River Cruise Rolling on the rivers By Arnie Weissmann / April 02, 2013 Share 1 -- AMSTERDAM -- The invitation suggested it was going to be an intimate cocktail hour with Torstein Hagen, the outspoken chairman and CEO of Viking River Cruises, to celebrate the simultaneous naming of 10 Longships. It soon morphed into a 75-minute press conference with a 60-minute opening statement by the chairman. Hagen presented detailed evidence to support the case that Viking was not only the biggest and best-run river cruise company, but also offered the finest product at a terrific value. There were suggestions that Viking was not merely dominant but responsible for creating the demand that has made river cruising the fastest-growing segment of the travel industry. Hagen praised his management team as "the most professional" of any river cruise line and underscored that Viking was "a real company," with significant assets, 2,500 employees and ambitions to become more involved in capital markets to fuel further growth. But it also became clear that Viking adheres closely to the personal vision, preferences, tastes and economic philosophy of the man who owns 95% of its equity. Hagen described his target audience as "people with some curiosity, who have worked hard and earned some money. They haven't had time to see these places -- and not just see, but experience the culture. They're grown-up people. They speak English. They are 55-plus." He paused. "We target people like me." He's equally clear about people he is not interested in: "We have no need whatsoever to say we want some younger people onboard. If you have teenagers, then you should go somewhere else. We don't encourage [inter]generational travel. We market to North Americans, Brits, Australians. Nothing else. No Turks, no Brazilians. They may sneak on a person from Hong Kong or whatever, but the language is English, and it's the ambience of these types of people [that we strive for]." And if that's not clear enough: "It is for people like me who want to have a quiet time and travel with people like myself." HagenismsLikewise, the ships physically reflect Hagen's personal and economic aesthetic. "I'm a minimalist," he said. "Because there are a lot of women around, we have to have some decor, some style, but we try to make it simple, because we're in a very small space. [Due to restrictions on ship size along Viking's main itinerary, Amsterdam to Budapest, its Longships are built to a length of 443 feet, a width of 37 feet and a height of 20 feet.] And within those parameters, you can innovate as much as you want. But if you clutter it with too many things, the space gives a much smaller impression." In sum, he said, "So we are not a boudoir cruise line. If you want to go with a boudoir, you know who you can go with." Though Hagen would not clarify the reference, one journalist guessed Uniworld Boutique River Cruise Collection, a line that, most would agree, does not have a minimalist aesthetic. He replied only, "We are clean and tidy in what we do." By and large, the river cruise operators adhere to the unspoken rule of the ocean-cruising community: Do not criticize thy competitor on the record. Hagen delights in testing -- some might say stretching -- the boundaries of this tenet, and when it comes to ocean cruise lines, all bets -- and gloves -- are off. Some Hagenisms uttered during his presentation: "I consider ourselves to be a professional company. That's what differentiates us from most of the others in the river cruise industry." "A suite isn't a large room. A suite is two rooms or more. And we're very, very consistent in our use of that. One of our competitors says, 'We have all-suite ships.' They have no-suite ships." The present oceangoing cruise line model "is to get them onboard at any price and then fleece them." "We don't have a gym. When you look at these so-called gyms in the basements of these ships, they are just inferior things to what people are used to at home. If people want a spa, we will bring them to the Four Seasons in Budapest when we get there." "Along the river, we are the employer of choice. We have been recruiting, and people stand in line from the ocean cruise lines to join us.""Obviously, to be on a bus is not nice. And to be on a 3,000-passenger ship is not nice. It's not nice under the best of circumstances, and under the worst, bad." "We don't have to put in a specialty dining restaurant. I was on one of our competitors once, and they had specialty dining. It was a two-week cruise; I lasted four days. But I saw how it worked. On a two-week cruise, you could go once or twice, and the rest of the time you had to eat in the grub store." "We generate the demand [for river cruises]. So, of course, what happens now -- I'm a little bit annoyed -- is that when we are full, someone else will pick up some of the crumbs. But let them. We don't intend to leave a lot of crumbs for our competitors, but you should leave some." (When a journalist asked why, he replied: "They're nice guys. We're good friends.") A Viking attribute: Few attributesHagen is a master at positioning a relative lack of attributes as a virtue. In addition to having no specialty restaurant, gym or spa, he points out that Viking has no swimming pool, no cinema and no bicycles. And he's proud that he can carry more passengers on the same size ship as competitors. When asked to respond specifically about Hagen's penchant for criticizing competitors, claiming credit for driving demand and bragging about his ships, some river cruise operators declined to comment, but others were more forthcoming. Avalon Waterways Managing Director Patrick Clark credits Hagen and Viking's marketing spend with raising awareness of river cruising, and he acknowledges that "all river cruise operators have benefited." But he argues that other operators have also contributed, launching modern ships before Viking and offering onboard amenities that first attracted ocean cruisers. "There is more promotion of river cruising ... than at any previous time," he said. "Viking has been the beneficiary of this collective effort." Uniworld President Guy Young, perceived to be on the receiving end of Hagen's "boudoir" comment, said his company "eschews the cookie-cutter approach used by Viking" and is positioned as a "boutique" line with unique designs for each ship, aiming to deliver a differentiated product to a high-end clientele. He also said Uniworld has "a very different approach [to] guest capacity and comfort," carrying 20% fewer guests, but more staff, on each ship. Rudi Schreiner, president of AmaWaterways, opened Viking's USA office in 2000 and recalls its board's early vision of building up to 50 ships within a short period. That ambition was delayed, he said, by 9/11. "Everybody has a different approach to how to run their business," Schreiner said. He set Ama's course on a "more cautious approach" of building two to three ships per year. "Our new ship's average cabin size is 218 square feet," he said. (The most common Viking Longship cabin, the Veranda, is 205 square feet.) "We feature gym, massage, hair dresser and multiple restaurants. We focus on the individual needs of our customers with more choices every year, improved services onboard as well as on land. "We wish Tor and Viking all the best for their future," Schreiner concluded. While others focus on luring customers with extras, Hagen's strategy assumes economics will trump those amenities and services and that passengers will be more than happy to book his "similar product" if they can get it for less. One gets the sense that Viking's management understands that its product doesn't need to be best, as long as it's good enough. And the numbers Hagen shows bankers and journalists about market share and mind share would seem to support his reasoning. He claims he'll have 44% market share by 2014, up from 16% in 2007, and that he currently has 64% aided brand recognition among consumers 55 and older in the $75,000-plus income range, according to a survey he commissioned. His next closest competitor has 19% brand recognition. Comparing ocean cruising and river ship cruising, Hagen says that blue-water cruising has had a growth rate of 6% since 2001, compared with 14% for river cruising. However, he claims that if Viking were removed from the equation, river cruise growth would be only 4%. (When it was pointed out to him that ocean cruising starts out from a higher base, he acknowledged that when compared with ocean cruising, river ships amounted to "peanuts.") He also showed a customer-satisfaction chart in which passengers who had previously sailed on oceangoing lines were asked to compare that experience with Viking. "The only one they thought was better than us was Silversea," he said. It doesn't take much to get Hagen to launch into criticism of ocean cruise lines, and he finds the topic of travel agent commission to be a particularly rich vein. Ocean-ship commissions for travel agents, he said, are "being chipped, chipped, chipped. And some of our competitors, at least in the past, have withheld commissions on port charges. Like any stupid cruise line. We feel this is dishonest. To go on a cruise, you have to be in a port, don't you?" Driving demandUnlike some of his competitors, Viking aggressively pursues direct marketing to consumers. "It's no secret," Hagen said. "We do direct mail, and we take direct bookings. We really don't care where people book. The main thing is that they do book. But when they book with us, travel agents get commissions on everything. For an average Viking booking, an agent gets $1,500. We pay on anything [associated with the product] that's prebooked. We pay 5% commission on air; who the hell does that these days?" Hagen said he spent $400 million on marketing over the past 10 years, "which is much more than all of our competitors combined. We spent it on direct mail. We spent it on trade. We spent it on television. We spent it on the Web." When there is a ship to be filled -- in, for example, Europe during the slow months of November and December -- "then we put it in the mail. We can stimulate demand, whereas our competitors just sort of sit there and wait for customers to call them, or call travel agents." Vicki Garcia, COO of Cruise Planners, is not bothered by Viking's direct efforts. "It helps," she said."Otherwise, the consumer might not know about it. And they're very good about giving back a client if there's any question about whose client it is." Hagen said that 2012 cabin occupancy was 96.4%, adding, "This year, our capacity is up 40%. Of our 51,000 cabins available in Europe from the period March through mid-October, there are only 650 cabins still available. If you go to our website, you see 'sold out,' 'sold out,' 'sold out.'" Indeed, representatives of agency groups and wholesalers attending the ship naming confirmed that demand for Viking is strong. Michele Kish, senior vice president of product for Flight Centre USA, parent of Liberty Travel and Gogo Worldwide Vacations, said it has been a challenge to reach productivity targets for Viking because, despite the rapid expansion of capacity, finding availability is "definitely a challenge." "It took a little while for us to understand how long the booking window is for river cruising," she said. "Last year we did such a big push for Viking at the end of 2012 [to reach the target] that by the end of that year, we actually ended up with more 2013 bookings than we had in all of 2012. And now we're selling 2014." The Longship strategyThe naming of 10 ships at once for vessels launched over two calendar years demonstrates marketing acumen, but Hagen is first and foremost a financial guy. He believes in using space efficiently, and the Longship designs reflect that. He squared off the bow so he could get seven additional cabins in "for free." And regardless of other rationales he might offer, things like gyms, bike stables, cinemas and specialty restaurants take up space that could become additional cabins. His minimalist decor might make spaces look less cramped, but it also saves money on fixtures. Hagen claims that the efficiencies he builds in actually cost him more up front, a claim disputed by Uniworld's Young, who said he spends more on his ships, which each have a unique design. There have been 28 virtually identical Longships built in the last three years, and 12 more will be launched over the next 12 months. Moreover, Hagen said no one should "discount the possibility" that there will 100 ships in total before the end of the decade. These virtually identical Longships provide Hagen with considerable advantages of scale. He has to print only one set of deck plans, and he can purchase everything in bulk. He passes some, though not all, of his higher margins back to customers in the form of value pricing. Asked to explain the differences among the three generations of Longships, he was hard-pressed to come up with any. "The names, of course," Hagen said. The ships, he acknowledged, are "all the same, apart from their lipstick." Pressed further, he said lobbies were modified, with the previous generation featuring marble and the 2013 ships using wood. Hagen will test the versatility of the Longship concept in 2015 when he brings a version into waters that have proved treacherous for other river cruise companies. The day after the 10 ships were named, Viking was again in the news, saying that the company would be bringing the Longship style to America. Hagen plans to begin service on the Mississippi in 2015. From cruise CEO to total lossThe success of Viking is sweetened by aspects of personal redemption and resurrection. Hagen, now 70, had become interested in the deep-water cruise industry in 1973 when, he said, he applied for and "was almost appointed COO of Norwegian Cruise Line. I came in second in the round." Had he come in first, he asserted, "there wouldn't be a Carnival today, I can assure you." As a consultant (and eventually partner) for McKinsey and Co., Hagen said he helped bring Holland America Line back from the edge of bankruptcy during the 1974 fuel crisis. Two years later, he became CEO of Bergen Line, one of the owners of Royal Viking Line. He moved over to become CEO of Royal Viking from 1980 to 1984, where he worked with the line's founder, the legendary Warren Titus, whom Hagen describes as his "idol." He came close, he said, but failed in an attempt to lead a management/employee buyout of Royal Viking in 1984. Ownership decided to sell instead to Norwegian Cruise Line, then owned by Kloster Cruise. Royal Viking was dissolved by Norwegian in 1994. Hagen joined the board of Holland America Line in 1985 and was involved with the sale of that business to Carnival Corp. in 1989. And he surfaced again in 1994 when he helped Kloster/Norwegian raise a $300 million junk bond to ensure the delivery of the Windward. Although he remains on the board of the holding company that sold Holland America to Carnival, for the most part he left the ocean cruise industry and got involved in the Russian equity markets, where, he said, he did well with oil shares. He cashed out and put everything into a Dutch shipping company. But that investment went south. "I lost everything I had in life," he recalled. Rescued by oligarchsHe got back into the Russian equity market, he said, by helping "a couple of oligarchs buy a shipping company." In return, "they let me have four ships cheap, and I started Viking River Cruises in 1997." He is clearly very pleased with and proud of what Viking has become so far, but one senses that Tor Hagen's redemption won't be complete until he makes his mark once again in ocean cruising. Viking has two oceangoing vessels on order for delivery in May 2015, two more contingent upon financing and options for another two. The vessels are relatively small by today's cruise ship standards -- 928 passengers each -- and they won't stray far from the coasts. "We asked our customers what they wanted, and they said they didn't mind being with us on the oceans, too," he said. Hagen was hesitant to talk much about the ocean ships last month because he wanted to keep the spotlight on the launch of the river ships. But his excitement got the better of him, and he offered up several clues about what the Viking ocean experience might be like. "You will recognize a fair amount of the same design," he said. "Open air, understated elegance. It'll be for couples; it's not for children, consistent with our river ships," he said. "The gym and the spa on most ocean ships are upstairs. Where do you think we'll put the gym and the spa? We'll put it downstairs, because you don't need a view for the spa. "What will we put upstairs? The biggest-selling cabins," he said. "You will see it is the same philosophy: [The ocean ships] will be very, very, very efficient in the use of space. And that means we'll be able to offer an outstanding product at a low price." What's more, he said, "We're going to be destination-focused. I think ocean cruising has lost its direction. It's just the ships that matter to them, but I view my mission as reintroducing the destination into ocean cruising." Although Hagen's bravado and showmanship can rub some of his competitors the wrong way, he seems to relish the role of gadfly entrepreneur, and he enjoys pushing around the edges of what a respectable line owner is and is not supposed to do. In the end, he clearly intends to fully enjoy every perk coming to him, up to and including deciding the names of ships in the fleet. Maritime tradition frowns upon naming a ship after a living person, but in the group of 10 Longships being christened in Amsterdam last month, some thought they saw an exception being made as a bottle of champagne crashed against the bow of ships named for Viking gods -- including Tor. Email Arnie Weissmann at email@example.com and follow him on Twitter.