If you’ve ever wondered, “How do cruises make money?”, you might be surprised to learn that ticket sales account for only about 65% to 70% of cruise companies’ revenue, even as demand has driven up prices this year.
Here we’ll explain a bit about ticket sales, other revenue sources, and some of the factors that play into both. We’ll also list the percentages that make up the overall picture for each cruise line’s parent company.
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Ticket sales
Ticket sales account for only about two-thirds of the combined revenue of the big three cruise line parent companies. Carnival Corporation, Norwegian Cruise Line Holdings and Royal Caribbean Group.
In a research report released May 29, Truist Securities predicted that ticket sales such as cruise fares and airfares booked through cruise lines will account for 66.1%, 67.5% and 69.6% of the three companies’ revenues, respectively, by 2024.
In-flight spending
Truist Securities said Carnival’s onboard spending Norwegian Cruise Line Holdings and Royal Caribbean Group’s brands will account for the remaining 33.9%, 32.5% and 30.4% of the three brands’ revenue in 2024, respectively.
This onboard spending category includes obvious items like shore excursions, drink packages, Wi-Fi, casino and arcade games, alternative dining, spa treatments, and purchases from onboard shops, but it can also include shuttles to and from the airport, any travel insurance or protection purchased through the cruise line, and even cancellation fees.
“Our goal is experiences,” Royal Caribbean Group president and CEO Jason Liberty said during an earnings call Feb. 1. “We continue to try to drive experiences that our guests not only want, but are willing to pay for. … Of course, there’s a lot of things that we’re adding to our ships. … That extends to destinations and what we’re doing in the private island space. … Our goal is to keep our guests in our ecosystem.”
Location, location, location
As expected, per diem rates (the total amount spent on board per passenger per day, including both ticket sales and on-board spending) are higher in remote than in high-traffic destinations.
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For example, per diems in Alaska and Europe are significantly higher than in the Caribbean or Bahamas. It’s a matter of supply and demand – there are far more ships offering voyages to the latter destinations than the former, driving down prices in the Caribbean and Bahamas.
Additionally, people traveling to bucket-list destinations are typically willing to spend money on excursions and other experiences they may never have again. The more exotic the destination, the rarer the excursion opportunities tend to be and the higher the price. For example, while snorkeling and parasailing are available in almost every Caribbean destination, glacier trekking is available in only a few destinations in the world.
On the other hand, someone booking a three-night weekend getaway may be on a tight budget and therefore less willing to pay the extra cost.
Promoting advance reservations
On recent earnings calls, cruise line executives said they are strongly encouraging guests to book activities and experiences in advance, arguing that even if guests reserve land tours, spa treatments or alternative meals before boarding the ship, they are more likely to make those purchases once on board, resulting in higher overall spending.
“Part of the meaningful progress we’ve seen is the ability to purchase and plan a vacation before the cruise,” Royal Caribbean Group Chief Financial Officer Naftali Holtz said during an earnings call Feb. 1. “This also translates into a huge financial success, as people book a vacation, get on board and spend 2.5 times more than those who aren’t on board.” [booked activities] “Pre-cruise.”
“With regards to the Norwegian brand, we are in continuous improvement mode in terms of expanding pre-shipboard sales and capturing greater share of customer over the extended period of time once they’re in our ecosystem,” Mark Kempa, executive vice president and chief financial officer for Norwegian Cruise Line Holdings Inc., said in an earnings call Feb. 27. “This will play an important role going forward as we consider revenue opportunities.”
“At Norwegian, we are working to improve our pre-cruise planning capabilities to enable our guests to book even more before they leave home,” Harry Sommer, president and CEO of Norwegian Cruise Line Holdings, explained on the same conference call.
Conclusion
How do cruise lines make money? Cruise revenue comes from two areas: ticket sales (cruise fares and airfare booked through the cruise line) and on-board spending (purchases of cruise-related products and services through the cruise line, as well as cancellation fees).
Current fares are the most expensive in cruise history, but cruise lines are focused on increasing revenue from on-board spending, encouraging passengers to make purchases by booking long before they set sail.
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