In recent years, Carnival and RCCL have become increasingly dependent on their onboard businesses. Downward pressure on ticket prices resulting from rapid capacity
Real US$
(2014)
Food Depreciation
Payroll
Marketing Other Commission
& transport.
Fuel Operating
profit Onboard Onboard
revenue
Ticket revenue
Carnival
200.77
Food Depreciation
Payroll
Marketing Other Commission
& transport.
Fuel Onboard Onboard
revenue
Ticket revenue
RCCL 219.93 250
200
150
100
50
0 Revenue/PCD Costs/PCD Revenue/PCD Costs/PCD Operating
profit
Fig. 7.4. Carnival and RCCL’s real revenue, operating costs and operating profit per PCD in 2014.
growth and external shocks (see Figs 7.1 and 7.2) have led to a situation where cruises are turned into sophisticated platforms optimized for selling all sorts of goods and services. McDonald’s is sometimes said not to be in the hamburger business but in the cola and fries business because this is where they make their profits. In this sense, mass market cruise lines may be said to be in the shopping, casino and shore excursion busi- ness, rather than in passenger shipping. In order to induce passengers to spend time and money onboard rather than ashore, the big cruise lines design and promote their new ships as destinations in their own right (Weaver, 2005), rather than as floating hotels or means of transportation. The more money passengers are willing to spend during their cruise, the higher is the passengers’ economic value to the cruise line and the more compelling is the argument to deliberately subsidize ticket prices with the passengers’ expected onboard spending to lure more people into cruising (Vogel, 2011). This process has been a contributing factor in the decline of ticket revenue per PCD, but it is also instrumental in expanding the cruise industry’s market potential.
To demonstrate the growing extent of the cruise industry’s economic dependence on onboard business, a single snapshot like in Fig. 7.4 is not enough. Time series data and a suitable indicator are needed. One possible indicator is the ratio of net onboard revenue (i.e. onboard revenue minus cost of onboard business) and operating profit.
For simplicity, it will be referred to as:
NOR OP/ =netonboard revenue operating profit
If operating profit exceeds net onboard revenue, then NOR/OP < 100%, which means that ticket revenues alone are sufficient for a cruise company to be profitable. On the other hand, if net onboard revenue is greater than operating profit and thus NOR/OP
> 100%, onboard business subsidizes ticket prices. The line of demarcation separating these cases is defined by NOR/OP = 100% and depicted in Fig. 7.5a as a horizontal dashed line.
In Fig. 7.5a, Carnival’s solid curve and RCCL’s dotted curve illustrate the evolution of two companies’ dependence on their onboard business between 2001 and 2014.
Both curves show clear upward trends from 2005, which indicates that net onboard revenue has been growing faster than the companies’ operating profits. Until 2008, Carnival was largely able to cover its operating costs (excluding the cost of onboard business) with its ticket revenue, and net onboard revenue was about equal to Carni- val’s operating profit (NOR/OP ≈ 100%). Since 2008, however, the company’s onboard business has paid not only for operating profit but also for an increasing portion of operating costs (NOR/OP > 100%). RCCL had already been relying on its onboard business to subsidize cruise operating costs for much longer, but the situation became more extreme after 2008.
Figure 7.5a could easily be misread as evidence that the cruise industry has made the transition to a business model allowing it to cope with its declining ticket revenues per PCD. However, such a reading of the diagram would neglect the fact that a ratio increases in value not only when its numerator grows faster than the denominator, but also when the denominator falls faster than the numerator. The peaks of RCCL’s NOR/OP curve in 2009 and 2012, for example, are the result of particularly low operating profits in those years, not of particularly high net onboard revenues. Carni- val’s curve peaked in 2013 for the same reason. This side of the story is illustrated by Fig. 7.5b. Here, the two curves represent Carnival and RCCL’s return on sales, i.e.
operating profit in relation to total revenue. Return on sales is a measure of how much profit is being produced per dollar of sales. Both return-on-sales curves point down- wards, which means that Carnival and RCCL’s total revenues are becoming less and less profitable.
Conclusion
Carnival and RCCL, which represent three-quarters of the global ocean cruise industry, share some remarkable economic features: they receive interest-free loans worth bil- lions of dollars through customer prepayments; they save further billions of dollars in labour costs due to the tipping practices they help to enforce; their occupancy rates consistently exceed 100%; and yet their cruise operations are losing money. Mainly as a consequence of the cruise industry’s enormous capacity expansion in mass-market segments, ticket prices per PCD have fallen by over a quarter in real terms since 2001.
Cost reductions have not been able to keep pace. The cruise lines’ onboard businesses have to bear the increasingly heavy burden of delivering the entire operating profit and paying for a growing share of cruise operating costs.
A look at the cruise industry’s order book for new ships (Cruise Industry News, 2015) suggests that the significant additional capacity expected over the coming years will not allow ticket prices to recover. Lower fuel prices may buy the cruise lines time but will not offer a permanent solution to the problem of eroding profit- ability. It seems more realistic to stop and reverse the downward trend of onboard revenues per PCD. The successful decoupling of RCCL’s onboard business from ticket revenue in 2002–2007 (see Fig. 7.2) may offer lessons yet to be fully under- stood. But even then, it is unlikely that onboard business will save the day. Too big
0%
50%
100%
150%
200%
250%
300%
350%
400%
(a) (b)
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Year Year
0%
5%
10%
15%
20%
25%
01 02 03 04 05 06 07 08 09 10 11 12 13 14 Carnival
RCCL
Carnival
RCCL
9/15
9/11 9/11 9/15
net onboard revenue operating profit
NOR/OP = operating profit
total revenue Return on sales =
Fig 7.5. Carnival and RCCL’s NOR/OP and return on sales 2001–2014.
are the combined effects of shrinking revenues per PCD (see Fig. 7.1) and shrinking returns on sales (see Fig. 7.5b) to be overcome by onboard business alone, which represents only about one-quarter of total revenue.
Teece’s (2010) abovementioned business model definition demands ‘a viable struc- ture of revenues and costs’. Carnival and RCCL’s financial data raise doubts about the viability of the companies’ future structure of revenues and costs, and hence about their future business model. The transformation of the cruise industry from a fairly exclusive niche within the tourism sector into a mass-market phenomenon presents challenges to which the major cruise lines do not seem to have found an economically viable answer yet.
References
Carnival (2015) Investor relations, annual reporting. Available at: phx.corporate-ir.net/phoenix.
zhtml?c=140690&p=irol-reportsannual (accessed 23 March 2015).
Cruise Critic (2014) An insider’s guide to cruise tipping. Available at: www.cruisecritic.com/
articles.cfm?ID=132 (accessed 23 March 2015).
Cruise Industry News (2015) Cruise Ship Order book. Available at: www.cruiseindustrynews.
com/cruise-news/cruise-ship-orderbook.html (accessed 23 March 2015).
Cruise Market Watch (2015) 2015 World wide market share. Available at: www.cruisemarketwatch.
com/market-share (accessed 23 March 2015).
Cruiseship.org (2015) Carnival cruise tips/gratuities. Available at: www.shipcruise.org/
carnival-cruise-tips-gratuities-tipping-policy (accessed 23 March 2015).
Klein, R.A. (2001) High seas, low pay: working on cruise ships. Our Times: Canada’s Inde- pendent Labour Magazine 29–34, December.
Klein, R.A. (2011) Responsible cruise tourism: issues of cruise tourism and sustainability.
Journal of Hospitality and Tourism Management 18, 107–116.
Leonhardt, D. (2011) The paradox of corporate taxes. The New York Times B1, 2 February.
Lindquist, L.A. and Golub, R.M. (2004) Cruise ship care: a proposed alternative to assisted living facilities. Journal of the American Geriatrics Society 52, 1951–1954.
Manning, E.W. (2012) Impacts of cruising. In: Vogel, M., Papathanassis, A. and Wolber, B.
(eds) The Business and Management of Ocean Cruises. CAB International, Wallingford, UK, pp. 46–59.
RCCL (2015) Investor relations, financial reports. Available at: http://phx.corporate-ir.net/
phoenix.zhtml?c=103045&p=irol-reportsAnnual (accessed 23 March 2015).
Teece, D.J. (2010) Business models, business strategy and innovation. Long Range Planning 43, 172–194.
Tucholsky, K. (1931) Rezension zu Hans Falladas Roman ‘Bauern, Bonzen und Bomben’. Die Weltbühne 14, 500, 7 March.
Vogel, M. (2009a) The economics of U.S. cruise companies’ European brand strategies.
Tourism Economics 15, 735–751.
Vogel, M. (2009b) Onboard revenue: the secret of the cruise industry’s success? In: Papa- thanassis, A. (ed.) Cruise Sector Growth. Gabler, Wiesbaden, Germany, pp. 3–15.
Vogel, M. (2011) Monopolies at sea: the role of onboard sales for the cruise industry’s growth and profitability. In: Matias, Á. and Nijkamp, P. (eds) Tourism Economics: Impact Analysis.
Physica, Heidelberg, Germany, pp. 211–229.
Vogel, M. (2012) Pricing and revenue management for cruises. In: Vogel, M., Papathanassis, A.
and Wolber, B. (eds) The Business and Management of Ocean Cruises. CAB Inter- national, Wallingford, UK, pp. 131–144.
Vogel, M. and Oschmann, C. (2012) The demand for ocean cruises – three perspectives. In:
Vogel, M., Papathanassis, A. and Wolber, B. (eds) The Business and Management of Ocean Cruises. CAB International, Wallingford, UK, pp. 3–18.
Weaver, A. (2005) Spaces of containment and revenue capture: ‘Super-Sized’ cruise ships as mobile tourism enclaves. Tourism Geographies 7, 165–184.
Zott, C., Amit, R. and Massa, L. (2011) The business model: recent developments and future research. Journal of Management 37, 1019–1042.
Introduction
Revenue management is the deliberate and selective use of pricing strategies as a means of influencing consumer demand (Klein, 2006; Gross and Lück, 2012; Vogel, 2012). Pricing strategies affect revenue generation and, ultimately, profitability. Some sellers provide extra-charge add-ons to consumers who purchase their main product.
These add-ons are proliferating in a variety of industries, including the airline industry (Nason, 2009; Hamilton et al., 2010). Air travellers sometimes have to pay a fee for checked baggage and onboard food. It could be argued that consumers have, across a range of domains, become more accustomed to additional-charge products and ser- vices. A more market-oriented ideology in the public sector across a number of coun- tries has prompted the introduction of more user-pay schemes in connection with public services (More, 1999; Lee and Pearce, 2002). Many businesses have also turned to various forms of fee setting as a means of increasing revenue and profitability.
In the cruise industry, the practice of providing extra-fee products and services to passengers has become widespread. Passengers ‘find [themselves] forking out for everything from a cup of coffee to an ice cream bar or snack. You pay to dine in a specialty restaurant, for fitness classes, for in-cabin movies or to hire a DVD’ (Archer, 2008, p. 16). Extra-charge add-ons account for between 25% and 30% of the total revenue earned by Norwegian Cruise Line, Royal Caribbean Cruises Ltd and Carnival Corporation (Stieghorst, 2014).
The rise of extra-fee add-ons in the cruise industry has been noted by scholars (Klein, 2006; Gross and Lück, 2012; Vogel, 2012) as well as travel writers who con- tribute to newspapers and magazines (Archer, 2008; Elliott, 2011; Stieghorst, 2014).
This chapter argues that a closer examination of the extra-fee phenomenon in the cruise industry exposes three tensions. The first tension relates to power: the power wielded by cruise lines as they structure their shipboard experiences and its connec- tion with the rising power of consumers in the commercial realm. Second, a tension exists between, on the one hand, consumers who could potentially feel ‘nickel and dimed’ by the option to pay for so many extra items and, on the other, the notion that extra-fee charges could benefit passengers. The third tension involves the connection between standardization and customization, two processes that are responsible for
8 High Fees on the High Seas?
The Provision of Extra-Fee Products and Services
A
dAmW
eAver*
Victoria University of Wellington, School of Management, Faculty of Commerce, Wellington, New Zealand
*E-mail: [email protected]
creating a modular, choice-filled experience. These three tensions suggest that the provision and purchase of extra-fee items is underpinned by a complex series of rela- tionships. The relationships that are described in this chapter are the product of cer- tain tendencies and counter-tendencies that cut across each other. However, these tendencies and counter-tendencies are bound together by an overarching logic that increasingly accepts the adoption of additional charges and user fees.
There is a simultaneous attraction and aversion to extra-fee add-ons. The status quo with respect to certain business practices is accepted, even sometimes embraced, but it is also subject to criticism. This ambivalent condition reflects the nature of power relations that characterize the commercial interactions between cruise lines and their passengers. The profit motive is a central and guiding principle for these inter- actions. Current circumstances – shaped by the way in which power operates – are supported by consumers who, similar to cruise lines, typically respond positively to the principles that underpin the functioning of the free market. One can be critical of certain nuisances associated with the status quo – for example, a myriad of fees and charges – without rejecting ‘the system’ altogether. This chapter is sympathetic with conceptualizations of power and influence that are more nuanced and complex (Lukes, 2005). Countervailing tendencies may co-exist and reflect, at different times, either satisfaction or discontent but such tendencies (or their corresponding counter-tenden- cies) do not necessarily challenge current conditions more deeply. Extra-fee products and services, despite the complaints, would appear to have become a firmly entrenched phenomenon within the cruise industry.
The three tensions that have been identified and briefly summarized are addressed in separate sections of the chapter. Some conclusions are then provided. The data used in this chapter are derived from articles published in newspapers (such as The Wall Street Journal), travel magazines (such as National Geographic Traveler) and travel trade publications (such as Travel Weekly). Quotations that appear in this chapter are used to document the actions of cruise lines and to convey the beliefs and opinions of authors, analysts and industry participants who have written or spoken about the cruise industry. These commentators and practitioners support their points of view by offering evidence ranging from specific anecdotes to numerical data. The quotations that are used were selected from several publications and the ideas they address are organized into a comprehensible narrative. This narrative examines tensions shaped by tendencies and counter-tendencies. The interpretation offered by this chapter is one among many that could be written.