Cruise & RM - Carla Bento

Revenue
Management
for Cruise
Ships
Carla Bento, ESTH, IPG

Overview / Presentation
outline
• Summary of Business Performance of Cruise
Vacation in Europe
• Trends and profiles of the cruise ship market
• Ship Classifications
• Critical variables in cruise business
performance
• The Cruise Product
• A financial breakdown
• Revenue Management
• 8 steps to get done
Erasmus IP project, “Sustainability of Cruise Tourism”, 15-26 April 2013,
Seia-Portugal

Summary of Business
Performance of Cruise
Vacation in Europe
• Circa 1880 – An increase in the profitability
of travel leads to the appearance of the
first cruise enterprises
• “Península and Oriental Steam Navigation
• Company” (P&O) is believed by some authors to
be the first cruise company
• 1920s
• Activity with a particular emphasis on Germany
• Intended primarily to senior tourists
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Summary of Business
Vacation in Europe
• 1950
• The activity expands worldwide, mainly because
the increase demand for sun and sea
destinations, and also air travel growth.
• It becomes accessible to people with common
income.
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• http://www.youtube.com/watch?v=KxY5GoFrO
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Summary of Business
Vacation in Europe
• 1960s
• Growth in demand intensifies during this
decade.
• Early 1970s
• Cruise terminals are restricted to piers in ports
that traditionally received the transatlantic liners.
• From the end of the 1970s
• A change occurs in the way the product is
pictured
• The industry is no longer regarded as a luxury
product
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Summary of Business
Vacation in Europe
• The cruise industry owes THE LOVE BOAT TV series for
the dramatic popularity of cruising starting in the
1970s.
• P&O Lines, the former owner of Princess Cruises,
emphasized in an early 1990s financial press release
that the LOVE BOAT had probably generated over
a billion dollars in revenues for the cruise lines.
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http://www.youtube.com/watch?v=icAwcByaNtY

Summary of Business
Vacation in Europe
• 1990s
• There is an increase in airline capacity
• Also an increasing representativeness of non
North American passengers
• Today
• Increased market demand for cruises leading to
significant growth of European ports
• New range of destinations and new home ports
in less saturated areas
• The potential for business growth in Europe
remains high
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Trends and profiles of the
cruise ship market
• The Cruise Experience
• Many tourists who choose to cruise perceive
cruising as safe, social, service-oriented, and
customer friendly.
• Cruise ships combine familiarity with the
excitement of travel.
• Easiness is also perceived as an advantage:
“we only pack twice during the whole vacation!”
• Some travelers perceive cruising as expensive,
claustrophobic, elitist, seasickness-inducing, and
reserved for older people only.
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cruise ship market
• The Cruise Experience
• It is less expensive to take a cruise than flying
and staying in hotels with minimal quality (and
still have to pay for food and additional
shipping); Ward, 2010
• A wide variety of shore excursions and activities
are offered at each port of call
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cruise ship market
• The growth of Europe as a cruise
destination has been motivated by two
separate but related factors
• New European tourists attracted by European
cruise companies based in Europe, as well as
the North American companies;
• The increased demand for cruises in Europe by
European and North American passengers,
encouraged by the decision of North American
companies to put more vessels operating in
Europe
• http://www.turisver.com/article.php?id=60708
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cruise ship market
• In this context, the main European
destinations, both for European and North
American Cruise tourists are the
Mediterranean and the North of Europe
• There is a number of cruise destinations:
• Caribbean, Alaska, Northern Europe,
Mediterranean, Middle East, South Africa, India,
Mexican Rivieira, Panama Canal, South
America, Australia, New Zealand, Middle East,
Bermuda, Bahamas, Hawaii, Greek Isles, Africa,
Australia, South America, Asia, Polynesia,
Panama Canal and Alaska
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2013 – Projections
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Source: Cruise Lines International Association

cruise ship market
• Duration
• Usually lasting between 3 and 22 days, and,
occasionally, there may be routes of 45 or 90
days
• There are also two-day trip cruises and others
that take passengers around the world lasting
up to 180 days
• The most common duration of a cruise is usually
seven days
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cruise ship market
• Seasonality – examples
• Cruises departing from the port of New York and
destined to Bermuda are between the months
of April and October.
• The crossings of the Panama Channel are
organized between September and April.
• Alaska cruises are held between the months of
May and September.
• In the case of the Mediterranean, Northern
Europe and Greek islands cruises are carried out
mostly between April and November.
• Cruises bound for the East, Australia and New
Zealand are held between October and April
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cruise ship market
• Loyalty
• The cruise industry has a high number of repeat
guests
• From the moment a tourist is captivated by this
kind of holiday, he or she likes to try different
ships and explore different destinations (Travel &
Tourism Analyst, 2010).
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http://www.cruise-addicts.com/

cruise ship market
• Major Players / Cruise Operators
• Cruise brands take great care when it comes to
their reputation because customers believe a
brand name implies a certain standard of cruise.
• Cruise operators or brands dominate the
market. They either lease or own cruise ships for
which they create itineraries or products.
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Major Cruise Line brands

cruise ship market
Major Players – The major companies in the
field include:
• Carnival Cruise Lines
• Celebrity Cruises
• Costa Cruises
• Cunard Line
• Holland America Line
• MSC Cruises
• NCL (Norwegian Cruise Line)
• AIDA Cruises
• Classic International Cruises
• Crystal Cruises
• Disney Cruise Line
• Hapag-Lloyd Cruises
• P&O Cruises
• Princess Cruises
• Royal Caribbean Cruise Line
• Star Cruises/NCL
• Azamara Club Cruises
• Pullmantur
• Oceania Cruises
• Regent Seven Seas Cruises
• Saga Cruises
• Swan Hellenic Cruises
• Fred Olsen Cruise Line
• Iberocruceros
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cruise ship market
• Major Players
• Branding is essential to bring in new business
• encouraging repeat customers
• creating brand recognition
• defining the company’s approach to operations
and marketing
• most importantly, establishing customer loyalty
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Ship Classifications
• Luxury
• Small liners with few passengers who enjoy five-
star-level accommodations
• Premium
• Above-average service, food, and amenities
• Resort/Contemporary
• The modern “floating resorts,” complete with
swimming pools, golf ranges, and climbing walls
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Ship Classifications
• Niche/Specialty
• Rely on specialization to attract their clientele.
Emphasizes one or more aspects of the cruising
experience, such as cultural interaction, soft
adventure, or language enrichment.
• Value/Traditional
• Involves mid-sized, older cruise ships with fewer
facilities than the newest megaships.
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Critical variables in cruise
business performance
• Travel Agents
• Travel agents who specialize in arranging cruises
often form strong alliances with cruise
companies, who frequently support “their
agents” through training, sales events, and
customized marketing materials.
• Alliances
• Cruise operators may decide to form alliances
with other vacation service providers in order to
create a more attractive package, or to create
additional reasons for customer loyalty.
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• The Distribution System
• The cruise market can be divided three ways:
focused on the product, on customer identity,
and on satisfying a need.
• Traditional travel agents are stagnating as a
channel for cruise distribution. They made no
significant gains in 2011 and lost out to online
and direct channels.
2012 U.S. Online Travel Overview, PhoCusWright
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• The Distribution System
• Traditional agencies delivered 62% of cruise
passenger revenue in 2011, but that was down
from 66% in 2010. Agents’ share of cruise sales
will decline further – to 57% – by 2014
• Overall, online cruise sales grew by 32% to hit
$1.9 billion, or 13% of all cruise sales in 2011.
• Online cruise sales are expected to grow by
double digits from now until 2014, when they will
account for 18% of cruise revenue
PhoCusWright.
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• The Distribution System – Cruise line sites
outpace OTAs
• Cruise line-branded websites are fast outpacing
OTAs in share of cruise revenue.
• The cruise lines’ own sites will expand their share
of online cruise revenue from 43% in 2010 to 59%
in 2014.
• OTAs and cruise line-branded websites had an
even 50-50 split in the share of cruise revenue in
2011.
PhoCusWright.
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• The Distribution System – Cruise line sites
outpace OTAs
• “That pattern will continue as more consumers
go straight to the cruise lines and as cruise lines
continue to ramp up their capacity to support
direct sales, both by processing transactions
through their websites and by referring shoppers
to 800-numbers to complete bookings”
• As OTAs lose ground to supplier sites, “travel
agents will struggle to compete with OTAs,
supplier sites and cruise line call centers”
PhoCusWright.
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• The Distribution System – Large lines more
aggressive online
• The largest cruise brands are driving the trend
towards online/direct sales. Those leading the charge
include Carnival Cruise Lines, Royal Caribbean
International, Norwegian Cruise Line and Princess
Cruise Lines
• However, distribution channels vary widely among
the cruise lines
• Holland America line and Celebrity Cruises, rely more
on travel agents and have lower online penetration.
• Others, including Crystal Cruises, Regent Seven Seas
Cruises and Silversea Cruises, rely overwhelmingly on
travel agents or do not accept online books at all.
PhoCusWright.
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• Market Segments
• Some segments of the cruiser market
include:
• Restless Baby Boomers
• Enthusiastic Baby Boomers
• Born between 1946 and 1964.
• The largest generational segment numbering
nearly 78 million members.
• Luxury Seekers
• Consummate Shoppers
• Explorers
• Ship Buffs
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• For Cruise Operators
• Cruises have a variety of fixed costs, such as
fuel, port administration, and customs.
• To increase profits, the cruise operators seek to
reduce these costs without adversely affecting
quality.
• Larger companies can negotiate for such items
as fuel and consumables much more easily than
smaller companies. Through negotiations, costs
can be effectively reduced, often by quite a bit.
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The Cruise Product
• The Cruise Product
• Cruises have three different economic
features:
• Inelasticity - a cruise product is “perishable”
because it can’t be stored if not sold
• Heterogeneity - the product consists of a
variety of components that make the cruise
experience different for each customer
• Complementarity - the cruise is not one
single experience but a host of elements
that combine to form the cruise experience
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The Cruise Product
Revenue centers
• Dining –The Buffet
• Main Restaurants
• Other Options
• Bars
• Entertainment
• Entertainment generally does not produce
additional revenue for the cruise, but small sales
can be made indirectly.
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The Cruise Product
Revenue centers
• Shore Excursions
• Shore excursions are sold to passengers both
before and during the cruise. Alone, they
generate revenue, but the shore excursion’s true
purpose is to add value to the cruise
experience.
• Beauty and Therapy
• Cruise brands may contract concessionaires to
provide the service or other brands may have
their own staff.
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The Cruise Product
Revenue centers
• Shopping
• Shops generally include fashion stores for both
sexes, a gift shop, a general store, and a
jeweler.
• Photography
• The presence of the photographers ensures that
passengers can purchase professionally taken
pictures, some of which are available in special
presentation packs.
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The Cruise Product
Revenue centers
• Casinos
• Cashless ships are becoming more popular
within the cruise industry, with special cards for
passengers to use that credit purchases to their
account.
• Celebrations
• Many brands have developed special, inclusive
wedding packages.
• Other celebrations can be catered to as part of
a package, such as honeymoons, birthdays,
and anniversaries.
• MICE
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The Cruise Product
Revenue centers
• Role of Tipping
• Cruise lines have different methods for tipping:
several choose to enact a “no-tipping” policy;
others provide a helpful brochure which
suggests tipping in a very standard and orderly
system, while some automatically levy a daily
service charge.
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The Cruise Product
Managing the Operations
• Managing the Operation
• One key to successful management is
understanding the attitudes and behaviors of
the crew - knowing the employees.
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The Cruise Product
• Environment
• Traditionally, the hospitality industry has not
been terribly environmentally friendly
• The industry as a whole uses immense volumes
of energy, water, consumer goods, and rare
luxury items while seemingly ignoring the
environmental consequences of its consumer-
driven product.
• Cruises in particular must take care that they are
operating in a more ecologically friendly
manner, simply because they operate in the
ocean.
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The Cruise Product
• Health, Safety, and Security
• Onboard diseases, such as the norovirus, tend to
garner a lot of media attention, but they are in
no way the only threats.
• Security is also a significant concern, especially
because cruises have recently begun marketing
themselves as a very secure vacation option.
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The Cruise Product
• Safety
• There are a few downsides to the increase in
security: more bureaucracy, longer lines for
passengers and crew to wait in, less privacy,
increased costs, and a higher level of
complexity when planning.
• Interestingly, security equipments are not as
effective at preventing security issues as is
creating a “security philosophy and mindset”
among the staff, crew, and officers.
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The Cruise Product
Managing the Hotel Department
• Managing Service – Five elements must be
consistently maintained in order to provide the best
customer experience:
• Officers, managers, crew, and staff must all be
sufficiently trained
• Employees should be instinctively customer-
oriented in their thinking
• Crew at every level should be empowered to
solve customers’ problems
• Employees should be aware of company
standards
• Employees should be capable of exceeding
assumed standards
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The Cruise Product
• Accommodation
• Because capacity may exceed 100% due to
strategic booking, accommodation
management must be extremely efficient,
thorough, and above all, flexible
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The Cruise Product
• Cruise Ship Rate Options and Strategies
• Depend largely on itineraries and configuration
of specific ship
• Generally, rates based on number of
days/nights: “5 days/4 nights”
• Rates usually inclusive: includes 3 meals per day
• Rates vary based on ship’s cabin/room layout:
• Generally, higher-level cabins/rooms with
outside views cost the most
• Lower-deck, inside cabins cost least
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The Cruise Product
Managing Food and Beverage
• Supplies and Services
• Planning food and beverage supplies for an
entire cruise ship relies on analyzing prior
consumption patterns, planning menus for
different types of passengers, forecasting
needed quantities, and identifying expected
changes to routine.
• Germans: more Pork is needed
• Americans: more Beef and Chicken
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How much does a ship cost?
Here are a few exemples
Ships by Line Year built Ship Weight Capacity
Cost to Build
(millions USD)
Cost per
Berth (USD)
Azamara Quest 2000 30,280 710 $150 $196,000
Grand Mistral 1999 48,200 1,248 $245 $153,000.
Celebrity Eclipse 2010 122,000 2,850 $640 $203,000
Costa Allegra 1992 28,400 784 $175 $175,000
Disney Dream 2011 128,000 2,500 $900 $225,000
MSC Precioza 2013 139,400 3,502 $550 $126,000
Norwegian Epic 2010 155,900 4,228 $1,2 billion $230,000
Voyager of the
Seas
1999 137,300 3,114 $500 $130,000.
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Voyager of the Seas – a few
numbers
• Capacity – passengers 3114 / crew 1181
• Ratio: 0,37
• Length – 310 meters – Width 42 meters
• Food preparation:
• 22 000 daily meals
• 63 000 Deserts per week
• 49 000 Appetizers per week
• 14 000 Steaks per week
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Voyager of the Seas – a few
numbers
• Weekly consumption (05 December 2007)
• Beef 8 636 kg
• Pork 34 010 kg
• Lobster 1 591 kg
• Fresh eggs 75 000 units
• Fresh fruit 20 455 kg
• Fresh vegetables 29 091 kg
• Yogurt 4 200 units
• Milk 4 542 litres
• Assorted frozen items 38 636 kg
• Sea food 5000 kg
• Coffee 682 kg
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Financial Breakdown of
Typical Cruiser
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• Break down of the estimated 2013 average
cruise revenue and expense per passenger
for all cruise lines world wide.
• The average revenue per passenger per
day is projected to be $200.85,
• with $152.39 ticket price
• and $48.47 on board spending
• average cruise duration 8.5 days, median
duration 7.0 days.

An example: Revenue Expenses
Ticket (8,5 days average duration) $1,311
Onboard Spending $417
-Casino & Bar $222
-Shore excursions (cruise line
portion)
$81
-Spa $40
-All other onboard spending $61
Total spending $1,728
Other operating costs $251 14.5%
Agent commission $225 13.0%
Ship fuel costs $221 12.8%
Corporate Operating Costs $200 11.6%
Payroll $190 11.0%
Depreciation/Amortization $166 9.6%
Victualing (food) $104 6.0%
Onboard and other $76 4.4%
Other and transportation $57 3.3%
Interest Expense $54 3.1%
Total Expenses $1,543
Profit before taxes $185 10.7%
ErasmusIPproject,“SustainabilityofCruiseTourism”,15-26April2013,
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The Cruise Product
• Managing Facilities
• One of the main challenges involved in
operating a cruise ship includes dealing with the
lack of space.
• All of this leads to the need of…
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Revenue
management
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Revenue management
• Revenue Management is the application
of disciplined tactics that predict customer
behavior at micro-market level and
optimize product availability and price to
maximize revenue growth. Cross (1997)
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Revenue management
The Yield Management core concept is to
provide
• The right service
• At the right time
• For the right price
• To the right customer
• … through the right distribution channel.
Adapted from Kimes (1989). The Basics of Yield
Management
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Revenue management
• Revenue management
• It can be defined as offering the proper
type of inventory (cabins/staterooms) at
the correct price to maximize revenue.
• Revenue Management is the act of
skillfully, carefully, and tactfully managing,
controlling, and directing capacity and
sources of income, given the constraints of
supply and demand.
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Revenue management
• Revenue Management (cont.)
• The perishability of the product (a cruise cabin
unsold on a particular cruise can never be
resold) drives the revenue management policy.
• The multiplier effect suggests that revenue can
be made after the booking is already made,
and therefore the revenue management system
needs to concern itself with attracting sales
once onboard.
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Revenue management –
application
• Relatively fixed capacity / Constrained
Supply
• Fluctuating demand
• Ability to segment markets
• Perishable inventory
• Product sold in advance
• Structure of marginal costs:
• Low variable (sales) costs
• High fixed (production) costs
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application
• Revenue optimization strategies can be
applied to any service industry in which
service capacity or inventory is limited or
constrained and thus must be managed
and allocated among interested buyers.
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Service Industries Applying
Revenue Optimization
Strategies
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Bars
Bed and
breakfasts
Campgrounds
Car rentals Casinos
Catering
services
Comedy clubs Concert halls
Convention
centers

Strategies
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Cruise ships Dining clubs Golf courses
Health clubs Hotels
Janitorial
services
Live concerts/
performances
Motels Night clubs

Strategies
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Personal/
fitness
training
Race tracks
Recreational
equipment
rentals
Resorts Restaurants
Ski resorts/
lifts
Spas
Sporting
events
Swimming
clubs/ pools

Strategies
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Tanning
services
Theaters/
cinemas
Theme
parks
Timeshares
(lodging)
Uniform
services
providers
Water parks

developing a strategy
• Customer knowledge is the first
fundamental element in the development
of a revenue management strategy
• Who are my customers?
• Who are my potential costumers?
• How much do they earn?
• How much money are they willing to pay for my
service/product?
• What do they like to do when they are on
board?
• How can I exceed their expectations?
• Where do they buy or produts?
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• Customer knowledge (2)
• Know your consumers and their preferences
• Prosumer = Professional + consumer
• Be aware of e-commerce
• Invest on a CRM programme
• Customize your products and packages
• Know how much each customer is worth for you
• Work on the Price/Value relationship
• Improve your products’ perceived value
• Invest on Marketing research
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• Marketing segmentation and selection is
the second fundamental element
• Define your leading market
• New and growing segments include adventure
travelers and sub segments based on lifestyle
preferences
• Know where they buy your products –
distribution channels by segment
• Analyse emerging trends and niche markets
• Total customer worth
(Primary Revenue + Ancillary Revenue – Acquisition
Cost) x Propensity Y
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• Internal assessment is the third fundamental
element
• Develop a deep SWOT analysis
• Work on the results, i.e. look at the strengths to
see how they can help you minimize or reduce
threats
• A competitor is a rival with whom one competes
• A business may have several competitors locally,
nationally, or even globally – know them
• Positioning
• The physical and mental perceptual placement
of a product or service in a customer’s mind –
How is your product seen buy your customers and
potential costumers?
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• Competitive analysis is the fourth
fundamental element
• Competitive intelligence
• conduct primary research and analyse
secondary research to understand the
characteristics of the competition
• Once an organization completes its own SWOT,
it should then try to develop an individual SWOT
analysis for its top 3 to 5 competitors
• Market share
• percentage share of an overall market captured
by an individual organization
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• Demand forecasting is the fifth
fundamental element
• When do the customers book?
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• Demand forecasting (2)
• Understand the laws of supply and demand
• The law of demand states that the quantity of a good or
service demanded by buyers tends to increase as the
price of that good or service decreases, and tends to
decrease as the price increases, all things being equal.
This represents an inverse relationship between price
and quantity demanded
• Understand price elasticity
• The extent to which quantities supplied or demanded
change when there is a price change
• How does this affect the organisation?
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• How to forecast demand?
• Know your demand generators and drainers
• Analyse past book behaviour
• By segment and distribution channel
• Ask the following questions:
• 1. How did last year’s forecast compare to actual
production?
• 2. How did the demand look this time last year?
• 3. How many sales were made on this date last year?
• Additional historical reports may include:
• 1. Denials and regrets
• 2. Lost business reports
• 3. Cancellations
• 4. No-shows
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• Channel analysis and selection is the sixth
fundamental element
• Analyse
• Channel productivity
• Costs
• It is important to understand that not all
channels will produce in the same manner over
each date in the course of a year.
• Determine which channels will optimize
revenues for each specific date of the year and
then assign the appropriate levels of inventory
to each channel on each date.
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• Dynamic-value based pricing is the seventh
fundamental element
• Many variables go into establishing the price for
a product or service.
• First, the position of a product or service in its life
cycle will have a significant impact upon
determining its price.
• Second, customer loyalty and brand equity play
tremendous roles in establishing price. Third,
competitors’ prices have an impact on the
setting of price.
• Demand plays a key role in establishing price –
note that discounting is not always the best
option
• Prices communicate
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• Dynamic-value based pricing (2)
• Concept of price/value is essential
• How do the cruisers value the experience?
• How do customers perceive and react to price?
• Develop a customer-centric approach to
pricing
• pricing strategies centered upon the perceptions
and buying behaviors of customers rather than
focused solely upon the attributes of its products
and services
• The price should be as dynamic as the demand
• The main objective is always to maximize
revenue
• Best Rate Guarantee on your direct channels
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• Consider customer loyalty and repeat business.
• Frequent customer programs are popular in all
sides of the hospitality industry. Pricing is a key
factor in attracting membership
• Consider the value of a brand in establishing
price. Brand equity is the value generated by a
brand
• Note that the Internet has made price
transparency a feature of all products and
services offered online
• Price parity is defined as the practice of
maintaining consistent prices across all channels
of distribution
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• Pricing strategies must be determined for each
customer/channel combination as well in a customer-
centric approach
• Rate Fences: Managing Differential Pricing
• Tangible
• Inventory type
• Position, view
• Amenities
• Intangible
• Time of usage
• Booking lead time
• Restrictions
• Special (negotiated) rates
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• Channel and inventory management is the
eighth and final fundamental element in
the development of our revenue
management strategy
• Manage the inventory to maximize profit – using
forecasting data
• Use overbooking if necessary
• Control sales throughout all channels
• Close dates when necessary
• Leave the best and most profitable channels
open
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• The strategic management process may be broken
down into four primary activities, which we will refer
to as the IDEA:
• I = Identification of goals and objectives
• D = Development of strategies and tactics
• E = Execution of selected strategies and tactics
• A = Analysis, evaluation, and adjustment of strategies
and tactics
• The process is circular, meaning that one the
process is complete, it simply begins once again.
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• And the selected strategies must be
SMART:
• S = Specific
• M = Measurable
• A = Achievable
• R = Realistic
• T = Trackable
• Re-evaluate whenever necessary
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Cruise line trends survey
• Global destinations
• Exploring the unknown
• Big brand entertainment
• Specialty dining
• Romance reigns
• Importance of outdoor spaces
• The more the merrier (groups)
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• Rapid innovation across all areas of the
guest experience
• River Cruising fastest growing segment
• Lingering longer – establish relationships
• Families and generations
• Leveraging technology wherever possible
• The role of the Travel agents as “Travel
advisors”
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• 68% believe bookings will be comparable
or better than 2012
• Booking window is getting shorter
• Customers are and remain, brand loyal
• Home port, price and onboard facilities are
the top 3 decision making factors
• Ethnic groups, weddings and
honeymooners represent the top 3 growth
potential target groups
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Conclusions
• Know your product and services
• Know your guests and potential guests
• Engage on meaningful relationships with them
• Develop a plan
• Analyse and adjust when necessary
• Innovate
• Be aware of the trends
• Keep on going  !
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The End!
• Questions?
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Thank You!
• c.bento@ipg.pt
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Cruise & RM - Carla Bento

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