The cruise industry after Covid-19 crisis: challenges and … · 2020. 7. 15. · Title: The cruise industry after Covid-19 crisis: challenges and opportunities for a new Revenue

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The cruise industry after Covid-19 crisis: challenges and opportunities for a new Revenue Management perspective

Andrea Lanzanova

Maiora Solutions Insight Center 2020

1 Maiora Solutions – Insight Center 2020


TABLE OF CONTENTS

1. Introduction ....................................................................... 2

2. Issues after the pandemic outbreak .................................. 3

3. Finding light in the night .................................................... 5

4. Conclusions ........................................................................ 9

5. Authors ............................................................................. 10

Maiora Solutions – Insight Center 2020 2

1. Sail to a new world

The global pandemic caused by Covid-19 has put the travel and tourism industry in crisis, not only because of

the forced shutdown imposed by countries affected worldwide but also due to the social distancing measures

and the fear about contagion.

Many factors will determine the duration of recovery, including the discovery of a vaccine and, surely, the

pandemic has already and will continue to change the way people think, behave, and relate to each other.

Travel & leisure companies, such as airlines, railways, cruise lines, hotels, car rental companies, and tour

operators, will have to adapt to this new reality by evolving their business models.

With a particular focus on the cruise sector, the aim of companies should now be focused on inspiring customers

and create new demand, particularly in a situation where taking a cruise trip may be seen as a risk, due to the

perception of the cruise ship as an outbreak of disease. The quarantine imposed on 3,711 passengers and crew

members on board the Diamond Princess ship probably represents the most famous case of the virus outbreak

outside a country, together with the Grand Princess case.

The first level of countermeasures needed to encourage demand is to communicate that cruise travels and

holidays are completely safe and that all tools, actions, and procedures to protect guests’ health have been

implemented. Secondly, it is necessary to reduce customers’ uncertainty and fear to lose money, applying

flexible cancellation and payment conditions, as well as allowing refunds and rebooking in case of problems.

However, these measures alone cannot be sufficient to stem the contraction in demand that will continue over

the next period, as they just represent a good starting point. The other big question mark is how to set of the

right price in this moment of uncertainty.

In this paper, we will analyse the main issues that cruise lines are facing, and we will try to provide ideas and

solutions that will help the revenue management teams to face the challenges ahead. In particular, we have

identified three macro problems that cruise lines have to handle. Past booking data that are not good anymore

to predict future demand; the inadequate logic of the currently-implemented revenue management systems

and processes; CRM data that are not reliable anymore because the pandemic has already changed customers’

booking and travel habits. We will then describe three analytical approaches which represents viable solutions

to overcome the commercial issues arising from the current crisis. These initiatives, if implemented correctly,

will bring even more benefits in the longer term, when the global crisis will be overcome, uncertainty will be

lower, and demand will become more stable.



2. Issues after the pandemic outbreak

The Covid-19 crisis keeps generating impacts on the cruise lines industry, affecting many aspects of the industry.

Almost everything must be rethought. It is paramount to find new solutions, right now.

Load factor

Cruise lines are likely to operate with a lower-than-expected load factor over the next 6-8 months, reaching

higher levels from summer 2021, hopefully. This means that operators will have to improve efficiency, reduce

costs, and increase revenues from ancillary services to compensate for the lower number of guests onboard.

This will be a complicated issue and will require proper digital platforms and trained staff to identify all the

opportunities for cost efficiency, cross-sell, and revenue growth.

Itinerary planning

As various destinations around the world will be closed or access will be significantly limited for a long period,

cruise lines will have to rethink itineraries, adapting, modifying, or creating new ones. More time may be

considered for the boarding and disembarkation procedures, different evacuation plans, and risk profiles. Due

to the exponential number of new factors to be considered, itinerary planners will undoubtedly need more

sophisticated and data-driven technologies to increase responsiveness. Some cruise lines may likely consider

diversification and expansion of their portfolio to include land-based alternatives and shore excursions directly

supplied and managed by the company. Thus, allowing for greater control of the whole service and the

necessary health security measures.

Market conditions

For an indefinite time, demand levels will be lower than the pre-crisis ones. Moreover, customer needs,

expectations and travel patterns are likely to be very different. The process of consolidation in the cruise

industry might accelerate, with large market players acquiring the smaller ones. In this context, flexible

companies able to react quickly will have the opportunity to gain significant market share and to assert their

position in the market.

Data and systems reliability

The current crisis has created a year zero for prices optimization. All typical reference points that drive demand

forecasting and price optimization, such as historical booking data, elasticity models, market conditions,

itineraries, competitor prices, and seasonal demand trends, have become meaningless. This drastic change in


the industry has made traditional revenue management systems unreliable, at least in the short term. They are

unable to provide correct recommendations at this stage because historical sales data are misleading, making

price elasticity models inadequate, as forecast models are usually based on backward-looking approaches.

Current algorithms are designed to reduce prices as the level of demand decreases,and viceversa. However,

any change in price is risky because traditional revenue management systems, not designed to deal with this

extreme situation, may overreact. Price cuts to increase volumes, in a moment like this, would be unnecessary

and, indeed, harmful since they would not be able to boost a demand which is stuck for other reasons.

To sum up, this complex, unprecedented, and unique global situation, reflects into three main issues for the

cruise industry:

▪ Past booking data are not good anymore to predict future demand

▪ Revenue Management systems and processes are inadequate

▪ CRM data are not reliable anymore because the pandemic changed, and will continue to change, customers’

booking and travel habits

As a consequence, there is an evident need to rethink revenue management approach, tools and processes to

identify opportunities at the beginning of this new era and optimize revenues doing something new.



3. Finding light in the night

Companies must therefore rethink revenue

management in a new perspective, using tools that

provide fresh information and new data with statistical

significance. This is key in the demand forecasting

process and definition of new pricing strategies.

In the following paragraphs we illustrate tools and

methodologies that can be implemented by cruise

operators at different levels of sophistication and

applicability in the short term.

Get fresh data with conjoint analysis

Conjoint analysis is a widespread survey-based statistical technique

used in market research to get fresh and reliable data on consumers’

preferences. It is capable of measuring price sensitivity as well as value

perception of each attribute of the product. The peculiarity of this

technique is the ability to disaggregate a product’s price into the

values that consumers attach to each attribute.

Conjoint analysis enables companies to design new products and

services by including and pricing the services according to what

consumers want and are willing to pay.

After obtaining consumers’ preferences, it is possible to predict at what price the consumer would purchase

the product or service containing different combinations of attributes, including those that currently do not

exist in the market. Moreover, it is possible to develop a reliable model to predict the share of the market

segment that would prefer each product or service version, at any specific price level. This is the used to

calculate the price elasticity function.

After the pandemic outbreak, it is very difficult to get a clear picture of customers' preferences. Cruise lines do

not know the value attributed to the specific elements that make up the offer, making it very complex (if not

impossible) to understand customers' current needs and willingness to pay from historical data. A consumer


research with conjoint analysis can then be very useful to assess what customer needs and what they may be

willing to pay for in this particular period.

A useful example to understand the importance of conjoint analysis for the cruise industry in the short term is

the possibility to measure the perceived value and the customers’ willingness to pay for different fares, based

on their flexibility terms, therefore understanding, in times of uncertainty, how much each customer segment

values the possibility to cancel a booking, and at which fees. A consumer research like this grants a robust

statistical significance process in a relatively small amount of time that would make it possible to implement a

strategy to optimize the prices of the different fares and types of cabins.

Machine learning, rethink revenue management systems

The business interruption caused by COVID-19 represents an

opportunity for cruise lines to develop new and more advanced

analytical models able to understand, involve, and delight customers.

Machine learning technologies combine human and machine work in

the so-called augmented intelligence approach.

Machine learning is a branch of artificial intelligence that uses

statistical methods to progressively improve the performance of an

algorithm in identifying patterns in data.

The algorithm can automatically learn from data, without receiving explicit instructions from the programmer.

The ability to forecast demand will always remain crucial in the cruise business and machine learning algorithms

can deeply enhance the predictive capability of the company, as the weight of more recent vs past date can be

automatically determined by machine learning techniques.

Customers segmentation

The current situation has highlighted a new – crucial – kind of segmentation, that companies of all industries

will have to deal with, for some time: the segmentation based on the risk level.

This new dimension, which is partly interconnected with age, would overlap with existing customers segments,

and will likely have impacts on both the purchasing behaviours as well as operations onboard, forcing

companies to act on several levels, to respond to new needs.

Machine learning techniques such as k-means clustering would allow companies to identify in early stage the

emerging of new customers groups and new behaviours, allowing a quicker time-to-market for new products,

fares and services.



Forecasting and price optimization

The first companies that will apply machine learning approaches will be able to employ more effective price

optimisation models, gaining a competitive advantage over other market players. Traditional data science

models and algorithms, such as regression analysis, will not be applicable until sufficient data on the changed

demand condition are available. Soon, it will be necessary to have the fullest possible understanding of

customer needs and expectations. With very low levels of demand, it is imperative to satisfy and inspire

customers increasing loyalty. Machine learning models can optimise the bundles' composition and increase

customer satisfaction. This is possible thanks to the association rules, which learn from the purchase data and

define the combinations and bundles of products and services that specific customer segments are willing to

buy at a premium price.

Itinerary optimization

Machine learning applied to itinerary optimization can read and integrate internal and external essential data

to maximize the operating margin of each cruise. Data to be considered come from multiple sources, as ticket

price, excursion revenues, port costs, ship fuel consumption curves, port appreciation levels, flight prices to

reach the port of embarkation from airport hubs in the reference markets, and perception of itinerary and

destinations value by potential customers. Machine learning techniques such as neural networks and decision

trees can dynamically evaluate each cruise and itinerary, providing the company with an optimized itinerary

map, with a day-by-day and hour detail, based on business objectives and constraints and variations of all the

above-mentioned data. New itineraries can be pre-defined and assessed quickly through scenario modelling,

to respond to unpredictable external factors.

Price perception in customers’ shoes through neuromarketing

Neuromarketing is a reference branch of the so-called

neuroeconomics. This discipline merges traditional marketing with

neurology and psychology. The goal is to illustrate what happens in

people's brains in response to certain inputs related to products,

brands, or advertising, to determine the strategies that lead to

purchase. Neurological data collection methods, like

electroencephalography, positron emission tomography, and

biological data collection methods, as eye-tracking, facial coding

system, galvanic skin response, and heart rate, have recently started to be used in social science studies


In this paragraph the focus shifts from the importance of the analysis of explicit data collected from direct

customer transactions or actions, to the analysis of more implicit reactions that a certain communication,

promotion, website page, or price generates in the customer. The key issues are the levers that the company

can use to influence value perception and purchase urgency, as well as the importance of protecting privacy.

Determining prices in the tourism sector implies a higher degree of complexity. Not only product characteristics

such as intangibility and inseparability are involved, but also emotional, unconscious, and subconscious aspects

of the customer, when making the purchasing decision. Market researches, such as the conjoint analysis,

represent reliable methodologies for setting prices. However, traditional data collection techniques may not be

sufficient to capture and measure emotional responses to products.

An A/B Test, in web analytics, is a randomized controlled experiment with two variants, A and B. It is a form of

hypothesis test in the field of statistics. The A/B test is a way of comparing two versions of a single variable, to

test the subject's response to either variable A or B and determine which is the most effective.

It is a useful ally, for example, to increase the conversion rate of direct bookings from the cruise company

website. Launching two version of the same website allows to measure the visitors behaviour on the pages and

the differences between the two versions along key dimensions such as time spent on specific pages, movement

and clicks of the mouse, reactions to pop-ups, purchase rate, when and where the visit ended, and so on. This

is a good and not invasive process to assess the customer reaction when she/he is in front of the company

communication. This is even more crucial now for cruise companies, as they need to measure the effectiveness

of health & safety communication in relation with booking trend.

Another interesting example of the application of this experience research to increase the conversion rate is

the case of the 2008 presidential election campaign when former president Barack Obama raised a considerable

amount of dollars by experimenting A/B testing methodology (Dan Siroker, Pete Koomen (2013). A / B Testing:

The Most Powerful Way to Turn Clicks into Customers. John Wiley & Sons). Obama’s team of analysts

understood that every campaign website visitor represented an opportunity and that optimizing the website

through A/B testing could help to raise tens of millions of dollars. Through a multivariate full-factorial test, they

were able to test 24 different combinations of buttons, images, and videos at the same time on the dedicated

web page. Every visitor was randomly shown one of these combinations and then monitored whether they

signed up. The winning variation had an improvement of 40.6% in the sign-up rate with respect to the original

page.

Neuromarketing techniques can, therefore, provide valuable information in defining prices starting from the

customer perception point of view. Combined use of multiple neuromarketing techniques with other more

traditional methodologies, can increase the reliability on customers’ price perception.



4. Conclusions

The future of the cruise industry is not so clear and well defined. The pandemic is changing the sector (and the

world) as we know it today. Some players will leave the market or portions of it, creating opportunities to

consolidate the market position.

This sector has repeatedly shown a capacity to recover from complex situations with flexibility and the ability

to adapt to the changing external environment, even from major events like the Costa Concordia wreck.

New skills, competences, technological resources, and greater integration among different departments will be

needed to define new approaches and methodologies.

Tools and methodologies above mentioned represent key pillars for a new and more comprehensive revenue

management strategy, based on an incremental approach. Cruise operators can implement this strategy at

different levels of sophistication and applicability. The first step of application includes the use of conjoint

analysis to obtain reliable information, not available in historical data. Conjoint analysis is easy and fast to

implement. Machine learning represents the second step of the implementation. These methodologies have a

higher degree of complexity because their key element, the self-learning capability, needs time and data science

skills to be fully implemented and leveraged in the price and inventory definition. To fully exploit the potential

of machine learning, it is necessary to design integrated business processes that combine human analytical skills

and machine data capabilities. The last step of the approach is the use of neuromarketing techniques. They can

read the reactions of consumers generated by communication, prices, and promotions. These techniques allow

cruise companies to reach a higher level of customer knowledge.

This sequential approach represents a new revenue management paradigm for the cruise industry, and It is a

key step to face the challenges arising from volatile demand and a new competitive scenario.

This crisis seems like no-crisis ever seen before, in modern history, and as always in history, the struggle to

survive will be won by those who adapt and change to new models and by those who innovate, willing to sail

to new worlds.


5. Authors

Maiora Solutions is a company of data experts listed in the registry of Italian

innovative start-ups. It provides data analytics, pricing review, revenue

management, promotions, and commercial plans expertise to a large range of

companies in different industries, both in Italy and abroad. It has supported cruise

companies in the development of price optimization and revenue management

systems, business intelligence tools, value-based consumer research for new

strategic pricing, and price elasticity measurement. It has also carried out projects for the coordination between

the market sales and marketing activities.

Andrea Lanzanova is Project Manager at Maiora Solutions.

He is an expert on pricing strategies, revenue, and inventory management,

reporting tools, data analytics, business development, and project management.

He carried out many projects in the tourism and hospitality field working as a

consultant for different international companies. He worked on the

implementation of a new global destination-oriented offer and its new pricing and

promotion strategy of the ultra-luxury cruise industry market leader.



Get in touch with us for further information:

Email: [email protected] Website: maiorasolutions.com LinkedIn: Maiora Solutions

Headquarter: Via Gian Battista Vico 42, 20123 Milano

Documents

The cruise industry after Covid-19 crisis: challenges and … · 2020. 7. 15. · Title: The cruise industry after Covid-19 crisis: challenges and opportunities for a new Revenue