NCL’s IPO Outlines Consumer-Direct Strategy

Norwegian Cruise Line’s disclosure last week of its strategy to boost consumer-direct sales came more as confirmation than surprise to members of the travel industry.

The frank discussion of NCL’s direct sales strategy was contained in a proposed initial public offering (IPO) of $250 million worth of common stock in NCL. In the filing with the Securities and Exchange Commission, NCL Corp. outlined a business plan which made clear that selling direct to consumers is an integral and increasingly important part of its growth strategy.

“We continue to grow our direct business through investments in our brand and our website as well as increasing our direct sales force,” NCL said in the offering, which named consumer direct as one of four primary distribution channels.

NCL said direct sales had grown from 13.3% of net ticket revenue in 2007 to 27% for the first nine months of 2010.

“The assumption is that selling direct is going to cost less money, that it’s going to secure loyal customers on a longer basis, and that they think they’re better at capturing those new customers as well as securing their existing customers than the [agency] distribution model,” commented Lindsay Pearlman, executive vice president and general manager of Ensemble Travel Group.

He added that the line’s increased emphasis on the consumer-direct distribution channel is, “reflective of a strategy that you have to be a blind man not to see.”

Pearlman said he didn’t see NCL’s focus on direct sales affecting Ensemble’s relationship with the line. “If we continue to bring value to them, to grow their business, it has no impact,” he said. “If they feel they can do it more effectively and for less cost, then we’ve done a poor job. Would I prefer that they didn’t go direct? Of course.”

(Executives from other major travel agency marketing groups contacted by Travel Market Report were either unavailable for comment, did not return phone calls, or declined to comment.)

In a prepared statement, Brad Tolkin, co-chairman and co-CEO of World Travel Holdings, parent company to CruiseOne & Cruises Inc., said, “I am wholeheartedly confident in the commitment Norwegian Cruise Line has exhibited to the agent community. With a rapidly expanding fleet that includes Epic and two newly announced ships, Norwegian Cruise Line will be smart about their business. They are very well aware of the critical importance of the travel agent channel to their success.”

Regarding the doubling of NCL’s direct sales from 13.3% of net ticket revenues in 2007 to 27% in the first nine months of 2010, Jack Mannix of Jack E. Mannix & Associates in Weston, Fla., surmised that such growth is typical for cruise lines’ contemporary and, to a lesser extent, premium brands.

“Particularly in the contemporary end, it’s imperative that their ships go out full. The motivation is not to make it more challenging for the retail community. It’s a cost-effective way for them to be filling the ships. With the advent of internet, it gets easier,” said Mannix, former president and CEO of Ensemble.

Higher Yields?
“Whether you get the same APD [average per diem], the same onboard spend, I don’t know,” Mannix said of direct bookings. “If a travel agent puts somebody onboard who’s paying $100 a day and the cruise gets a direct booking that only pays $50 a day, then the agency’s business is obviously more lucrative.”

In its public offering, NCL said the reverse is true: “Passengers booking directly with us tend to book earlier and in premium category inventory which provides higher Net Yields.”

Mara Hargarther of Hargarther, Thaler & Associates, LLC, a CruiseOne franchise in Ponte Vedra Beach, Fla., was doubtful. “I know that my company, CruiseOne, has a larger-cabin average sale and longer booking window than most other channels. My guess is they are comparing it to call centers. I strongly doubt when comparing the stats from NCL direct sales consultants to us, there could be any chance that our numbers would not be superior by all measures.”

As for the significance of NCL’s stated growth in consumer direct sales over the last three years, that may not be as dramatic as it appears, Mannix said. In light of poor sales in 2008 and 2009, “to have the numbers grow dramatically would be mathematically expected.” NCL said in the IPO that its direct sales had grown from 13.3% of net ticket revenue in 2007 to 27% for the first nine months of 2010.

But Oivind Mathisen, editor of Cruise Industry News in New York, said travel agents should “really pay attention” to that jump in direct sales. “I think that’s huge,” he said.

Ensemble’s Pearlman said the growth has to be examined in context. “What is that number related to market share? If they increased it, plus their market share has gone up, then it works (for NCL).”

Filling Ships
NCL declined to comment on specifics in the IPO, citing legal restrictions. However, a spokeswoman said that the overall distribution strategy outlined in the public offering is necessitated by the line’s expanding capacity. 

One day before filing its public offering with the SEC, NCL announced plans to build two 4,000-passenger ships at a price tag of $1.2 billion. The ships are slated for delivery in 2013 and 2014. In June, the line launched its 4,100-passenger Norwegian Epic.

“In order to support this 30% capacity increase, we need every single distribution channel to be extremely healthy and robust,” the spokeswoman said via email. “This includes our travel partners, international and direct. None are mutually exclusive; they all need to be working in order to support our large capacity increase.”

Those are pressures travel agents must respond to, Mannix suggested. “As the cruise industry increases capacity, all other things being equal, they need to make sure they maintain their importance by continuing to fill capacity.”

Agency Partners
NCL’s public offering outlined distribution plans through four channels: retail/travel agent, consumer direct, international, and “CM&I” (full-ship charters and corporate meetings and incentives).

The cruise line also specifically noted in the offering its initiatives to strengthen ties with travel agent partners. These included restructuring of its agency sales force to “more effectively support the larger accounts, which represent approximately 50% of our customers.”

As part of that restructuring, the line aims to “gain access to a significantly larger number of travel partners through an outbound call center,” according to the IPO.

The effectiveness of using call centers to reach smaller and mid-size agency accounts remains to be seen, Pearlman suggested. “I’ve never seen that done very well,” he told Travel Market Report.

Asked to comment on the future of cruise distribution, Mathiesen said he’d still be more comfortable booking through a travel agent than on the internet, given the complexity of the product. But, he added, “People are changing today. Young people book everything on the internet, so it seems to be going that way.”

Also, he noted, compared to some other cruise products, NCL’s Freestyle Cruising attracts passengers who are more outgoing and independent, a demographic that may in fact be more comfortable booking its own travel.

Leisure editor Dori Saltzman contributed to this report.