Deutsche Bank's Advice for Carnival: Reduce Commissions

MarketWatch has quoted a Deutsche Bank broker regarding the state of the cruise industry and, specifically, Carnival Corp. The bank downgraded Carnival from buy to sell and offered this:

"If we are indeed in an era where oil is around or above $100 a barrel then we believe that the cruise industry needs to rethink its strategy towards substantial shipbuilding programs," the broker said. "We believe that fuel surcharging has no material impact on offsetting this pain. With rising shipbuilding costs exacerbating this issue, we believe that Carnival needs to shift to a returns-driven philosophy, where the group raises cruise prices and reduces commissions."

MarketWatch said Carnival still has a $10 billion ship order book, which would make it tough to shift to that strategy for at least four years.

Carnival, as a company, has long been the friend of travel agents and has gone to great lengths to ensure that travel agent commissions are ensured and protected. Micky Arison, Carnival Corp. chairman and CEO said as much during the company's second-quarter earnings call earlier this year, particularly regarding its flagship Carnival brand.

"I think it’s very important to state that the travel agency distribution system has been an effective and efficient distribution system for this company for 35 years, and it got us to where we are," Arison said. "So we clearly believe that we need to continue to support them [travel agents] and they have shown this year they can give us the yield improvements we need to overcome at least partially the higher fuel costs. Despite the fact that I would expect to have a little less direct business next year, particularly at Carnival Cruise Lines, the effect of that would be higher yields."

We think its premature to say Carnival would follow the strategy call by Deutsche. The travel agent community is the backbone of the cruise industry and will stay so for years to come.

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