Comment: Cruise market is buoyant – but late

Fred. Olsen Cruise Lines sales and marketing director Nathan Philpot explains why the industry has cause for confidence.

"At a gathering of young, relatively new executives from the P&O Group in the mid-90s, I was representing P&O Ferries who, pre-Eurotunnel launch, were the ‘golden boys’ of the group, generating very healthy profits. I was introduced to executive director Sir Bruce McPhail who congratulated me on Ferries’ performance, however, as he walked away he said, "but do keep an eye on [P&O] Cruises’ impressive return on capital employed". 
 
This ‘impressive return on capital employed’ led to significant investment in cruise ships, and in the UK, the number of passengers doubled in the first ten years of the new millennium, from 750,000 to 1,500,000. This growth was achieved during a time when the package holiday market fell from 20 million passengers to less than 15 million.
 
However, the cruise industry has always been reliant upon existing customers, with only one third of the market being first-time cruisers; in 2012, more than half of cruise passengers took two or more cruises.
 
So, cruise passengers are an experienced and savvy bunch of bookers, who have learnt very quickly how to seek out the best value. Cruising is a very social holiday experience and people will talk about how they booked and what they paid – more than any other type of holiday.
 
Cruise lines, like hotels, are often judged by the financial markets on occupation rate as an indicator of performance and this, along with high fixed costs and – for some cruise lines – significant onboard spend, has meant that cruise lines have sought to maximise ‘bums on berths’ to achieve 100% occupancy and get the most out of their assets. This means that prices are cut nearer to departure to encourage bookings and achieve this aim.
 
We can see two forces at work: cruise lines attempting to maximise occupancy at the expense of yield; and savvy customers learning that the later they book, the better the deal. The cruise customer is typically retired (average age 56) and has not been so greatly impacted by the global recession. They, like all of us, still want a deal, and they have the time to look for one. Crucially, they can holiday ‘at the drop of a hat’ – they don’t have to book their time off in the same way as others who are working or have children at school – and they can wait until a couple of days before departure and then go.
 
The general economic climate and the ‘Costa Concordia’ disaster have not dramatically reduced demand, but they have accelerated the deal- seeking, late-booking culture that was already on the move. The number of bookings made inside three months has increased dramatically over the last three years. Cruising remains as popular as ever, but we, as the cruise industry, have to find ways to maximise revenue from a very different booking model. We may have to get used to seeing negatives versus last year early on when comparing year-on-year performance, but will need to remain confident that, as the year progresses, our passenger numbers will catch up and overtake the previous year; which is what we are seeing now, with bookings +50% in May and June.
 
Prior to my joining Fred. Olsen, ‘Latesaver’ deals were at 7.5% commission, and historically the share of this type of booking was less than 10% of our total business. As we have seen, the market has changed, which is why we have made our recent decision to increase the commission on late sales to the full 10%, because it accounts for a much larger share of an agent’s bookings and earnings.
 
More good news is that the share of those who book more than 12 months in advance is also increasing, albeit slowly, demonstrating that, where there is a scarcity of cabin types, or popular or unusual itineraries, then cruise customers will commit. For example, our ‘Solar Eclipse Cruise’ sold out inside three days. Shame there isn’t one of those every month!"