from Christmas Island on a fishing boat. As Norwegian Cruise Line’s senior port captain, Langset’s mission was to visit Fanning Island to determine whether it might make a good port call for NCL’s planned Hawaiian-based ship, then the Norwegian Leo. Langset was trying to find a way to comply with a century-old U.S. law that prohibits foreign-flagged vessels from picking up and dropping off passengers at U.S. ports, without first having cruised to a “distant foreign port.”

Christmas Island was to have been that distant foreign port, but it was too distant. Plus, the harbor was not deep enough for the ship’s tenders. Captain Langset knew Fanning Island had sufficient deep water and was closer to Hawaii than was Christmas Island. So he chartered a fishing boat and set out with crew.

The trip to Fanning Island was uneventful, but on the return the boat’s engine failed, leaving Langset and crew adrift in the South Pacific. Fortunately, Langset was able to radio a nearby navy boat for help. His good fortune on the high seas marked an auspicious beginning for what would become one of Norwegian Cruise Line’s most successful moves – to base a ship year-round in Hawaii, made possible only by using Fanning Island as a distant foreign port.

The U.S. maritime provision that left Langset and crew adrift is known as the Passenger Vessel Services Act. The provision was designed to protect the U.S. shipbuilding industry by allowing U.S.-flagged vessels to embark and disembark passengers in U.S. ports, thus giving American-built ships a perceived advantage over foreign-flagged competitors (in practice, however, U.S. minimum-wage laws, which internationally flagged vessels need not comply to, erase competitive advantages for American-made ships.)

While NCL was laying plans to enter the Hawaii market, two American Classic Voyages’ units, American Hawaii Cruises and United States Lines, were already operating a couple of U.S.-flagged ships there year-round. Each of the two ships spent more than 80 hours in Hawaiian ports during typical seven-day cruises. By contrast, the Norwegian Star, the NCL ship now operating in Hawaii, spends only 24 hours in Hawaiian ports. The trip to Fanning Island, more than 800 miles distant, requires that the ship sail a full day to and a full day from – with six hours in port at Fanning.

“Fanning Island is obviously a necessity for purposes of qualifying the voyage,” says NCL’s President and CEO Colin Veitch. “But we get strong positive feedback from passengers once they’ve been there. It’s an exquisite off-the-beaten-track experience.”

As one of eight islands straddling the equator in the Republic of Kiribati, Fanning Island claims deserted beaches, crystal-clear water, tropical blue-green lagoons and a still-intact local culture. Veitch describes Fanning Island as something akin to a private island, like those operated by cruise lines in the Caribbean, but differing in that it is a living, working island of 1,300 residents.

Having satisfied the Passenger Vessel Services Act, NCL had one other regulatory hurdle to contend with. Cruise ship gambling is not permitted in Hawaii. To comply, NCL planned to close the casino aboard the ship originally intended for the Hawaii market, the 1,960-passenger Norwegian Leo, built in 1998 for NCL’s parent company, Singapore-based Star Cruises. But in December 2000, Hawaii passed legislation prohibiting cruise ships with gambling devices aboard, even if not in use, from beginning or ending cruises in Hawaii.

Undeterred, NCL announced it would replace the Norwegian Leo with the Norwegian Star, still under construction in Germany. The solution: A shopping center would fill the space allotted for the casino. With this accomplished, NCL announced the first “purpose-built” ship for Hawaii. END

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Miami-based Norwegian Cruise Line designated Hawaiian and Asian themes in many of the Norwegian Star’s 10 restaurants. Other “purpose-built” features for the Hawaii market: Two thirds of the ship’s staterooms feature balconies, and for those who really like to spread out, the Norwegian Star offers an industry first: 5,500-square-foot, three-bedroom garden villas with private gardens and roof terraces – yours for $10,000 per person. And for Don Ho wannabes, Norwegian Star also features a private karaoke room.

Posted on February 2, 2002 - by Ralph Grizzle

The European Cruise Market: North American Cruise Operators Shifting Dependence To Independents

America has long admired Europe’s shop-lined streets, where, at least in this American’s romance-filled mind, the village populace converges to purchase bread from the baker, meat from the butcher and flowers from the florist. The retail scene is nothing like that in most towns and cities on the far side of the Atlantic, where superstores dominate the commercial hub, and where one not only could but often does conduct a variety of activities – bank transactions, pizza purchases, dry cleaning drop off, grocery shopping and automobile repair – all at one store.

That superstore model, however, doesn’t stick when it comes to selling cruise vacations – in the U.S. and, increasingly, in Europe, where giant tour operators have a virtual lock on the vacation market. If you could walk the streets of America’s cruise distribution system, represented by the travel agents who sell cruises, you would find bootstrap entrepreneurs operating their businesses in small shops and, increasingly, from their homes. Some even have set up virtual storefronts on the internet. Indeed, America’s cruise distribution system is dominated by many small players and a few large ones.

Independent cruise-sellers operate in many small towns across America. Moreover, the North American cruise industry encourages agencies to fan out their networks by hiring outside salespeople or independent contractors, who act as foot soldiers that pitch cruise vacations directly to consumers in the neighborhoods where they live. It’s not surprising then that with this array of distribution methods, 26,000 agencies sold cruises in 2001 on Carnival Cruise Lines, the world’s largest cruise line.

North American cruise operators would like to see the same model applied to the European market. Europeans generate only single-digit percentages of the total annual cruisers for North American cruise lines. A spokesperson for Carnival Cruise Lines reports that only 5 percent of its passengers come from Europe. Norwegian Cruise Line and Royal Caribbean International cite similar percentages.

What’s more is that only about 2 percent of Europeans have taken a cruise vacation, compared to 11 percent of Americans. The European market underperforms, cruise executives contend, because cruise sales are funneled through a relative few general sales agents, as they are called on the Continent, and multiples, as they are called in the United Kingdom.

In Germany, which cruise executives refer to as “the most underpenetrated market in Europe,” giant tour operators such as Preussag AG, dominate the market for package vacations and appear to be “more interested in selling brochure pages” than they are selling cruises, says Gary R. Bruton, senior vice president, international, for Miami-based Royal Caribbean International and Celebrity Cruises. He and other cruise executives bemoan the fact that they must pay to be included in the tour operator’s brochures. It is the cost, cruise executives lament, simply to get their products “on the shelf.”

There’s little hope in persuading tour operators to adopt business practices that resemble the U.S. model. For starters, tour operators resist performance-based commission contracts, which is the modus operandi for the North American distribution system. “The old model of depending on tour operators for distribution will never work in the long term.” Bruton says. “It’s a very inefficient way for us to operate.”

Shifting Alliances

That said, Royal Caribbean, which has established five offices in Europe, is working to reduce its reliance on tour operators, GSAs and multiples. The company is already seeing an uptick in bookings on Royal Caribbean and Celebrity ships by independent travel agencies in the United Kingdom. There, nearly 1,000 “storefronts” sell 50 percent of all cruise passengers originating from the United Kingdom. Perhaps not surprisingly, Bruton says he believes there are great opportunities for independent cruise-sellers to “zoom ahead” of the competition.

Indeed, faced with a glut of new cruise ships, the cruise industry is investing heavily to target Europe as a source for new cruise passengers. Norwegian Cruise Line, which has four offices in Europe, opened a new head office in Bern, Switzerland, just last year, heralding the move as a means of targeting “market growth” through an increased presence in Europe. “We see a tremendous amount of potential for NCL to increase our market share in Europe,” says Andy Stuart, senior vice president of sales and marketing for Norwegian Cruise Line.

Much of the cruise lines’ efforts are aimed at Germany, a market with a large population, a huge disposable income and six weeks of annual vacation. To that end, Carnival Corporation’s European subsidiary, Costa Cruises, announced last spring a new cruise product aimed exclusively at the German market, and P&O Princess Cruises last year launched a campaign to boost its presence in Germany.

Increasingly, however, the cruise lines’ efforts are spreading south. A proposed new joint venture between Royal Caribbean International and Princess Cruises aims to target customers in southern Europe. “When you look at the two largest European markets, the United Kingdom and Germany, they have entrenched national and international brands,” says Royal Caribbean’s Bruton. “But the romance countries, Italy, France and Spain, still show a lot of upside opportunity. Obviously, Costa and Festival, are national brands in those markets, but we think there are a lot of opportunities for growth. The region’s demographics and propensity to travel – there are a lot of things there working for cruising over the long term.”

One of the challenges for North American cruise lines marketing in Europe is how to distinguish their products, particularly across borders and cultures. In North America, cruise lines can rely on a single series of television advertisements to get their message across to a like-minded public. Getting the same message across in Europe might require several different “executions,” says Royal Caribbean’s Bruton, “because what works in the United Kingdom might not work in Continental Europe.” Moreover, in the various countries in Europe, there are differing product awareness levels and firmly entrenched national brands that make it difficult for relatively unknown North American cruise lines to make a dent in the market.

Even America’s best known cruise brand, Carnival Cruise Lines, struggles for awareness in Europe. Larry Pimentel, former chief executive officer of Seabourn Cruise Line and Cunard Line, says while traveling through Europe on business he was perceived as a “celebrity” as an executive for Cunard Line but was a virtual unknown when he wore the cap of Carnival Corporation, Cunard’s parent company.

As Carnival and other North American cruise companies strive to make their brands well known in Europe, they will square their aim on sprouting networks of independent travel agencies to help their industry blossom in Europe as it has in America. If they succeed, the streets of Europe better make room for one more specialty shop – the independent cruise-seller.

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Sidebar: Reaping Rewards

Clearly, there are financial incentives, in the form of commission payments, for independent cruise-sellers who work to awaken the sleeping European cruise market. North America’s big six cruise lines – Carnival Cruise Lines, Celebrity Cruises, Holland America Line, Norwegian Cruise Line, Princess Cruises and Royal Caribbean International – paid North American travel agents commissions amounting to US$1 billion in 2001, according to Colin Veitch, Norwegian Cruise Line’s chief executive officer.

Moreover, Veitch points out that commissions will continue to rise as these six cruise companies increase the collective number of bed nights they have to sell. Capacity is projected to increase by 45 percent over the next three years. If prices remain constant, Veitch says, the big six will distribute an additional US$500 million in commissions by 2005. “Even if prices drop by 25 percent, that’s still another $100 million in commissions on top of what we’re paying today,” he says.

Commissions to independent cruise-sellers in Europe are based on volume as in the U.S., says NCL’s Andy Stuart, “although the tiers for achieving higher commission levels may vary slightly given that cruising is a bigger business here [in the U.S.].”

What’s more is that cruise products sold in Europe have even greater potential for agency profitability than for similar cruise products sold in America. That’s because European cruises typically are sold as packages that include air transportation, pre- and/or post-cruise accommodations and transfers.

Posted on February 2, 2002 - by Ralph Grizzle

North American Cruise Operators and U.S. Travel Agents: Dancing Partners?

More than 90 percent of all cruises sold in North America are booked through travel agents. Travel agents represent a cost-efficient sales system, broadly distributed around the nation. It is hard to imagine how the cruise industry could function without this network of independent sellers.

With more than 30 North American cruise lines competing for consumer attention, cruises represent a complex vacation product that requires the expertise of an experienced cruise counselor. “A cruise is hard to sell without personal contact,” says Alan Rosen, of Sand & C Travel in Boynton Beach, Florida. “The cruise lines don’t have the manpower to handle it, and they can’t live without us. Just ask Renaissance.”

Ah yes, Renaissance Cruises. In the U.S. “Remember the Renaissance” resonates as a battle cry with travel agents who boycotted the company. Renaissance shunned travel agents to market direct to consumers. Only after bleeding red ink and failing to fill its ships did Renaissance begin making overtures to travel agents. Too little, too late. Without the support of travel agents, Renaissance collapsed late last year.

Make no mistake: The cruise lines know where their bread is buttered. “We need travel agents, period,” says Vicki Freed, senior vice president of sales and marketing for Miami-based Carnival Cruise Lines. “And we believe that we will continue to rely on travel agents for the vast majority of our business.”

These are more than just words. Cruise lines support agencies in a variety of ways, providing not only commission payments but also generous co-op advertising funds. A travel agency, for example, may produce a direct-marketing piece for mailing or place an advertisement in the local newspaper and expect cruise lines to kick in 50 percent or more toward the cost. Cruise lines also provide national advertising designed to drive consumers into agency offices, web sites that allow consumers to book online with the sale reverting to the travel agent, and a company sales force that works to educate agents and assist them with marketing.

“The cruise industry supports you to a much greater extent than any other sector of the travel industry,” Norwegian Cruise Line Chief Executive Colin Veitch told travel agents attending Cruise-A-Thon, an annual industry event held this past December in Fort Lauderdale. “The relationship is a symbiotic one. We benefit, you benefit. We support you, you support us. And you can’t say that about any other major sector of the travel industry.”

Slighted by the airlines, which have cut commissions drastically since 1995, travel agents find cruises to be one of the few lucratively commissionable vacation products remaining. “The airlines have been our best friends in making this [cruising's success] work,” says Gary Bruton, senior vice president, international, for Miami-based Royal Caribbean International and Celebrity Cruises. “They’ve made it clear that you can’t make a living selling air tickets.”

Despite the seemingly happy arrangement, however, there are rumblings of discontent. Cruise line executives bemoan the fact that travel agents aren’t selling hard enough to fill ships at respectable prices. Travel agents counter than cruise line pricing policies undermine their sales efforts.

The pricing issue becomes particularly contentious with group pricing. To fill ships, cruise lines offer non-price-protected “new booking offers.” These reduced rates aren’t available for passengers who booked early, thus the term “non-price-protected.” When early-bookers discover they paid more than other passengers who booked late, they become angry with their travel agents. The cruise lines contend that they are returning to a pricing model where those who book early pay less. “After September 11, all pricing models went out the window,” says Carnival’s Freed. “We really were doing it right 95 percent of the time before 9/11. We are finally feeling that we may be back to the formula of setting the lowest prices further out and increasing prices as demand increases.”

On the flip side, the major cruise companies, Carnival among them, instituted increased commissions to agents following the September 11 attacks. Forced to slash prices to spur bookings, the big cruise lines boosted agency commissions to 20 percent through 2001.

Even so, profitability has been hard to come by for agents who are selling cruises. “I don’t think the 20 percent commissions made much of a difference from a sales point,” says Sand & C’s Rosen. “For goodwill, it was terrific. We lost so much revenue with the rate reductions that it helped to offset those losses.”

When Carnival chief Bob Dickinson reminds agents that the industry is selling cruises at 1974-75 prices -a good sale pitch for motivating consumers – he neglects the issue that agency commissions are also based on a percentage of those reduced prices. Clearly, agencies are struggling. Carnival was sold by 2,000 fewer agencies in 2001 when compared to a year earlier, according to Fred Stein, director of agency compensation for Carnival. The probable reason for the attrition: agency closures.

Further complicating an agency’s ability to survive are so-called non-commissionable fees, comprised of port fees and other charges. Speaking to agents attending Cruise-A-Thon about the challenges ahead to fill new capacity, Dickinson quipped, “We will fill those ships, won’t we? We may be selling cruises at $1.49 and $500 in non-commissionable port charges and fees, but we will fill those ships.” The joke wasn’t lost on agents who are seeing non-commissionable fees continuing to rise.

The cruise lines contend that these fees are justified but perhaps not well understood. Particularly perplexing is how these fees are calculated. Two ships of similar size with similar itineraries operated by two cruise lines can have widely varying non-commissionable fees. Less perplexing is the fact that they continue to increase, although Carnival has vowed not to raise non-commissionable fees in 2002, “even though we will have increases due to rising security costs at ports,” Freed says.

In a move that angered agents, cruise lines last year reduced from 10 percent to 5 percent the commissions paid on the air transportation portion of the cruise (among the big players, Norwegian Cruise Line maintained 10 percent commissions on air, at least until this article went to press). Coming on top of proliferating non-commissionables and reduced cruise fares, the air commission cut bred ill feelings. “The impact was minor,” says Sand & C’s Rosen, “but the message was very bad.”

Increasingly, U.S. travel agents question whether, in fact, cruise lines are their partners. Agents feel they are being squeezed out, even going so far as to accuse cruise lines of stealing their clients, by encouraging them to book direct and, in some cases, by calling prospective cruisers before the agency can close the sale. Agents criticized Carnival for its aggressive use of “Personal Vacation Planners,” who work directly with consumers. Carnival’s Freed concedes that her company does take direct bookings, “but only because that is how some consumers want to book,” she says.

“We do not offer the consumer a better price than what the travel agent can offer,” she adds. “In fact many of our direct consumer bookings actually transfer back to a travel agent after we have the deposit, because agents either rebate, or offer group rates that are lower than the rates we have offered the consumer. And we gladly pay the agent their full commission on the booking [that Carnival initiated].”

At times, the relationship between cruise operators and travel agents more closely resembles one of, say, a marriage gone sour than it does a true, working partnership. “I believe this is a partnership that will survive,” says Sand & C’s Rosen, “but only out of necessity.” Of course, given the options, surviving, even out of necessity, isn’t so bad. Just ask Renaissance.