RCI's Fain Says Agents & Cruise Lines Are Sharing The Pain
Cruise Week

Back in November, Royal Caribbean Chairman/CEO Richard Fain questioned reports about the improving economy. “The recent news has been full of reports that the economy is rebounding or is about to rebound,” he told financial analysts. “But we haven’t seen any evidence of that in our bookings today.”

Fast forward to Royal’s earnings call with financial analysts this past week, and executives sounded much more positive about the direction of the company. “The year is looking much stronger than many thought possible only a short time ago,” said Fain. “We’re expecting good yield recovery.”

Despite these positive words, Fain later told Cruise Week that he’s not convinced about the strength of economic recovery. “The facts have changed, so the tones are more positive. But we’re still not happy. I don’t think the problem is over.”

Nor do most travel agents. Like Royal, most retailers report a pick up during Q4 and strong cruise bookings in January. However, they continue to report painful times overall on the commission side. For example, one agency group head estimated that cruise commissions dropped 25% in 2009 versus 2008.

Are agents getting hit with more than their fair share of the pain? In the case of RCI, the “Commissions, Transportation and Other” expense category showed a decline from $1,192 billion in ’08 to $1.028 billion in ’09. Fain says the drop in agent commissions is in tandem with Royal’s own revenue decline: “Commissions did not fall faster than revenues. Our net yields are down 14.2% [for the year]. ‘Commissions, Transportation, and Other’ is down 13.7%.”

Complicating commission calculations is the cruise scene in Europe. On the one hand, cruise lines report growth there, on the other, agent leaders say suppliers pay more to source international business. That theory suggests the commission decline is actually greater than 13.7% when it comes to North American travel agents.

Fain disagrees: “The assumption is that we pay higher commissions in Europe than in the United States, and that, in fact, our commission levels [in North America] are down much more than our own revenue. The answer is that’s not true.”

He notes numerous elements in play. “It is true in some cases, particularly where we operate through a general sales agent we are, in effect, paying some of the overhead through the commission, so we pay a higher commission to handle the paperwork,” says Fain, as one example. “So, yes, we do pay higher
commissions in Europe, but that’s not a material factor.”

Fain also points out that the percentage increase booked overseas in 2009 vs. 2008 is low single digits. “It went from 40% to 42% being booked outside of the U.S.,” he reports. “So that really is not a big factor impacting commissions. It’s a teeny microscopic change in percentages.”

He points to other factors impacting “Commissions, Transportation and Other” costs. “We had fewer people booking our air/sea, so our transportation expense as a percentage is down,” says Fain. “We also have things such as business in Alaska being way off, and Alaska was one of the higher commission areas in the past.”

Fain credits the agent-focused ASAP program of early 2009 as one of the reasons for the commission decrease not being quite as severe as the revenue drop-off. “But, basically, I would say that, for us at least, our revenues are down; we are suffering; commissions are down a comparable amount with revenues,” he reports. “If our revenues go up, so do our travel partners’.”

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