Charlie Funk
It looks like 2016 is going to be the banner year for the leisure travel industry that I predicted in my column last April titled "Pick a court position and play it." In other venues I offered my analysis of why we were going to see this boom.
Despite assurances of economists and politicians that the economy had recovered in 2009, the reality was that Middle America in general and millennials in particular were not participants. Continued high unemployment and underemployment created financial uncertainty even into 2015.
But a funny thing happened. The U.S. became a major oil producer, and energy price volatility not only moderated, but prices dropped to seven-year lows in 2015 (actually hitting a 12-year low last week). Job growth reached healthy levels. Inflation was under control. People felt better about their economic future.
Some 10 years ago, I developed an algorithm that I believed could forecast client call volume and sales based on a variety of economic factors, including the unemployment rate, the prime interest rate, housing starts, home mortgage rates, the consumer confidence index, the personal bankruptcy rate and gasoline pump prices. I assigned a weight of 7 to the factor I deemed most important, a 1 to the least, meaning that a change in the most important was multiplied by seven, the least by one.
Unfortunately, applying the initial algorithm to year-old data to see how well it predicted observed six-month-old call volume yielded results that were little better than random dart tossing. Bummer.
But everything changed when I made gasoline prices the most important factor. I would love to tell you the results track with 99% accuracy. I can't. But I can tell you that in July my forecast was that we would grow our business in 2016 by 20%. Since we are sufficiently on track to realize that growth, we're trying to add staff to handle the surge.
Why are pump prices so critical? As I write this, the average cost per gallon for unleaded regular in the U.S. is just under $2, and that's skewed by higher prices in California and Hawaii. The price difference between now and a year ago means the average family with two wage-earners driving a car to work will have at least $1,100 more discretionary income to spend. Given that the average family spends $1,400 a year on vacations and they have been putting most of that in their collective gas tanks for the last seven years means that there will be millions returning to the vacation market.
Demand has surged. Our August 2015 bookings were the highest for the month in our history, exceeding those of January and nearly equaling February.
We already see cruise prices going up substantially for at least two of the contemporary brands, as well as firm pricing for premium, deluxe and luxury brands in many markets and itineraries. That price firmness is reflected in reduced -- in some cases no -- availability for prime categories on the most desirable itineraries in the time periods in greatest demand.
Not surprisingly, many retailers are beginning to hear complaints from clients that prices are high, prices aren't going down as the sailing nears (as they had anticipated) and they aren't getting the upgrades they have come to expect.
Let's try to put all that in perspective.
Yes, the days of the $349, seven-night cruise are gone. At least one can hope that's the case. A quick check of Caribbean seven-night rates for June 1 through Aug. 15 suggests an average rate for an inside stateroom to be (gasp!) nearly $1,000 per person, plus $100 or more in taxes and fees. And a balcony stateroom in that same time period will easily run $1,400 or more. That compares with a price on the then-new Majesty of the Seas of $1,050 per person, plus port charges of $50, in October 1993, which at the time was the lowest of low-season pricing.
In current dollars, that is equal to $1,806, while that actual low-season 2016 average for an inside stateroom is about $700. All of a sudden, the current average cost of about $1,100 for an inside stateroom in high season seems quite the bargain. And it is.
Anticipating responses, let's look at two "Yes, buts."
Many cruises, especially in the contemporary segment, include much less today than they did in 1993. It was common then to offer lobster one evening at dinner, the cuts of beef were more varied and plentiful, and the number of selections at each course was greater. Freshly squeezed orange juice was available at no cost, as was 24-hour room service, and an espresso or cappuccino after dinner was complimentary.
While all that is true, taken in aggregate, all these items, including several alternative dining experiences, could be added to current cruise pricing and still not approach the inflation-adjusted cost of a 1993 cruise in comparable accommodations.
So how can cruise lines present a product that offers most of the same things as two decades ago at such a low initial cost? Because onboard spend is up substantially. In fact, the total "basket" of money the average cruise passenger spends today, allowing for inflation, might not be greatly different because of the proliferation of onboard spending opportunities. A senior cruise executive told me some years ago that the average onboard expenditure on a seven-night cruise exceeded $800 per stateroom. I have every reason to believe that number is higher, perhaps substantially, today.
The $3 blackjack table is long since gone. Years ago, a cruise was considered a great value because drink prices were substantially less than at land-based resorts or even in local clubs. Today, bar prices equal that of many, if not most, mainstream establishments. Fresh-squeezed orange juice is available at a price. Specialty coffees may be purchased most any time of day from an onboard Starbucks or the equivalent.
In fact, take away onboard spending entirely for these and other items and most cruise lines would lose money. It isn't about the ticket price and hasn't been since about 1999. It's about onboard spending.
And it's going to get better -- or worse -- depending on whether one is a cruise line executive/shareholder or a passenger.
Several cruise lines have announced recently that they will:
- Begin charging (or increase the charge) for room service.
- Change from fixed-price alternative dining to a la carte.
- Begin charging to participate in onboard activities or partake in features.
- Increase the daily recommended gratuity and/or change the gratuity from recommended to required.
Not surprisingly, these changes and others created a furor on consumer travel websites, the most common comment being that consumers were growing weary of being nickel-and-dimed and observing contemptuously that "it's become all about the money."
With all due respect, I don't know how to break it to those who posted that comment, but it has always been about the money.
Oh, and the other "Yes, but"?
Even some relatively small-volume agencies made 15% on cruise bookings in 1993. That meant they earned just over $300 on that low-season inside stateroom. Today, an agency with similar volume will likely make about $130 selling that same stateroom.
It's like this: More than a few suppliers offer products that have no noncommissionable fees. Others offer value-included packages that let the retail professional benefit by offering all or mostly inclusive packages over the base fare with a subsequent jump in commission. Today's travel professional has to do a better job of:
- Explaining to clients the facts of life about supply and demand and why booking now makes sense rather than waiting.
- Bringing value to the process by being bold enough to determine the prospect's total planned vacation budget and using that information responsibly.
- Outlining to the prospects how much they will really spend on the cruise they are considering.
- Offering products from suppliers that provide the best overall value to the client, not just the "best deal" with the cheapest up-front base fare.
- Selling those suppliers that have supported retailers historically, not just recently when they became desperate.