In the summer of 2012, a man walked into the casino on a Norwegian Cruise Line ship sailing in Europe carrying a paper bag that held close to a million euros. In a bit of extraordinary luck for Norwegian, he lost it all gambling.
That particular windfall was unusual, but it fits a larger trend of onboard revenue accelerating for cruise lines.
From Internet service to shore excursions to new drinks packages, the ways cruise lines are supplementing ticket revenue with post-departure extras are proliferating. (Click here or on the image for a larger view of a chart showing onboard revenue as a percentage of all revenue.)
The onboard picture is a bright spot in the industry. Several of the major players report that onboard revenue grew at a healthy rate last year, while ticket prices were anemic at best.
Driven by a rising awareness of how important onboard revenue can be to the bottom line, cruise lines are designing and building ships that offer more opportunities to stimulate impulse buying.
But in addition, said Norwegian CEO Kevin Sheehan, "It makes sure we remain relevant to the consumer. You need to keep it interesting."
For most of the 40-odd-year history of modern cruising, the industry touted its all-inclusive pricing as a selling point. The main exceptions were indulgences like casino gaming, spa treatments or shore excursions in ports of call.
That began to change around the turn of the millennium with Norwegian's creation of Freestyle Dining, an innovation inspired by the operations of its then-new parent company, Star Cruises.
A year later, Carnival Cruise Lines opened its first extra-charge restaurant, the 156-seat Nouveau Supper Club on the Carnival Spirit. Other lines fell in line behind the trend.
In 2001, the major cruise companies' annual reports revealed that onboard sales accounted for just over 20% of revenue. By 2012, that share had grown to 29.5% at Norwegian, 27.2% at Royal Caribbean Cruises Ltd. (RCCL) and 24.2% at Carnival Corp.
"It's [been] kind of an evolution," Sheehan said.
Adam Snitzer, a veteran of all three companies and now head of the Miami Beach consulting firm Peak Revenue Performance, said a trio of factors had been responsible for the rising tide of onboard revenue.
Money machines by design
The first factor is ship design. Newer ships are being conceived from the start with onboard revenue in mind, Snitzer said.
The recently launched Norwegian Getaway, for example, offers 13 bars and 28 dining options, a majority charging fees that range from $5 to $89. Many are clustered on decks six, seven and eight, where they comprise an entertainment zone that stays busy late into the night.
A key feature of the design is the Waterfront outdoor promenade, which opens the possibility of indoor-outdoor traffic and seating.
In addition, Snitzer said, "They're finding new ways to turn places into multiuse areas." As an example, he cited the Getaway's Spice H20, an Ibiza-inspired sunbathing space by day and an outdoor disco after dark.
"In older ships you have a theater, and the theater would be empty for most of the day [and] only be operated at night," he said. "Now there are more things in that space, which creates more things for people to do and more opportunities for onboard revenue."
Norwegian has told Wall Street analysts that ships such as the Epic and Breakaway, which were built to maximize onboard revenue, are more profitable and command higher fares than the line's older ships.
With that in mind, several lines are now retrofitting older ships with new bars and alternate dining venues, an example being Carnival Cruise Lines' Fun Ship 2.0 initiative, which includes adding a RedFrog Pub and BlueIguana Tequila Bar, as well as extra-fee restaurants such as Ji Ji Asian Kitchen and Cucina del Capitano.
A little marketing magic
A second reason onboard revenue is doing better is that cruise lines are managing the opportunities differently than they did in the past.
"Historically and traditionally, the people who were in charge of the onboard revenue departments were people who came up in the operations side of the business," Snitzer said.
But today, he said, onboard managers have a more "commercial" orientation: "They're coming in with more analytical perspectives and greater emphasis on marketing."
As an example, Snitzer pointed to the best price guarantee on shore excursions that Carnival Cruise Lines recently unveiled.
"It's something that Best Buy would do," Snitzer said. "It's a retail technique, but it has been applied by a cruise line, and we've never seen something like that before. In my view, it's quite innovative."
There are also managers who sail with each ship to tweak onboard spending by offering specials in spas, bars and shops, as well as making sure that other sources of onboard revenue are promoted.
Ken Muscat, senior vice president for marketing at MSC Cruises, said, "This position is typically under the responsibility of the deputy hotel director, who is responsible for coordinating all revenue centers."
A third driver of increased onboard spending has been new technology, Snitzer said.
"The major cruise lines have retooled their websites to do a very good job of letting people book their spa treatments or their shore excursions or make their dining reservations even before they get on the cruise," he said.
That's important, because passengers tend to have a "pre-departure" and a "post-departure" wallet, Snitzer said. If onboard items can be stuffed into the pre-sail wallet, some consumers end up finding other things to buy from the post-sail one, he said.
An example is the relatively new practice of single-price packages for alcoholic drinks, which can now be purchased and paid for before departure.
New technologies such as interactive in-cabin TVs and e-display panels also enable passengers to buy items, reserve a time at the spa or a specialty restaurant and view promotions for shore excursions and other potential sources of onboard revenue more easily, Snitzer said.
Indulging the foodies
While alcohol sales, casino gambling and shore excursions are generally acknowledged as the three prime onboard revenue streams, alternative dining may be the fastest growing. (Click here or on the image for a larger view of a chart of the charges for alternative dining options on some of the larger lines.)
"There's all kinds of new bar concepts, pretty much followed by new restaurants," Snitzer said.
Bigger ships have paved the way. One of the first restaurants to apply a cover charge was the Johnny Rockets installed on Royal Caribbean International's Voyager of the Seas in 1999.
As newbuilds push past the 4,000-passenger level, almost all offer separate Italian, Asian and steakhouse restaurants. A few have super-premium restaurants such as Remy on some Disney ships, 150 Central Park on the Oasis and Allure of the Seas or Ocean Blue on Norwegian's two newest ships. At these venues, meals are priced at $49 to $75 per person.
A dedicated chef's table, typically seating 12 diners, has also been cropping up on many ships, with a per-person cost in the range of $90 to $100.
Internet access and entertainment are other emerging sources of onboard revenue. The appetite for bandwidth at sea is apparently insatiable as passengers no longer want to be out of touch with friends, family or work. Charges vary, but on Royal Caribbean International ships, for example, connectivity starts at 65 cents a minute, with discounts for bulk packages.
In a recent conference call, Royal Caribbean President Adam Goldstein said that Internet service "has been doing well for us, which we wanted to see because we made a significant investment in seven or eight times more bandwidth to the ships this year."
The bulk of cruise ship entertainment remains free, but Carnival Cruise Lines recently unveiled a concert series called Carnival Live, with show tickets priced at $20 to $40 per person (or $100 to $150 for VIP seating).
On the Norwegian Getaway, entertainment and meals are being blended. The Getaway features the Illusionarium dinner show venue, which seats 232 diners, each of whom pays $25 to $30 to watch magic acts while they eat. The ship also offers a lunchtime wine tasting/theater experience called Wine Lovers the Musical for $25 per person.
There are a fair number of lesser onboard revenue streams, everything from cabana rental ($99 to $149 on the Celebrity Reflection) to deluxe photo portraits ($175 for an 8-by-10 on the Royal Princess) to barber services ($45 for a shave on the Norwegian Getaway).
Onboard sources accounted for more than $750 million in revenue at Norwegian last year, an 11.9% increase. At RCCL onboard revenue grew 6.7%, while Carnival Corp. saw a 2.2% overall increase.
Walking a fine line
As the mass-market cruise lines push onboard spending opportunities upward, they must avoid the perception that they're nickel-and-diming passengers. In fact, a number of luxury cruise lines now market their bundled onboard products as a point of product differentiation.
Sheehan said his line stresses that many new features, such as a ropes course and water park on the Norwegian Getaway, are free and that passengers can dine and cruise and never spend extra.
"It's a choice," he said. "We want to be clear about that."
Other cruise lines are both improving their core product and adding onboard revenue sources. For example, Carnival Cruise Lines' new main dining room concepts, American Table and American Feast, are being phased in this year fleetwide at no additional charge.
Cruise executives also say that many of the items that cost extra on cruise ships, such as spa treatments or alternative dining, are priced at or below resorts or comparable land venues.
Another area where cruise lines must tread cautiously is in how onboard revenue growth is portrayed to travel agents.
Virtually none of the money that cruise lines take in onboard is subject to commission, and as the percentage of revenue from onboard grows, some agents wonder if they are being cut out of profitable business.
Snitzer said that he doesn't think so. "There's no particular discussion or interest in shifting the total revenue from ticket sales to onboard sales in order to reduce commissions," he said.
Analysts say the fact that ticket sales, which are commissionable, have been rising more slowly than onboard revenue has more to do with the tough conditions affecting ticket pricing in recent years.
"I think the industry would love to be able to raise ticket prices; it just doesn't seem to have the ability to do so," said Matt Jacob, a cruise analyst for ITG Investment Research.
Jacob said consumer behavior seems to drive the onboard spending boom, as cruisers remain cost-conscious about fares but more willing to spend once they arrive on vacation.
"I don't think it's a conscious decision that they're trying to shift spending more to onboard," Jacob said. "If they could, they would raise prices on the cruise tickets."
Carnival Corp. CEO Arnold Donald said that while Carnival's brands enjoy the extra lift that onboard activities provide, tickets still account for more than 70% of the revenue.
"That is the biggest driver of the business," Arnold said in a question-and-answer call-in for reporters in January. "And that's our primary focus, not only to reward the travel professionals for what they do but also to drive the business."
If onboard revenue were commissionable at 15%, the 2013 onboard sales as reported by Norwegian, Royal and Carnival last year would be worth about $1 billion to agents.
Jacob said that despite the rising share of cruise revenue derived from onboard sales, travel agents have few alternatives to the cruise industry when it comes to earning commissions.
"The cruise industry is still, if not the highest, one of the highest opportunities for travel agents right now," Jacob said. "There are very few other industries that pay the remuneration that the cruise industry does."
At least one cruise line, however, has found a way to partly reward some travel agents for their client's onboard spending.
Azamara Club Cruises this year began crediting agents in the Virtuoso consortium with 3% commission overrides for high-value clients, and one of the factors contributing to high value is a propensity for onboard spending, according to Azamara President Larry Pimentel.
Pimentel said that Azamara's metrics are unusually granular and that he can tell how many drinks a customer has had and whether he or she bought the call liquor or Dom Perignon.
Sheehan said he's not sure how to implement such a system at Norwegian, but he's interested in how it might work.
"My whole story here at Norwegian is getting the right guest at the right time in the right part of the ship," he said.
For travel agents to earn extra for high-spending clients, Sheehan said, Norwegian would have to be able to "chart the data."
"If you can deliver someone who's in a suite or a minisuite or up in the Haven and they're booking well in advance, and then you know with pretty good certainty they're people who are going to spend nicely on the ship, I think it would be nice if we could figure that out," he said.
Follow Tom Stieghorst on Twitter @tstravelweekly.