While the world grows more anxious over the growing
possibility of a trade war between the U.S. and China, the bigger issue for
cruise lines sailing out of the world's most populous country isn't tariffs or
technology transfer. Their bogeyman is distribution restrictions.
International cruise lines are increasingly frustrated with
the limits on how their products can be sold in China.
While in most parts of the globe, cruise lines can sell
their voyages retail through travel agents, in China they've been funneled into
chartering their vessels to wholesalers that are then responsible for filling
"China is a B2B market much more than a true consumer
market," Carnival Corp. CEO Arnold Donald said in a recent conference
call. That means most of the communication and marketing to customers is out of
the cruise company's control.
In a speech in March in Shanghai to about 300 Chinese travel
agents, Ken Muskat, CEO of SkySea Cruise Line, said that the Chinese market is
being held back by its reliance on the wholesale model.
"Are we going to stay status quo or hit 4 to 5 million
passengers?" Muskat asked the crowd. "Cruising won't go away, but
will it grow?"
Muskat said that to stimulate more cruise business, other
channels of distribution must be exploited.
At SkySea, which is partly owned by Royal Caribbean Cruises
Ltd. (RCCL) and recently announced it is shutting down for unrelated reasons,
the move was away from 100% charter and toward working with smaller agencies,
"You need to embrace the evolution of distribution so
you don't miss out," he told the agent group.
Suboptimal growth and a lack of connections to customers
aren't the only problem with the charter sales model.
Donald said that when a charter contract is booked, the
cruise line recognizes 100% of the revenue on its books immediately, even
though the actual sailing might be months away.
"Now, when they book that full-ship charter with us,
there may have been no guest booked at all," Donald said. "And so you
are recording a 100% in January for June sales."
But because of their clout, the charter companies are
allowed to come back after the sailings and renegotiate the price if their own
sales didn't meet expectations. Among other things, that makes business
"Even though you recorded it, then there's claims and
credits on the back end," Donald said.
That problem was evident in 2017. Many cruise lines
chartered their ships early in the year on the typical short itineraries from
Shanghai that travel to Korea and southern Japan. But in March, the Chinese
government began discouraging travel to, and business dealings with, South
Korea in response to the country's installing a new U.S.-built missile defense
For six weeks in March and April, new charter business dried
up. Meanwhile, itineraries that went only to Japan were in less demand, forcing
wholesalers to lower their prices to fill the cruises.
So the charter companies asked the cruise lines to rework
the charter price, lowering the cruise industry's profits from the China market
International cruise lines have been sailing from China
since Costa Cruises began selling there 2006. At the time, there was barely any
model for cruise sales. Travel outside China for most citizens had long been
As a result, the distribution system for such travel was
undeveloped, limited to a few state-owned enterprises (SEOs) that the
government controlled. Today it is still dominated by those SEOs plus some very
large OTAs in China's larger cities, sources said.
Zinan Liu, president of RCCL's China and North Asia Pacific
Region, said the wholesale model is probably the most efficient one at this
time because it gives agencies exclusive access to the inventory and the market
power to sell at higher prices.
"The bulk purchase of cabins also enables charter
agencies to negotiate sizable shopping commissions with tour operators which
are an additional revenue stream," Liu wrote in an email. "Consequently,
cruise lines can also get higher yields because of revenue sharing with trade
However, Liu added, "As capacity grows, the wholesaler
system is problematic, as it may not achieve the penetration as much as a
Royal Caribbean International, like other cruise lines, is
trying to reduce its reliance on wholesalers. In a November conference call,
Royal president Michael Bayley said the line was quite pleased with the results
of new direct-sales efforts and that progress had been made in expanding the
base of sellers beyond the traditional wholesalers.
Norwegian Cruise Line is also pursuing direct sales after
receiving a license to do so in November. In a conference call, Norwegian
Cruise Line Holdings CEO Frank Del Rio told analysts that having a channel
where the cruise line has more control over pricing "would be a good
Norwegian is also selling cruises in China through a
partnership with Alibaba, the Chinese version of online retailer Amazon. Del Rio said Alibaba alone controls some 83%
of online purchases in China, adding that the Alibaba partnership will be
particularly helpful in targeting pitches to guests willing to pay more to go
on a cruise.
Cruise lines are also moving to break down the charter model
into smaller pieces. Carnival brands in China, rather than charter entire
ships, are beginning to work with travel agencies that will sell large groups.
With that model, Donald said, Carnival can forecast better
because it only has to recognize 10% of the revenue initially, with the rest
coming as the group is activated. "We think overall it gives us greater
clarity," he said. "It lowers the risk, the concentration of risk."