Agents were understandably concerned about yesterday’s news that the leading cruise lines in the UK are about to reduce the basic rate of commission they pay agents.
This move is by no means the full story of what sounds like a pretty radical shake-up of the commercial terms being offered for 2012 by the Complete Cruise Solution brands P&O Cruises, Cunard and Princess Cruises.
We await to hear the details with interest, but news of the move, which Travel Weekly understands has seen some larger agents told their commission will fall from 15% to 5%, has inevitably drawn comparisons with what the airlines did in the early nineties when BA led the way to slashing commission to zero.
Is this what we’re seeing here? Well, there are a number of reasons why not:
1. Cruise holidays are a very different product from aircraft seats. It’s not just a form of transport it is the holiday itself and, although it has inevitably become more mainstream and therefore commoditised as volumes have grown it has, and is likely to remain, a much more complex product to sell than simply a flight. Arguably with the proliferation of new ships and brands it has become more complex.
2. In the cruise sector there are no new entrants putting pressure on the established players by coming into the market with an aggressive direct sell model, as has been the case with the aviation industry that has seen the advent and rise to prominence of the lowcost carriers over the last 15 years.
3. Cruise is predominantly a trade sell with nearly 90% of sales in the UK coming through travel agents whereas selling seats on aircraft had more of a mix of direct and third party sales. This does not mean to say this will always be the case, but even in the US, where the head offices of most of the major cruise operators are based, trade sales continue to account for 80%-plus of the market.
4. Cruise is a sector enjoying a period of unprecedented growth. Flight commissions disappeared during a period of massive uncertainty for the airline industry and, as pointed out above, huge change in terms of new entrants challenging the established order. In contrast cruise in the last five to 10 years has come from a very low base to establish itself as a mainstream holiday option but remains niche when compared to the overall leisure travel market and so has potential to grow further.
All of the above doesn’t mean agents don’t have anything to fear from the changes being announced this week. Change is always disruptive and there will always be winners and losers. And it would be naïve to think that cruise operators aren’t looking at their bottom lines and thinking they can shave a few million or more off their cost of distribution.
Agents are likely to face growing pressure from cruise lines selling direct and will have to rely on their superior customer service to win out. Has it ever been any different? The question remains open as to whether they will be competing on a level playing field with lines, however.
But let’s face it: in the internet age, when customers are so easily accessible down the end of a broadband pipe, you’d struggle to get any investors to back a start-up venture that based its business model to such an extent as cruise on paying third parties to make its sales.
On the plus side for agents, any cruise line that thinks selling direct is some sort of panacea to all their problems is as wide of the mark as those agents who believe the operators are on exactly the same track as the airlines.
As Tui Travel recently found out when it cut commission to 7% distributing online isn’t as cheap as you think and travel agents, in-house or third party, remain a valuable part of the distribution mix, being able to up-sell and generally achieving higher prices than on its website.
Price here might be the key to what Complete Cruise Solution is trying to do with its changes. It knows that of the 12%-15% commission it pays agents to sell its product at least 10% is simply given away to customers in the form of a discount. Not all agents do this, admittedly, but many of the high volume agents do and this sets the benchmark for the rest of the industry.
Lines, accused of allowing this to happen, have always said they are powerless to stop it because they can’t be seen to be interfering or colluding on the final price the customer pays without falling foul of UK consumer laws.
So what if they don’t give the 10% to agents to pass on to the customer? What if that money is used in a different way to incentivise agents to stop just competing on price? After all, earning 5% of a higher ticket price is better than 5% of a heavily discounted fare.
Commission levels are always a sensitive issue among the travel trade for good reason, but in the end they are only a percentage. Could it be that paying a lower basic rate of commission, discouraging discounting while growing the market will see that actual amount good agents can earn increase?
Whatever the details of CCS’s proposals are, it would be wishful thinking to assume we are going to see an end to price competition, or larger cruise agents given some sort of preferential deals.
But it is alarmist to think that an operator with such a reliance on the trade is about to switch it off overnight and take on the cost in-house of generating all those sales and the customer support that entails.
Is this the slippery slope towards that end goal? Many agents will believe so, but doubtless others see it as an opportunity.