UBS forecasts cruise recovery by 2013, saved by smaller agencies
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Cruise ‘s future is bright but its full recovery will take another year, according to a new outlook published by UBS Investment Research.
This year was expected to be third consecutive year for yield recovery in the sector but has been slowed by the Costa Concordia incident in mid-January.
The accident took a toll on industry-wide bookings in the weeks and months that followed resulting in yields forecasted to fall by 2% for Carnival and 1% for Royal Caribbean. UBS believes 2013 will be a year for yield recovery for the pricing momentum lost during 2012.
By all accounts, 2012 was set as a great year with industry giants Carnival Corp and Royal Caribbean seeing strong demand and forecasting above average increases in yield, wrote Robin Farley, leisure, gaming and lodging analyst for UBS in her 107-page report. “However, the cruise industry in 2012 will likely be remembered for one day: Friday, Jan 13,” she added.
Aiding the recovery is the slowdown in new ship introductions. Carnival has reiterated its intention to deliver two or three ships per year and for 2014 and 2015 has only two ships on order for each year. Royal Caribbean has one ship on order for delivery in each of 2012, 2014 and 2015, with no new ships slated for 2013.
The report further claims that that cruise lines managed to reduce costs by spreading the base of their distribution across a far wider net of smaller agencies, which are less likely to reach override targets and thus meaningfully shifted share to lower cost of distribution. She cited statements by both Carnival and Royal Caribbean about their increasing spread of business, saying that for both operators “effective commissions have come down without the companies having to resort to commission cuts as a result of this share shift to selling through lower-cost agents”.
In a recent Carnival Corporation statement the cruise giant noted that “no controlled group of travel agencies accounted for 10% or more of their revenues”. The report also disputes the notion that cruise lines are trying to save costs by increasing direct sales; with U.S. figures showing that between 70% and 80% of all cruise holidays are still booked via agents.
In the UK, Complete Cruise Solutions announced commission cuts last year to 5% starting from 2012, the catalyst for that decision being the collapse of Gills Cruise. The commission cuts were necessary to arrest suicidal discount models such as Gills, according to David Dingle Carnival’s UK chief. Deep discounting by a small segment of the market such as Gills moved market share from smaller agencies who could not afford to compete and created some large and powerful cruise agents. These in turn made significantly greater demands to cruise lines on the override front and marketing support thus increasing distribution costs without necessarily growing the market in real terms. Commission reductions in the UK certainly arrested this trend. This resulted in many agencies having to reform their business models by selling expertise as opposed to selling only in price in order to survive, thus creating a far better level playing field and far wider spread of business and lower distribution costs, at least as far as the Complete Cruise Solutions brands are concerned.
