Saving Pvt Agencies (with apologies to Tom Hanks)

Some cruise lines’ new "anti-rebating" rules took effect today. Did you notice anything different when you got up this morning? Did your life change in any way? No? Probably not for most consumers, but things did change for most travel agents, at least in a small way. And that’s pretty much the way the cruise lines wanted it to work out for everybody. One of the end results the cruise lines wanted isn’t so much for something to happen, but rather for something not to happen, and this is their way of getting to that goal.

But we still find most consumers (and many travel agents) not understanding accurately what it will mean to them or exactly why the cruise lines are taking this action or even what’s really behind it.

There has been some evolution of the rules of the game in the last week or so since we first wrote about the restrictions. It still involves only three cruise lines: Carnival Cruise Lines, Royal Caribbean International and Celebrity. None of the other Carnival brands have made any move to join their sister brand, which is not unusual. Carnival Corp allows them to all work independently especially on setting their own policies and procedures such as this; they don’t all march in lockstep as the two Royal Caribbean brands do.

The Royal Caribbean/Celebrity policy became effective today (Friday) while the Carnival policy still is set to begin on January 1.

There is a very significant difference between the Royal Caribbean and Carnival rules. Neither allows agents to advertise anything but the approved discounted fares set by the line.

In Carnival’s case, they say agents may still choose to rebate part of their commission to customers, but they don’t want to see those rebated rates in any advertising or on any website (including the agent’s booking engine) or any reference to the agent having lower prices by phone specifically on Carnival.

Royal Caribbean/Celebrity has taken things one step further and simply does not allow agents to rebate or discount their authorized prices. Period. The company did provide a little additional guidance and say that they will allow agents to offer "value-added" items for free, such as free transfers between the airport and the pier or a free pre-cruise hotel night, for example. What they cannot offer according to the RCCL rules is anything that could readily be used as cash (and has a dollar amount right on it), such as onboard credit or a Sears gift certificate, for example. Royal Caribbean actually kind of likes the idea of agents getting a bit creative in promotions to offer some additional incentive to take a cruise - as long as those incentives aren’t measured in dollars.

What are they trying to accomplish by this? The stated goal of both companies is to preserve their distribution system as it is. That means they will have both large and small agents across the country, selling their product on the internet, over the phone, and face-to-face, however the consumer wants to buy it. Part of the philosophy is that the cruise lines want their customers to be able to choose from any of these sources which best fit their needs, and not to have to pay a premium to use one over another.

One thing that’s happening in the industry is that the little agent is getting squeezed by falling commissions and having to rebate (to keep their prices competitive) like the larger agencies which are selling in volume, cutting their profit margins thin and not providing the same level of service (or any) that the smaller agency is. This is an element in the industry’s current conditions that is a factor in many agencies closing. Played all the way out, eventually those same factors will affect the medium-sized agencies, ultimately leaving just a few very largest agencies which can move massive amounts of product.

Are the cruise lines doing this just to be the champion of the little guy? Probably not. They do like things the way they are with lots of distributors of their products all over the country and available lots of different ways, but they also fear having only a few large agencies out there to distribute their product. Once before a few years ago, things were shaping up that way and the cruise lines moved to nullify the changes, not wanting to have too many of their eggs in one basket. If there were just a handful of super-agencies, those agencies could control the relationship with the cruise lines, and the cruise lines like having the upper hand.

Ok, can we see a show of hands among travel agents? Who likes the new arrangement?

The cruise line executive who counted for us reports that almost all the travel agents raised their hands. (The larger discount agencies didn’t raise their hands, the ones who sell primarily on price and will discount to whatever level they have to, to get the bookings.) Who didn’t? Back in the corner. Why don’t you like it? "It’s my money. Why can’t I do whatever I want with it? Besides it doesn’t even sound legal."

Lisa Bauer, Royal Caribbean’s senior vice-president of sales told us that travel agents are the cruise lines’ agents (as in travel AGENT - get it?) and as their agents, the lines have the right to tell them how they can advertise their product, how they can present it and the price at which they can sell it. It would be different, she told CND, if the agent actually bought the inventory, owned it and resold it, like Wal-mart does with light bulbs. Then the suppliers couldn’t legally tell the store at what price they have to sell the bulbs. Since travel agents don’t ever buy the inventory and then try to resell it (and have to eat it if they don’t), the cruise line owns it, and the travel agent is just acting as their agent, passing the money through, and the cruise line has the right to tell them how they want it done.

Now if Carnival’s president and CEO, Bob Dickinson, where here, he would remind us that if travel agents are just going to give away part of their commission, the cruise lines may as well as reduce the commission and keep it for themselves as extra profit.

OK, cruise line executives, how many would like extra profit? I see every hand up, and even some puddles under chairs. We’ll just show that as unanimous.

Yes, the disgruntled man in the back. Do you have a comment? "Yeah. I think this isn’t about helping the little guy or keeping the big guys at bay. It’s really a move to get consumers to call the cruise line. If it’s the same price from the cruise line and the travel agent, most people are just going to call the cruise line and cut out the middle man. Then the cruise line can keep the commission for themselves." A smattering of applause erupts.

Cruise lines can actually make a booking today for less than what they pay the travel agent. But Lisa Bauer told CND they like the distribution system the way it is, because, overall, it is less expensive for them to have travel agents representing them and working with the customers. The reason is because there are lots of calls that don’t result in bookings: calls for product information, calls for prices as the consumer shops among cruises, calls for questions about their booking, calls to make changes and cancellations, and yes, one call to actually book. Bauer said that if they had to staff to answer all those calls, it would drive their costs up tremendously. In taking a booking from a travel agent, she said they only have to pay that agent once when the booking actually sails. They don’t have to pay the agent for handling all those other calls. If a cruise were a product the consumer picks out on his own, like a coat, then takes home and wears without ever normally calling the manufacturer, yes, you’d probably hear Bauer telling every consumer to call them direct. But Royal Caribbean knows that even on the simplest booking, from the most travel savvy customer, there is more than just that one call to book.

Now can we have a show of hands among consumers? Who likes the new arrangement? I don’t see many hands. Why isn’t your hand up, ma’am? "Without the rebates, I won’t be able to afford to cruise." And what about you, sir? "I know what I want, I just want to call the place that’s going to give me the cheapest price. This is going to make everybody’s price go up."

This shouldn’t make cruising unaffordable for anyone. Many consumers believe too much of what the discount agencies have led them to believe. According to one cruise line executive, they think that the rebates are in the 2%-5% range of the official price. The rest of that discount from the brochure rate is offered by the cruise line through any agency. The "big discount" the discount agency is getting the customer is only in that 2% to 5% range. Of course for the small agency that’s matching it, that could mean up to something like 40% of their potential profit is being given away.

Lisa Bauer answered the other question for us. She said that this doesn’t necessarily mean a price increase. Right now, she said, Royal Caribbean doesn’t really know what price the consumers are paying for their cruises. They only really know it’s something less than where they have them priced. Assuming that they have them priced right, at what the consumer really is willing to pay, the price went up to high today because everyone started selling at the official price, so Royal Caribbean should have seen a drop off in sales today. That would mean Royal Caribbean will be reducing some prices to stimulate sales. Bauer said that for the first time, they are going to know what the consumer really is willing to pay for their product and can then actually price it accordingly.

(Royal Caribbean, by the way, will be checking ads and making test calls to be sure everyone is really selling at the official price.)

Do I see any other hands? If there’s nothing else, we’ll adjourn until next week when Royal Caribbean can tell us how many discounters they’ve had to jail. Dive home safely now!