Arnie WeissmannOn our letters page and in comments on TravelWeekly.com, there has been a noticeable undercurrent of negativity toward Carnival Cruise Lines. There are accusations that Carnival is moving toward a consumer-direct strategy that would disintermediate travel agents. Some commenters charge that Carnival's efforts toward automated bookings are agent unfriendly. And there was even suspicion of Carnival's motives when it recently strengthened its "no-rebating" policy, a move that seemed clearly to be in most agents' interests.

One of the first things Carnival CEO Gerry Cahill told me when I met him was that he was "a very direct person." So I asked if he wanted to address some of these issues directly, and he didn't hesitate in agreeing to an interview. Our conversation follows:

Q: There's a segment of the travel agent community that believes Carnival Cruise Lines has made a strategic decision to move as much business as possible to direct bookings. Is Carnival doing that?

GC: The answer is no. It's actually ridiculous; it makes no sense at all. I'm not sure how many travel agents really believe it. But there's a lot of noise. You're right, Arnie, there's a lot of noise.

I'll give you a few facts that will show how ridiculous it is. First, all major cruise lines have a direct component of their business. And frankly, we would be kind of dumb if we didn't because if somebody wants to call here and make a book-ing, for us not to take it would be kind of dumb. That's the first thing. And that is a fact: Every major cruise line [takes direct bookings].

The second thing is Carnival Cruise Lines, the brand, drives more business through North American travel agents than any other cruise brand in the world. That is a fact. And we're about the same size as somebody else out there.

And the third thing is, if you take the number of people who work in the Carnival Cruise Lines call center that handle inbound and outbound direct [sales] calls, it is smaller today than it was three years ago when I started. Those are facts.

But the other reason it's not true: We would be dumb if we did that. Let me explain to you why I feel that way, about why we would be dumb to try to go direct.

Gerry CahillEvery cruise line that I can think of has a desire to maximize net revenues. Net revenues are basically what you're charging the customer for tickets, less the cost of the sale. And that would include the commission to travel agents, the direct costs of the booking, commissions to our people, that kind of stuff. We all want to maximize that number, the net number. It's logical.

So, as you know, in the U.S., we all try to fill our ships because you don't want to go with open beds. That's expensive. The thing about our business, our ticket pricing is very dynamic and variable. It goes up and down. Whether it goes up or down is a function -- this is pure economics -- of supply and demand. When you have a lot of demand and you have limited supply, your pricing goes up. When you have a lot of supply and limited demand, your pricing goes down. Really simple economics.

Once we order a ship and it comes into service, our supply is fixed. So, the variable then becomes consumer demand. And that variable, the strength of demand, is going to determine how much our gross ticket price is. And so, since we all want to maximize that number, we have to source guests from as many places as we possibly can. Again, very logical.

In order to source guests from as many places as we possibly can, we need as many travel agents as we can possibly get to provide us with guests, and if we do that, if we have a lot of different sources, we will be able to increase our ticket prices. It's pretty rational.

When you look at the travel agent community, they have the ability to reach people that we as a supplier cannot reach. There's a lot of different models; I really like this about the travel agent community, I think it's fantastic because the different models have the ability to reach people in different ways and in different places. You have the home-based agents. The home-based agents are great. They can get to a ton of people that we can't get to ourselves. Then you have travel agencies that have great brand names. They're going to reach people we can't reach. You have travel agents who are really good marketers. They will reach people we won't reach. So, they help us reach pockets of demand we couldn't get to otherwise.

If you think about that, that's exactly how we get to maximize our ticket prices. I'm not going to tell you I don't need the direct business, because I do. That's another pocket of demand for me, OK? But I also need the travel agent business, and we're not moving away from it. This is [coming from] a competitor of ours, trying to stir things up.

Q: One thing that keeps getting repeated in reader comments that follow stories about Carnival on our website is that once Carnival gets an agency's client contact information, it contacts the client and tries to convert the business to direct. Is there any truth to that?

GC: That certainly isn't true today. I heard three years ago, under the old regime, that was true, but it isn't true today. There's virtually none of that taking place.

We have really reined in our direct people because we don't want to do that; it actually doesn't make any sense. We want the guests to come on a Carnival cruise. Whether they go through a travel agent or they go to us direct, we want them to go on a Carnival cruise. I do not want to get into a fight with the guest [about] whether they're our customer or a travel agent's customer. That doesn't make any sense. It's not a good way to do business.

Q: When you say "virtually"...

GC: We're always going to have a one-out-of-10, 000 situation, but I can tell you that since I have been here, I do not hear anything at all about us reaching out to take a travel agent's customer. The only way it does happen -- and this does happen -- is sometimes a guest will call in here, they'll call our 800 number, and they will not tell us they're dealing with a travel agent and they'll start asking us questions. You get into that kind of misunderstanding. But we don't reach out at all. And we're very careful to ask [if a caller is using a travel agent]. We don't want to try and steal a customer from a travel agent.

Q: Even when you do things that I would expect most agents to applaud, such as strengthening the no-rebating policy, some reader comments indicate that they view even this as part of a go-direct strategy. Everything that you've said so far would indicate that your policies are travel agent-friendly. So why do you have these perception problems?

GC: The Internet is a very interesting place. People can make comments without identifying who they are.

Q: Are you saying some of the people writing comments have another agenda?

GC: They have an agenda, yes. They may not even be travel agents, some of those people making those comments.

Q: Competitors?

GC: I'm not going to make any accusations, Arnie. I'm just saying the interesting thing about the Internet is, your identity is hidden. And by the way, look, we deal with a lot of travel agents, and I can tell you -- and I meet with a lot of them myself -- that the vast majority are supportive. In fact, a lot of them think what's going on is fairly ridiculous.

Q: Agents seem, at least in their comments, divided on the Carnival initiatives to increase the use of technology in the booking process. Some have embraced the tools and believe it makes them more efficient, and others see it as shifting the workload onto them. Can you articulate how you believe these efforts are beneficial for agents?

GC:First of all, I understand that. Actually I'm appreciative of it. Because in many cases we're forcing change, and human nature is to resist change. Some will resist more than others. So it's not terribly surprising to me. But the way I look at it, it's really simple. The business world is a very competitive place, and it's a very dynamic place, and it's constantly changing, and if you look at what's happened to the cruise industry in the last 10 years -- to our suppliers, our travel agent partners, cruise companies -- we've had a couple of really traumatic things happen to us.

One, fuel has gone through the roof, so our costs of operating a cruise now is four times what it was 10 years ago. And our pricing has been under significant attack. So that's hurt our profitability. At the same time, it hurts the profitability of our distribution partners. So they've been under a lot of pressure, too.

And then, at the same time as that, you have the Internet, which has had a huge impact on society. It has been one of the most dramatic movers of change that I've seen. So, the way I look at it is this: The world is different. It's more difficult. We can sit there and talk about how things were in the old days and how much we liked the good old days, or we can try to figure out what's the best way to move forward.

From my perspective, fuel's not going to go down. Whether or not pricing comes back remains to be seen. We all want pricing to come back; it doesn't matter if you're a cruise line or you're a travel agent partner, we all want pricing to come back. But who knows if it will or won't? So we all have to look for ways to make our business more efficient.

And so, some of the initiatives are well received, some aren't. Certainly a lot of our travel agent partners swear by [our electronic booking initiatives]. And I will tell you we've had a huge increase in the percentage of our business that is done on an automated basis. A lot of our partners are very, very receptive to it, and there are those who are not as receptive to it.

But if you look at it on a long-term perspective, we're all going to have to make these changes. Quite frankly, there is no choice. We will all get there.

As we become more automated, we will be more efficient, and I believe our partners will be more efficient. And it's not like we have taken away the personal element; we still have people in the call center, and I can tell you we've spent a fortune on our call center, and those people are still there to answer questions for our travel agent partners, they're still there to help with these things. We still have our sales force.

But the idea is that for simple, routine transactions, it does benefit us and it does benefit our partners when we do that on an automated basis, and the fact that probably 60% of our business is now coming through on an automated basis from our travel agent partners tells me that. So I feel pretty confident we're heading in the right direction. I do understand, though, that there will be some people who won't necessarily like the changes, and we'll try and work with them the best that we can, to help them along. But that is where the future is going to be.

Q: Do you see Carnival ordering larger ships moving forward?

GC:[Laughs] I haven't started working on that generation. We have the Magic and the Breeze coming. But right now I won't say we won't go larger because I think it'd be stupid to rule that out. But I don't think we will go hugely larger, I don't think we'll make that next jump. And there are reasons.

There are some drawbacks when you get too large. You run into severe limitations on [what] destinations you can get into. You run into limitations on home ports. There are a number of ports in the U.S. that we sail out of that can't handle larger ships. And you get into all the other issues, the customer service issues, and things like that. Hopefully, we can always deal with those things.

So there's a balance. And exactly where that is it's hard to say today. But I don't see it jumping to 5,000 or 6,000 passengers. That's unlikely. But I hate to ever say never because you just never know with life. But it's not in our current plan.

Q: Cruise pricing appears to be moving higher, but the economy is still behaving erratically, and there are still big concerns over debt levels here and abroad. What's your thinking about where the economy is heading?

GC: People don't have to take a vacation. We have to recognize this. It's not up there with food and housing on the list of people's priorities in life. It is still high on people's priority lists, much higher than it was maybe 40 years ago. But it comes from people's disposable income, so we are going to be impacted by the economy. I don't think there's any getting around that. If the economy is strong, we're going to do better. If the economy's weak, we're not going to do as well.

Q: While several exciting new ships have been delivered over the past 12 months, the number of orders going forward has the shipyards concerned. Is the industrywide slowdown in newbuilds tied to a sense that currently we're in an overcapacity situation? Or is it a sense that future growth will slow? Or is there some other reason?

Gerry CahillGC: It's sort of what you said but not exactly what you said. The way I look at it is, the industry's a lot larger than it was 20 years ago. When you're small, you can grow at the rate of 15% a year, but as you get bigger, it get's harder to grow at 15% a year. And we're bigger today.

I don't believe we're in a situation where we have overcapacity. I think what we have is a situation where we'll still need more ships going forward, but we won't see the growth at the same level that we had. I don't think there's enough demand increase every year -- certainly the population's not growing fast enough -- to support 15% increases in cruise capacity like there was 15 to 20 years ago. It just doesn't work that way. We're a much bigger industry.

We have a little higher penetration than we had in those days; it's still relatively low. So cruise capacity is going to grow in the future, [in line] with what our expectations are on the future growth rate of demand for that product.

And what everybody is saying is we do believe there's going to be future demand growth, and we also believe that it probably isn't going to be 15% a year. Plus, there's one other variable, which is a very significant variable, and that is what I mentioned before about how we determine our pricing, and it's basically supply vs. demand.

If we slow down the growth in supply, we probably have a better chance of recovering some of the pricing we've lost in recent years. So that's a big factor because all of us want to see us get our pricing back up. If we grow our capacity at a little slower rate, the thinking is that will give us the ability to start working on increasing our pricing, which is a huge issue for everybody. It's a huge issue for the cruise companies, and it's a huge issue for our travel agent partners.

Q: Where do you think growth in the cruise industry will come from? Is there more potential outside the U.S.? In what region of the world do you plan to focus your resources for growth?

GC: Carnival Cruise Lines is part of a group, which makes us a little different from some of our competitors. Carnival Cruise Lines has always been primarily focused on North America. We have sister companies that are focused on other markets in other parts of the world. Frankly, I'm going to leave those markets to our sister companies. I'm perfectly happy here to continue to grow in North America. I believe that there is enough anticipated growth in demand in North America for Carnival Cruise Lines to still grow in this market, so we're going to focus most of our efforts here.

Now it doesn't mean we won't source some guests from other markets because we do. But probably more than any other cruise brand today we are focused on the North America market, and I don't see us straying from that strategy.

Q: Do you expect to see any cruise line consolidation going forward?

GC: That's a good question. You could see some small ones. I don't see it among the majors.

Q: Since becoming CEO, what do you see as the most significant directional change you've brought to Carnival Cruise Lines?

GC: I guess an appetite for change. Because I came in fresh, with a fresh pair of eyes, not having been in an operating role, I think I have probably caused the organization to implement change at a faster pace than it had historically, and to look to see what other opportunities are out there to change things. So, does that cause some of the focus on things like automation? Yes, it does.

I'm a little bit of a student of business history, and I was fascinated early in my career with this group they called the Nifty 50. And they were the 50 publicly traded U.S. companies with the largest market capitalization. And about 25 years later, there were hardly any of those 50 companies that were still anywhere close to the top 50, and it taught me a valuable lesson: If you don't change, business will change without you. And one of the biggest problems with being a big successful company is that you can become too comfortable, and you need to force yourself to change. That always impressed me, and I brought that with me here.

There's two things about me, Arnie. I'm sure I have my critics, inside and out, but two things about me are true: One, I am direct and tell you exactly what I'm thinking. And two, I'm very logical. I tell you what I think. The things I just told you are things I really believe.

Email Arnie Weissmann at [email protected] and follow him on Twitter
This column appeared in the July 19 issue of Travel Weekly.

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