When it comes to cruise commissions, travel agents love to talk about the good old days, that golden age when $900 of a $1,000 cruise fare was commissionable.
Ten years ago, it would have been unthinkable that the noncommissionable part of a cruise invoice might approximate the commissionable portion.
Gradually, infuriatingly, over the last 10 years, travel agents have watched a larger and larger percentage of the cruises they sell move into the noncommissionable portion of the final bill, producing a growing adversarial tension in the distribution channel.
But these days, with cruise prices in a free fall and noncommissionable fees, or NCFs, at an all-time high, agents’ angry protests have been replaced by pleas as many cruise sellers question their ability to survive on what have devolved into single-digit commissions in some cases.
"If cruise fares had continued to go up the same percentage that NCFs did, we wouldn’t have an issue," said Brad Anderson, co-president of America’s Vacation Center (No. 48 on Travel Weekly’s 2008 Power List). "We are in a deflationary period right now. And as the prices of cruise products have ratcheted down and NCFs have stayed level, that is a real dilemma for the majority of the distribution system.
"This is a crisis for most people in the industry," he added. "If the cruise lines aren’t careful, there will be far fewer agents out there to sell their product."
Cruise line executives don’t speak much to the issue of NCFs. They are reluctant even to define NCFs precisely, consistently rationalizing them vaguely as fees not related to the cruise itself.
A telling moment came at a Cruise Holidays conference in 2006 when an agent asked a panel of cruise executives why NCFs had risen so much. Colin Veitch, then CEO of Norwegian Cruise Line, called the issue a red herring, asserting that NCFs were only an issue to cruise sellers who focused on the least expensive accommodations.
If Veitch’s logic struck agents as arrogant and self-serving then, it strikes many as preposterous in an era of heavy discounting.
Yet Veitch’s assessment was mathematically correct in the sense that NCFs tend to be fixed costs such as port fees or stevedoring expenses. So, as a portion of the total fare, they shrink as the price rises.
The catch, of course, is that when prices fall, the NCF portion is not discounted along with the fare.
With cruise prices plummeting, a balcony fare today, for example, might be priced the same as the least expensive inside cabin in 2006. So, by Veitch’s own calculation, NCFs now matter to agents more than ever across the spectrum of cruise products.
'Not worth the effort'
In the fourth quarter of 2008, fares dropped to levels not seen since the aftermath of 9/11. Ray Mitchell of Action Travel in Richmond, British Columbia, reported that NCL in mid-October was offering a seven-day Caribbean cruise on the Norwegian Pearl for $113 per person.
"I did not ask what the NCF would be," Mitchell said. "Commission at 10% is not worth the effort."
Anderson, too, believes that selling a three-day cruise might no longer be worth a travel agent’s time or effort.
Even so, Anderson said AVC would see a record month in January, despite the plunge in cruise prices. As is true for many agents, yields are down but bookings are up, so he believes his agency can survive the NCF factor.
"We don’t like the NCFs, but our model is so efficient," Anderson said. "Where it’s really stressing the distribution out is in the most inefficient distribution. A model like ours, where bookings are primarily electronic and all agency owners specialize, there is little research needed. We do the marketing so they can focus on leads."
As a result, he said, AVC is not facing "near the level of crisis" being faced by less efficient, less productive cruise sellers.
But AVC might also be the exception that proves Veitch’s rule: Anderson said his company thrived by trying not to indulge bottom-feeders.
His agents, he said, are "good at upselling" customers. "Get them on a balcony," Anderson said. "If not, get them to switch to a five-day or longer cruise."
The inherent logic of that strategy worries Scott Barry, a leisure equity analyst with Credit Suisse, because inexpensive, short cruises have been key to the industry’s sustained period of remarkable growth.
"The biggest concern I’ve had is the impact of the lower pricing and higher NCF on the short-cruise market," said Barry, who recently grilled Royal Caribbean Cruises Ltd. executives about the health of the distribution system. "That’s the primary entry vehicle for the first-time cruiser.
"Yet the three- to four-day cruise, from a commission standpoint, doesn’t really make a lot of sense. So a lot of traditional travel agents have migrated away from those, and even the seven-day, and more toward the bigger-ticket stuff. The cruise lines have to provide incentive to the distribution mechanism to sell all of their products."
Not all analysts agree with Barry’s reasoning. With cruise prices dropping so precipitously, cruise companies are also facing pressure from shareholders to cut costs, and commissions to travel agents are among the highest costs they have. Since shares of Carnival Corp. and RCCL are currently at 10-year lows, some analysts downplay Barry’s concerns about protecting the distribution system.
Steve Kent, an analyst with Goldman Sachs, has long recommended that the lines cut distribution costs by growing their direct sales. On both Carnival Corp.’s and RCCL’s most recent earnings calls, in fact, Kent asked if the companies were considering commission cuts.
'The more, the merrier'
Significantly, both RCCL chief Richard Fain and Carnival CEO Micky Arison were quick to defend their dependence on the agent community.
"We need folks out there selling the cruise concept, selling our various brands all over the country, hundreds of thousands of them, the more the merrier," Arison told analysts in December. "And the reality is that we will support that distribution system as long as I’m CEO of this company."
But the pressure keeps mounting. Goldman downgraded the shares of both Carnival and RCCL to "sell" last month and issued caution on the entire cruise industry, pushing down the share price of both cruise lines even more.
With the exception of their need for credit instruments, private companies are not as vulnerable to the whims and pressures of Wall Street. So, not surprisingly, it was Regent Seven Seas Cruises -- a relatively small, privately owned player -- that first broke with the industry on NCFs, announcing last month that it would eliminate noncommissionables on all 2010 cruises.
Although Regent is a luxury line with only three ships, travel agents hope the move is a sign that in this economy, the travel agent might have a slight new advantage over the cruise industry.
"On the luxury end, I will support Regent," said Mark Comfort, co-owner of Cruise Holidays in Kansas City, Mo. "I sent a note to my staff to do everything in their power to sell more Regent to their luxury clients. … I said, ‘Let’s reward them for that policy change.’ I hope it gets everyone’s attention."
Comfort is one of many agents who say that NCFs have pushed their formerly cruise-only agencies to migrate not only to higher-priced cruises but to land-based vacations for which tour companies pay commissions on a larger portion of the total vacation cost.
"We’ve been a cruise-only agency for 20 years," Comfort said. "And for the first time in 20 years, we’ve had to start promoting land-based trips as well as cruises."
The shift in agencies’ focus to land-based products, he said, "is enough that the cruise lines are going to shoot themselves in the foot if too many of us start to do that. It’s really just a matter of a lack of profitability. It’s just that simple. They’ve got to change the NCFs."
Howard Moses, president of the Cruise Authority agency in Atlanta, said that after years of selling only cruises, his agency has expanded to land-based vacations as a result of NCFs.
"Honestly, it isn’t worth the effort to sell a three-, four- or five-night, or even a cheap seven-night, as the commissions are so ridiculously low," he said. "Land -- resort, tour, spa, ski, Vegas -- is now the fastest-growing segment of our business."
Tour operators say this should come as no surprise to agents, since they have been trying to market this fact to the trade for years.
Land vs. sea
Richard Launder, president of TravCorp USA, said that when agents compare a cruise and a tour targeting the same demographic, they recognize that the average take-home commission totals about 6% of the price of the cruise, compared with about 12% of the tour price.
"Pricing integrity is better maintained with a tour than with a cruise," Launder said. "The tour industry has always been that way. We could start pulling components out of tour prices and make them noncommissionable, but I don’t think that’s the right thing to do when 96% of our business comes from the travel distribution system."
Launder added: "The sense we’re getting is that a lot of folks that relied on the cruise industry for all of their income have recognized that the cruise lines are going to heavily discount their cruises. If the NCF percentage is going to be maintained, there’s not much opportunity there."
Agents who still sell mostly cruises expressed hope that the economic downturn would force cruise lines to take notice of any movement of market share to non-cruise products.
"Cruise had always been more of a singular value proposition, relative to land-based alternatives," Barry said. "Because some land-based alternatives have become so weak, like Hawaii, cruises may not be such a value because other land-based opportunities are coming down.
"If there is a share-shift issue and traditional travel agents who sell cruises are shifting focus to other travel, that will need to be addressed. I think the strategic leader in the category tends to be Carnival. If it is going to get addressed, it will be Carnival that will lead. They employ a book-to-fill strategy. It’s important to fill the ship, and the primary distribution mechanism to them is the traditional travel agent."
Barry acknowledged that such a decision would not be easy.
"If you make a policy decision like that, it’s tough to make an about-face somewhere down the road," he said. "For the foreseeable future, they will try to add incentive to the distribution channel through other means."
The cruise lines' perspective
Not surprisingly, the cruise lines have a very different perspective on the issue.
"We have not raised NCFs in four years," said Celebrity CEO Dan Hanrahan. "But as prices have been reduced, NCFs have stayed the same, making the percentage higher. It’s worth noting, too, that we recently eliminated fuel supplements and increased agent commissions through our ASAP agent support program."
While agents describe rapidly shrinking cruise commissions, cruise lines respond that they are paying out more commissions now than ever. But this argument holds little real sway, because given the massive growth of cruise capacity globally, it would be almost impossible not to pay more commissions.
Moreover, the issue is simply one of supply and demand. Bob Dickinson, former CEO of Carnival Cruise Lines, was fond of pointing out that as the cruise industry boomed over the last three decades, the number of agents selling cruise, and thus the distribution system in general, did not keep pace. As a result, there were more cruises for each agent to sell.
And since airlines stopped paying commissions long ago, and with so many travelers booking direct on the Internet, cruise lines face decreasing competition for agents’ attention.
The one piece of good news for cruise sellers is that in the current economic environment, it is very unlikely that commission rates will be cut or that NCFs will increase.
"You cut costs, but cutting commission costs can be one of the last things on the list," Barry said. "It doesn’t make sense. … This is arguably the most challenging environment the cruise lines have ever encountered. You’ve got to look to support the distribution channel and make sure it doesn’t get impaired, because that’s how you fill the ships."
The distribution system witnessed this when the three RCCL brands recently launched a program giving agents higher commissions, increased co-op funding and reduced FIT deposits, among other initiatives. Before that, Silversea for a short time was offering 25% commissions on cruises.
But while agents express hope that economic conditions will make their services more valuable, there is a darker side to the recessionary pressures washing over the cruise industry.
Eric Clemons, a professor of operations and information management at the University of Pennsylvania’s Wharton School, predicted that the recession could curtail travel that requires the guidance of an agent.
"Travel agents can no longer live on their commissions for serving ‘full service, free and independent’ to individual travelers," said Clemons. "The commissions, while small on cruises and tours, still cover the minimal level of service required, and those commissions are shrinking. … I suspect that a lot of complex, discretionary vacation travel is disappearing.
"My students still need to get home for the holidays. I still need to get to Florida to see my parents. But complex vacations may really disappear for a while. I’m not sure how agencies will survive when most travel is simple enough to be booked online."
