Distribution issues slowing cruise growth in China

While the world grows more anxious over the growing
possibility of a trade war between the U.S. and China, the bigger issue for
cruise lines sailing out of the world’s most populous country isn’t tariffs or
technology transfer. Their bogeyman is distribution restrictions.

International cruise lines are increasingly frustrated with
the limits on how their products can be sold in China.

While in most parts of the globe, cruise lines can sell
their voyages retail through travel agents, in China they’ve been funneled into
chartering their vessels to wholesalers that are then responsible for filling
the ships.

“China is a B2B market much more than a true consumer
market,” Carnival Corp. CEO Arnold Donald said in a recent conference
call. That means most of the communication and marketing to customers is out of
the cruise company’s control.

In a speech in March in Shanghai to about 300 Chinese travel
agents, Ken Muskat, CEO of SkySea Cruise Line, said that the Chinese market is
being held back by its reliance on the wholesale model.

“Are we going to stay status quo or hit 4 to 5 million
passengers?” Muskat asked the crowd. “Cruising won’t go away, but
will it grow?” 

Muskat said that to stimulate more cruise business, other
channels of distribution must be exploited.

At SkySea, which is partly owned by Royal Caribbean Cruises
Ltd. (RCCL) and recently announced it is shutting down for unrelated reasons,
the move was away from 100% charter and toward working with smaller agencies,
Muskat said.

“You need to embrace the evolution of distribution so
you don’t miss out,” he told the agent group.

Suboptimal growth and a lack of connections to customers
aren’t the only problem with the charter sales model.

Donald said that when a charter contract is booked, the
cruise line recognizes 100% of the revenue on its books immediately, even
though the actual sailing might be months away.

“Now, when they book that full-ship charter with us,
there may have been no guest booked at all,” Donald said. “And so you
are recording a 100% in January for June sales.”

But because of their clout, the charter companies are
allowed to come back after the sailings and renegotiate the price if their own
sales didn’t meet expectations. Among other things, that makes business
forecasts unreliable.

“Even though you recorded it, then there’s claims and
credits on the back end,” Donald said.

That problem was evident in 2017. Many cruise lines
chartered their ships early in the year on the typical short itineraries from
Shanghai that travel to Korea and southern Japan. But in March, the Chinese
government began discouraging travel to, and business dealings with, South
Korea in response to the country’s installing a new U.S.-built missile defense
system.

For six weeks in March and April, new charter business dried
up. Meanwhile, itineraries that went only to Japan were in less demand, forcing
wholesalers to lower their prices to fill the cruises.

So the charter companies asked the cruise lines to rework
the charter price, lowering the cruise industry’s profits from the China market
last year.

International cruise lines have been sailing from China
since Costa Cruises began selling there 2006. At the time, there was barely any
model for cruise sales. Travel outside China for most citizens had long been
highly restricted.