Time To For A Reality Check For Mr. Fain

[RDC1]

I haven't read the whole 14 pages of this discussion, but I do want to weigh in on the debate price vs quantity of cabins sold.

 

http://www.mckinsey.com/insights/marketing_sales/the_power_of_pricing

 

McKinsey is widely known as THE expert in pricing. Quite a few large companies use McKisney for pricing or other issues.

 

The clearly state (see exhibit 1 in the link) that with stable volume, a price raise of 1% equals an 8% raise in operating profits.

 

I think that if they do less last minute discounts, they can generate more than an overall price raise of 1%. I also think that with less last minute discounts, the number of sold cabins will remain quite stable. They might lose a few cabins, but will still come out ahead.

 

Note the need for stable volume in the article. In this case my comments were related to having to offset the volume reduction, by not filling a ship by having to increase revenue per passenger per day (prices or increased on ship sales). In that case you would need to increase price just to maintain current revenue if the occupancy rate were to drop and that trade off would be at 1 to 1.

 

The reason why a one percent increase in price would normally generate an 8 percent increase in profits is because the value of that increase would increase revenue, with no corresponding increase in costs and would drop right through to the profit line.

 

To put it into perspective a 1% drop in occupancy rate, based upon Q1 numbers, would result in a 17 million dollar drop in revenue. Since there would not be a corresponding decrease in costs (I am ignoring on ship alcohol sales here where their would be a some cost reduction, but small enough to be ignored in the general analysis) that drop in revenues would drop pretty much to the bottom line as a profit reduction. Since the net income for Q1 was 45 million that 1% drop in revenue would result in a drop in net income to 28 million or a reduction of 37%.

 

Now if they could increase price while maintaining occupancy rate a corresponding increase of 1% in revenue would take net income to 63 million, a corresponding increase of 40%.

 

Now this is a bit simplistic and their would be some costs and some other finance issues so it would not be quite this large, but it would not be far off either.

 

The cruise lines really do operate on a very narrow net margin. Especially when you take leverage (debt) into account. The debt level will limit how fast RCL can grow. They are already have the heaviest debt load of the big three cruise companies.

Edited April 24, 2015 by RDC1

[insidecabin]

What is the revenue generation profile.

1% of capacity is not 1% of revenue.

 

Not selling 1% of discounted insides is very different to not selling 1% cabins at the top end.

[RDC1]

What is the revenue generation profile.

1% of capacity is not 1% of revenue.

 

Not selling 1% of discounted insides is very different to not selling 1% cabins at the top end.

 

The only data we have access to is their reported average passenger revenue. The measure is the impact on the average. How they do it is up to them but the numbers are clear if their occupancy rate drops 1 percent they need to increase their average passenger revenue per day by a corresponding amount, otherwise it will impact their net income

[John&LaLa]

Plenty of discounting going on outside of Caribbean as well

[Missus Makkem]

We left Celebrity because of pricing. I don't want to pay for other peoples free drinks as they have it as a "free" perk on all of their cruises. The food quality, and selection has dropped. We have 4 cruises booked on RCL and all of them are several hundred dollars, p.p. than a similar cruise on Celebrity. 11 of our last 12 cruises were with Celebrity but no more. When RCL catches up with Celebrity, then our cruising days will be over. Final total will be 39 cruises with 423 days at sea.

 

And we have done the exact opposite to you, so just goes to show not everyone is the same.

[RDC1]

Plenty of discounting going on outside of Caribbean as well

 

Yes, but not as much as in the Caribbean. I pulled data from the last 4 10Q reports that I think demonstrates the point.

 

Q1 Jan - Mar Heavy Caribbean Presence

 

2013 8844590 passenger days 216.08 rev per day

2014 8853637 passenger days 213.15 rpd

 

Q2 Apr - June Ships heading out of Caribbean in Apr

 

2013 8485968 passenger days 447.08 rpd

2014 9032618 passenger days 428.14 rpd

 

Q3 Jul - Sept Ships largely out of Caribbean, but max Alaska

 

2013 9302555 passenger days 255.1 rpd

2014 9603329 passenger days 248.7 rpd

 

Q4 Oct - Dec Ships back to Caribbean

 

2013 8853637 passenger days 213.15 rpd

2014 9214643 passenger days 197.03 rpd

 

Now q3 is the time when you will get the most families traveling during summer so the high passenger days makes sense. But note the shift in average revenue during the peak Caribbean months, compared with the quarters when ships are elsewhere. Q2 after the Caribbean peak, but before the Alaska peak generates the highest average revenue per passenger. Q3 generates the highest occupancy rate (in the 107-108% range) with average per passenger revenue still 20% higher than peak Caribbean quarters.

[CatzEyez]

The economic reality is FACT. When the prices dropped and the discount seekers and cheap cruisers came, onboard revenue dropped. It makes more sense to keep prices higher where people will and do spend money on board.

 

Those who bought at a discount, were not prepared and did not spend as before. This is a verifiable fact. It is not elitist to state reality. Richard Fain has been stating for years that cruise prices across the lines were artificially far too low for the value offered. As a shareholder, this is a brilliant strategy to end this discounting nonsense.

 

You seem to be under the misconception that everyone is made of money, I for one am not! My first cruise with Royal was on the Allure and I did not pay a dime for it, but yet we did an excursion in all but one port because I had not figured out how things truly worked. we paid for the premium drink package our second trip on Allure so we did not have to worry about the daily cost. Yet we spent nearly 3k onboard. Which did not include my three stops daily at starbucks.

So if you are saying that ppl looking for deals are not spending at sea you are sadly mistaken. Just because someone looks for a deal does not mean they do not have money as you are insinuating.

I live in Las Vegas, and I am a native Floridian and have seen this on a daily basis of my life you look for a deal so you have those extra funds to spend on what you want!!!!

Edited April 24, 2015 by CatzEyez

[RDC1]

You seem to be under the misconception that everyone is made of money, I for one am not! My first cruise with Royal was on the Allure and I did not pay a dime for it, but yet we did an excursion in all but one port because I had not figured out how things truly worked. we paid for the premium drink package our second trip on Allure so we did not have to worry about the daily cost. Yet we spent nearly 3k onboard. Which did not include my three stops daily at starbucks.

So if you are saying that ppl looking for deals are not spending at sea you are sadly mistaken. Just because someone looks for a deal does not mean they do not have money as you are insinuating.

I live in Las Vegas, and I am a native Floridian and have seen this on a daily basis of my life you look for a deal so you have those extra funds to spend on what you want!!!!

 

Now the interesting question is when does he think that RCL started discounting and all of the "discount seekers and cheap cruisers" started buying RCL cruises. I went back 10 years and the average revenue per day is 10% less then what it is today for the corresponding period. Considering the recession and the relative lack of inflation for the 10 year period that is about right. So if his comment is correct the RCL must have been attracting the "discount seekers and cheap cruisers" for longer 10 years.

[GottaKnowWhen]

... if his comment is correct the RCL must have been attracting the "discount seekers and cheap cruisers" for longer 10 years.

 

I resemble that remark!;)

[insidecabin]

The only data we have access to is their reported average passenger revenue. The measure is the impact on the average. How they do it is up to them but the numbers are clear if their occupancy rate drops 1 percent they need to increase their average passenger revenue per day by a corresponding amount, otherwise it will impact their net income

 

That my point they don't.

 

if I have 2 cabins and one sells for $900 and one sells for $100 everage $500 and I dont sell 50% of them $500

 

The increase in revenue required by the unsold one to get back to $1000 is not $500 it depends which you did not sell.

 

If you look at the RCI numbers 2014 10k they get on average $232.18pppd, those empty cabins will not be loosing $200 in revenue.

 

bottom end non selling cabins are at <$50pppd.

 

On the slow selling cruises the average pppd will be much lower than on a holiday cruise.

 

Pick a ship, insides sell for $200+pppd on a holiday cruise but under $70pppd on a off season

 

guess where the unsold inventory will be?

 

TAs are even more desperate averages on those a re down across the board.

 

Balcony on Allure TA that if left empty would have lost them <$50pppd revenue they were selling it at.

 

Stick a diamond in one of those and by the time they have eaten and drunk there way across the pond you won't be making much money.

Edited April 25, 2015 by insidecabin

[RDC1]

That my point they don't.

 

if I have 2 cabins and one sells for $900 and one sells for $100 everage $500 and I dont sell 50% of them $500

 

The increase in revenue required by the unsold one to get back to $1000 is not $500 it depends which you did not sell.

 

If you look at the RCI numbers 2014 10k they get on average $232.18pppd, those empty cabins will not be loosing $200 in revenue.

 

bottom end non selling cabins are at <$50pppd.

 

On the slow selling cruises the average pppd will be much lower than on a holiday cruise.

 

Pick a ship, insides sell for $200+pppd on a holiday cruise but under $70pppd on a off season

 

guess where the unsold inventory will be?

 

TAs are even more desperate averages on those a re down across the board.

 

Balcony on Allure TA that if left empty would have lost them <$50pppd revenue they were selling it at.

 

Stick a diamond in one of those and by the time they have eaten and drunk there way across the pond you won't be making much money.

 

One correction you used the APCD gross yield number. That is revenue divided by capacity (occupancy 100%). Which is a higher number then revenue divided by passenger days which equals 219.93 since the occupancy number for 2014 was 105.6.

 

You have to take into account onboard spending. It is not a given that those that take advantage of the last minute discounts necessarily have low amount of on board spending. When you look at it the average daily revenue per person per day is really pretty low. So even an average on board spend for 2014 was 59.30 with even a heavily discounted cabin sale generates half of the average per person per day revenue.

 

The cost side of the equation is pretty much fixed. The delta in alcohol costs would not even be a rounding error, compared to the revenue number. Once a cruise is made the cost difference between one sailing full and one sailing empty is not much, considering that a lot of the food is fresh and must be used. The same crew costs exist, the same fuel costs, etc.

 

I would also expect that the service charges are not included in the daily spend and pppd totals. So that money for the crew is also lost with an empty cabin.

 

If you look at statistics across all cruise line the demographics on spending breaks down like this:

 

Per person per week spend. Contemporary cruise line passengers

 

5000+ 2%

2000-4999 20%

1500-2999 19%

1000-1499 25%

500-999 26%

Under 500 8%

 

For the full year 2014 the revenue per passenger per day number average comes in at 1539.51. Now 59% of the cruise passenger demographics are beneath that spending line.

 

So while in I agree that the price of the discounted cabin is not the average. The question is can you afford to write off even half of the average with a heavily discounted cabin when faced with the spend demographics. They certainly haven't shown having the pricing power to do so in the past 10 years.

[The_Big_M]

Isn't it a choice of perks on Celebrity ...drink package, OBC, or gratuities?

 

Yes, there is choice. But:

1) Celebrity primarily market the drinks package and it is the most sold. I'd suggest it's more that they offer the other two for those who the drinks package is undesirable e.g. minors, low volume drinkers, or those who have it covered other ways.

2) The drinks package value is much higher than the others. Where an increase exists, it is often likely to be greater than the other two choices, but closer to the price they charge the drinks package for.

[insidecabin]

AIUI the cruise revenue also includes the fixed/variable per booking costs that take a chunk out of the gross fare, like the port fees, some taxes, commissions.

 

The lower the fare the high the proportion of that fare get eaten by these cost.

 

take the point that 27% of the revenue is onboard spends

[klingoncruiser]

I went back and carefully reread Fain's word. I read it as.... the last minute (10-30 days from the cruise) will NOT be lowered any more. He is willing to sail with empty rooms than get someone in the room at any cost. I understand, but don't see how long this will last. I guess we will all see. The bottom line will dictate if this works shortly. :rolleyes:

[John&LaLa]

:what:But there will be price drops after final.

Edited April 27, 2015 by John&LaLa

[Maraprince]

Sounds like cutting off your nose to spite your face!

 

Empty cabins do not bring in revenue. Better to make a little less on the cost of cabin than have it go unsold.

 

MARAPRINCE

[insidecabin]

Sounds like cutting off your nose to spite your face!

 

Empty cabins do not bring in revenue. Better to make a little less on the cost of cabin than have it go unsold.

 

MARAPRINCE

 

The problem is people see lower prices and aim for lower.

Some will wait and get the deals even though they could pay more.

 

The industry is trying to reset expectations at a higher level with all sort of price rises.

 

Losing a bit for a few months if it gets loads more off everyone later.

 

Princess are getting 25% better money this year off me on their late uk deals.

[RocketMan275]

Sounds like cutting off your nose to spite your face!

 

Empty cabins do not bring in revenue. Better to make a little less on the cost of cabin than have it go unsold.

 

MARAPRINCE

 

But empty cabins do not have costs; food, electricity, etc., either.

 

You are right of course that it's better to make a little less than to make nothing. But, here's the deal.

 

Cost of cabin: depreciation, electricity, crew, etc.

Revenue from cabin: fare and on-board.

 

Certainly there is a break even point. If the fare is reduced below that point, the cabin loses money. Now the debate is what is that break even fare?

 

We will never figure that out and all the talk on this thread is merely speculation. We simply do not have the numbers to accurately calculate the break even point.

 

There is another factor here that I think we're missing. Transportation companies such as airlines often send signals to each other about their willingness to raise fares on certain classes of service or routes. Sometimes, an airline will raise one fare on one flight to see if other airlines also raise there's. Sometimes other airlines won't raise theirs and the first airline reduces it's fares back to where the were. Other times, the other airline matches the increase which is a signal that they're ready to raise fares too. In that case, rates will be quickly raised on other routes and other classes of service. Of course, the companies have to be discrete to avoid price fixing but these things have been reported in various places.

 

Now, is it possible that Fain is sending a signal to the other cruise lines that if they stop discounting, RCI will too? It that is the case, then all this talk about whether it is better to cruise with empty cabins is rather moot.

[RDC1]

But empty cabins do not have costs; food, electricity, etc., either.

 

You are right of course that it's better to make a little less than to make nothing. But, here's the deal.

 

Cost of cabin: depreciation, electricity, crew, etc.

Revenue from cabin: fare and on-board.

 

Certainly there is a break even point. If the fare is reduced below that point, the cabin loses money. Now the debate is what is that break even fare?

 

We will never figure that out and all the talk on this thread is merely speculation. We simply do not have the numbers to accurately calculate the break even point.

 

There is another factor here that I think we're missing. Transportation companies such as airlines often send signals to each other about their willingness to raise fares on certain classes of service or routes. Sometimes, an airline will raise one fare on one flight to see if other airlines also raise there's. Sometimes other airlines won't raise theirs and the first airline reduces it's fares back to where the were. Other times, the other airline matches the increase which is a signal that they're ready to raise fares too. In that case, rates will be quickly raised on other routes and other classes of service. Of course, the companies have to be discrete to avoid price fixing but these things have been reported in various places.

 

Now, is it possible that Fain is sending a signal to the other cruise lines that if they stop discounting, RCI will too? It that is the case, then all this talk about whether it is better to cruise with empty cabins is rather moot.

 

The difference in costs for a cruise between a full cabin and and empty cabin minimal. The crew size is fixed so they still pay the same crew costs with a few empty cabins, electricity is generated on board so you might save a little fuel, but nothing really measurable. As far as food costs more gets thrown away on a normal day then a few empty cabins so no real change there either (even if there was no waste food is only around 5% of the lines expense structure). The only way you would get a change in costs would be if they decided to reduce occupancy so much that they could close off sections of cabins and reduce some staff permanently (for long periods of time they cannot make those kinds of changes cruise to cruise). Bottom line is the cost savings with a few empty cabins would not even be the rounding error compared to the change in revenue.

 

If Fain is trying to send a message his competition is probably laughing. RCL is heavily Caribbean based. CCL uses Carnival to set a bottom level for rates in that area. The Caribbean is very fare competitive and over capacity. Until RCL shifts capacity out of the Caribbean to be more in line with the overall industry (35% vs 49%) they are going to be more impacted by discounts and fare competition than competing lines (CCL primarily).

 

RCL is carrying a far higher debt load when compared to revenue then CCL and that is impacting their overall profit.

 

As far as break even on an individual cabin that number would be pretty small. As far as break even on overall average cabin fare and onboard revenue that is pretty easily calculated, considering that RCLs net income in 2014 was 9.5%.

 

They are similar to airlines in that once a cruise or flight takes place the key is how to maximize revenue. The question is does RCL have pricing power to raise fares to offset lower occupancy numbers.

Edited April 30, 2015 by RDC1

[John&LaLa]

I think he us trying to change our mindset on pricing. Book early, prices only go up. Do not count on snagging deals 30 days out. Just my opinion

[3dog]

The difference in costs for a cruise between a full cabin and and empty cabin minimal.

 

You are obviously not in the hospitality business. You forget that an occupied cabin generates laundry; it requires more maintenance; it requires more service; it requires more cleaning; occupants consume amenities; it consumes a number of people's time in dealing with that cabin. Though each of these items in their own may be small, there are a significant number of small items to manage a cabin to make it a non-trivial cost. Way too many people believe that the difference in costs of an empty vs. occupied room is none to minimal, and you would be wrong.

[Byron_1978]

Note the need for stable volume in the article. In this case my comments were related to having to offset the volume reduction, by not filling a ship by having to increase revenue per passenger per day (prices or increased on ship sales). In that case you would need to increase price just to maintain current revenue if the occupancy rate were to drop and that trade off would be at 1 to 1.

 

The reason why a one percent increase in price would normally generate an 8 percent increase in profits is because the value of that increase would increase revenue, with no corresponding increase in costs and would drop right through to the profit line.

 

To put it into perspective a 1% drop in occupancy rate, based upon Q1 numbers, would result in a 17 million dollar drop in revenue. Since there would not be a corresponding decrease in costs (I am ignoring on ship alcohol sales here where their would be a some cost reduction, but small enough to be ignored in the general analysis) that drop in revenues would drop pretty much to the bottom line as a profit reduction. Since the net income for Q1 was 45 million that 1% drop in revenue would result in a drop in net income to 28 million or a reduction of 37%.

 

Now if they could increase price while maintaining occupancy rate a corresponding increase of 1% in revenue would take net income to 63 million, a corresponding increase of 40%.

 

Now this is a bit simplistic and their would be some costs and some other finance issues so it would not be quite this large, but it would not be far off either.

 

The cruise lines really do operate on a very narrow net margin. Especially when you take leverage (debt) into account. The debt level will limit how fast RCL can grow. They are already have the heaviest debt load of the big three cruise companies.

 

The article ( http://www.mckinsey.com/insights/marketing_sales/the_power_of_pricing) also states the following:

volumes would have to rise by 18.7 percent just to offset the profit impact of a 5 percent price cut

This also works in the other direction: as long as volumes do not shrink 18.7%, an average price increase of 5% is still a considerable amount of extra revenue and a considerable % of extra operating profit.

 

They do also state that a wide price band is not necessarily a bad thing. So this does allow some last minute discounting, ie 10 days before sailing to sell at least some of the extra cabins. This is short enough to sail-date to avoid speculation on price drops, but still allows some extra cabins to be sold to people who would otherwise not be on the cruise (people who can afford to go on holiday at the last minute - these are not necessarily people on a budget but also includes people on a larger budget that prefer the flexibility of last-minute travel plans - some people on a larger budget are not bothered with the concept of "work" :rolleyes: ).

 

I am sure they also did some investigation on the concept of value-pricing to understand the key buying factors that drive their customers. This might have shown them that a certain increase in average price (which can be obtained by selling less cabins at a discounted price) might not have a negative effect on sales.

 

I believe this to be the message he is trying to convey. We will not be discounting heavily so do not speculate on that to happen. We will only give discounts very short to sail-date to still sell some extra cabins that may be available.

[insidecabin]

You are obviously not in the hospitality business. You forget that an occupied cabin generates laundry; it requires more maintenance; it requires more service; it requires more cleaning; occupants consume amenities; it consumes a number of people's time in dealing with that cabin. Though each of these items in their own may be small, there are a significant number of small items to manage a cabin to make it a non-trivial cost. Way too many people believe that the difference in costs of an empty vs. occupied room is none to minimal, and you would be wrong.

 

Wear an tear goes down but not much else on a ship.

 

There is a side effect that the time saving(eg cabin steward) get distributed to the other cabins maybe improving their cruise experience.

 

One thing they can do with an empty cabin is do a deep clean/maintenance without disrupting passenger experience.

 

Laundry a set of sheets and towels in a 2000 room hotel laundered in house.

Food saving in the noise range of food costs. The average $13pppd pays for all food including crew across all brands, X and ACC will be higher RCI lower.

 

My guess is that they could give the cabin away for the cost of selling it(taxes commissions etc.) and the profit from on board would cover the marginal extra on ship costs.

 

My view is if the losses from a few empty cabin can put $1 on every cabin sold in the future they have covered them and more.

 

The cutthroat bottom end late discount market is small but very disruptive to price perception. All cruise lines are trying to reset expectations.

 

Where RCI have a big problem is at the top end they are playing catch up with suite amenities of other lines and even when this round of upgrades are complete they will still be behind the likes of NCL and MSC.

 

The current upgrades are also disrupting a number of cruises giving passengers a less than satisfactory cruise experience.

 

NCL changed the game again this year by making the Suites effectively All inclusive with the choice program. Drinks package, Dining package, $300 OBC, excursion allowance was gratuities paid.

 

Followed that with open bars on the shore trips from Miami probably the most competitive cruise market.

[insidecabin]

......... (people who can afford to go on holiday at the last minute - these are not necessarily people on a budget but also includes people on a larger budget that prefer the flexibility of last-minute travel plans - some people on a larger budget are not bothered with the concept of "work" :rolleyes: ).

 

This works if your passenger is loyal(some might say blinkered) so they WILL chose one of your cruises..

 

If I have money sitting there to spend on a cruise, any cruise that attracts me, then the trick for the cruise line is to get that money first.

 

We mix it up when the trip is right we book, being UK we have access to cheap flights to most of Europe ports, like $30 return to Copenhagen in May.

 

We can look at all of northern Europe and the Med for something that takes our fancy.

 

For May Princess pulled the trigger first and got the booking

RCI had a deal a day later.

HAL had one 5 days later.

 

In the Med Costa and MSC set the bottom line with prices $40-$60pppd inc flights.

[Byron_1978]

This works if your passenger is loyal(some might say blinkered) so they WILL chose one of your cruises..

 

If I have money sitting there to spend on a cruise, any cruise that attracts me, then the trick for the cruise line is to get that money first.

 

With a huge market of cruises departing from southern Florida (given my idea of the local demographics - higher percentage of retired people with the funds to reside in southern Florida + a higher percentage of foreign people with so-called retirement visa's), my guess is that that specific market is big enough not to worry too much about loyalty...Most mass market lines will get their share of that cake as often it would be a combination of factors that decide for which cruise to take, not just price.