Seven Seas Cruise Vacations Inc.
Occupancy Management1
Pamela Homesworth, Director of Operations – Yield Management for Seven Seas Vacations looked across her desk and let out a sigh. She looked exhausted and not a little bit frustrated as she removed her glasses and started to speak.
“It’s Tuesday, the worst management day of my week” she said. “Today is the day I have to decide what to do with our remaining occupancy for a week Saturday to ensure we sail with a full complement of passengers. When I first came into this business, you made your profit from the last twenty percent of travelers, now you try not to lose your shirt to keep the ship at capacity for each sailing. I blame the internet!” Seven Seas Cruise Vacations
Pamela Homesworth, then a 31 year old businesswoman, had joined Seven Seas Cruise Lines Inc. directly from an MBA focused on electronic marketing and operations. She began work six years earlier as the internet came to be a strategic force for consumer businesses, starting in 1998. Pamela worked her way into increasingly important roles with the firm and with the start of the fall cruise season had taken over an experiment that Seven Seas was testing on integrated vacation planning and direct sales under the selling brand Seven Seas Cruise Vacation.
Using one of their midsize ships, Seven Seas was sailing a dedicated week long circuit from Miami through the western Caribbean and back along the coast of Mexico while testing several new ideas for managing passenger occupancy and also in transporting passengers to the Miami cruise terminal. Seven
Seas was targeting this marketing experiment at customers whose homes were located within the North
East United States and Central and Eastern Canada. Seven Seas was targeting this offering to families in the 25 – 50 year old demographic looking for a 1 week holiday in the winter season that was sold more like a resort vacation rather than a traditional cruise.
Pamela and her associates had conceived of the idea for Seven Seas Cruise Vacation after studying the resorts of Mexico, the Caribbean and southern Europe and they felt they have a novel offering to attract a new class of vacationing families, couples and singles to their line. To preserve the positioning and pricing of their main offering, Seven Seas had elected to create a new brand to test market under, and thus the Seven Seas Cruise Vacations was born.
1

This case has been prepared to provide material for class discussion; it is not intended to illustrate effective or ineffective handling of a managerial situation. Names and events may have been alte red to protect confidentiality or to aid in illustration.
Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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Pamela had developed what she felt were several strategic differentiators that would support the Seven
Seas Cruise Vacations business plan:
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Through a business associate, Pamela was able to negotiate a fixed fee deal with a major air carrier to transport passengers from any of her target markets to the cruise terminal in the port of Miami for a per person cost of $450 for adults and $250 per child;
Pamela had studied marketing in her MBA and was a strong believer in the internet as a marketing channel, though cautious of the pricing erosion that often took place through electronic marketing. Testing the internet as the sole marketing and booking channel was the primary focus of Pamela’s present assignment;
Pamela brought a sound accounting background as well as an analytical mindset to her daily operations; and
The last few winters had been particularly cold throughout her target market and this had allowed Seven Seas to raise prices throughout their fleet and build up a cash reserve that they felt could sustain them through a period of slower occupancy as a result of experimenting with different inventory management techniques.

The Seven Seas Mermaid
The Seven Seas Mermaid was a midsize ship in the Seven Seas fleet. Originally commissioned for the fall
1992 season, while not state of the art compared to other ships in the fleet, the Mermaid was comparable to competitor’s ships in terms of amenities, maximum occupancy and passenger services.
The Seven Seas Mermaid had undergone a refit and maintenance cycle prior to returning to service for the past summer season, working the Alaskan cruise itinerary and allowing Pamela to refine her vacation program offering. One of the big changes made in refit was the rationalization of unit types across the ship. While many vessels were designed to maximize the number of passenger cabins, through the creation of various layouts and sizes to accommodate the geometry of the ship, with the
Mermaid Seven Seas elected to move common services to the more difficult to use spaces and to create standard size and layout cabins that were identical across the ship. A smaller selection of cabin types was thought to simplify booking by reducing inputs to the buying decision. As a result the ship now had
5 types of cabins throughout, all viewed as comparable within a class. The remainder of the ships public spaces were used to house the restaurants and bars, the spa and other entertainment facilities.
Pamela knew from her analysis that the type of clientele each of her suites and villas attracted would spend different amounts of money on the premium services her ship offered. Premium services were where the revenue was made now in the cruise industry. The basic fare covered core operating costs, though recent price competition meant that even that was being challenged. Premium services included alcohol, spa services and meals in the specialty restaurants. Pamela knew from experience and analysis that premium services generated considerable supplemental income and the bulk of the profitability for Seven Seas. To be successful as an operator Seven Seas had to understand its fixed and variable costs – fixed costs were incurred whether the cabin was occupied or not, while variable costs were incurred only when the cabin was occupied.
Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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The big innovation that Pamela was testing this season was the use of standard pricing for vacation packages, attempting to test the theory that customers and prospects would respond positively to a cruise offering that was sold more like a traditional resort stay rather than how cruises had historically been sold. Pamela structured vacation packages such that each type of unit had a cost for a week long cruise, leaving the port of Miami on Saturday afternoon and returning to the port early the following
Saturday morning, and this cost was the same no matter how many people were staying in the unit (up to the maximum occupancy of the unit). Unit pricing was new to the cruise industry, having traditionally sold passage on a per passenger basis and charging penalties when a booking didn’t have sufficient passengers to meet an occupancy threshold. When appropriate there was also discounting for passengers in the same suite above a threshold. Pamela reasoned that families were more inclined to make unaided buying decisions based on a week’s occupancy rather than per person with various formula to understand total cost. Pamela further reasoned that including in her cabin rate air fare for two adults and two children, such that the price quoted was the price of the vacation unless extra services were consumed by the family, would simplify the evaluation of a cruise vacation against other choices and raise the prospect of a sale to her target market.
The specifics of Pamela’s pricing, inventory and anticipated supplemental revenue are detailed in Table
1 - The Seven Seas Mermaid Capacity, Unit Pricing and Premium Service.

Unit
Type
1A
1B
2A
2B
2C

Description
Upper deck villa
Mid decks villa
Mid decks suite
Lower decks suite
Interior suite – all decks

Quantity
28
84
84
84
126

Average
Rate
Alcohol
(weekly) profit / Unit
$6,000
$250
$5,500
$225
$4,500
$225
$4,000
$175
$3,000
$150

Average
Premium
Average Spa Meal profit / profit / Unit Unit
$400
$200
$300
$200
$175
$150
$0
$150
$0
$50

Table 1 - The Seven Seas Mermaid Capacity, Unit Pricing and Premium Service Sales (average)

The fixed costs / cabin, was a standard $1,000 regardless of type. Variable costs, which included cruise staff, housekeeping, consumables such as soap and towels, food and other costs are detailed in Table 2 Variable Costs by Unit Type.
Unit Type
1A
1B
2A
2B
2C

Variable Costs / Occupied Unit
$600
$500
$400
$400
$250
Table 2 - Variable Costs by Unit Type

Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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Reservation System & Enterprise Resource Planning (ERP)
Seven Seas Vacations had a fairly simple reservation system with two methods of inputting weekly reservations. The reservation system interfaced to the main Seven Seas Cruise Lines Inc. enterprise resource planning (ERP) system and the vacation business used the main services of the ERP system including ticketing, customer relationship management (CRM) and financials.
Agents, who worked in a call center answering phones from customers and travel agents, could access the reservation system through computer screens. They could look up available suites and villas for a given week and see a grid of filled and empty cabins by floor and type. If a customer was interested in booking they could select an available cabin and input the appropriate information for the customer.
Pamela had invested in development of a web site that allowed customers to browse vacation packages and purchase from the site. The web site engine accessed the same screens as the call center agents, and to the reservation system it looked like a web reservation was created by a call center agent.
Each night a program ran on the reservation system to identify new reservation and book the appropriate airfares with the airline.
The reservation system had limited reporting options and a single data extract routine that wrote out a comma separated file for a given week, showing the status of reservations and vacancies for that week.
The file format for this export is documented in Table 3 - Reservation System Export File Layout.
Line 1
Line 2 – 407

Data of voyage details cabin reservation details

Table 3 - Reservation System Export File Layout

The first line was the sailing date of the particular voyage that was represented in this weekly extract, while the remainder of the file had one line for each of the cabins (suits or villas) within the Seven Seas
Mermaid with the values for each cabin documented as defined in Table 4 - Reservation System Extract,
Cabin Line Details.

Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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Attribute
Cabin Type
Cabin Number

Details
One of 1A, 1B, 2A, 2B or 2C
All cabins are sequentially numbered starting at 1
(first cabin in the 1A class) and going through to
406 (last cabin in the 2C class)
Y or N, for Yes or No
A number from 0 – 4, with 0 if the cabin isn’t reserved. If there are 4 adults at present Seven
Seas only allows 2 additional children in the cabin
A number from 0 – 4, with 0 if the cabin isn’t reserved or there are no children. At present
Seven Seas can’t accommodate more than 4 children in a suite or villa
A number from 0 – 5, with 0 if the cabin isn’t reserved, representing the source of the reservation. 1 = call center, 2 = web site, 3 = wholesaler (see below), 4 = package (see below), 5
= discounted web (see below)

Reserved
Number of Adults

Number of Children

Source

Table 4 - Reservation System Extract, Cabin Line Details

Selling Excess Capacity
Pamela would often extract the data from her reservation system and ponder what she should do about occupancy for future weeks. One of her Tuesday task’s, that made this her least enjoyable week day, was that she had to plan, and if appropriate notify, third parties that could sell units for her through alternative channels to ensure the voyage was at or near capacity. While her call center and website generated the bulk of her sales, there were times she needed extra help to sell a given voyage, and she needed to release content a minimum of 10 days from departure Saturday to these alternative channels so they could sell on her behalf.
There were three main channels Pamela sold excess capacity through, and they had different costs and probability of success associated with each channel.

Travel Wholesaler’s
The most predictable channel for selling capacity was what was called a “wholesaler”. Pamela could approach a wholesaler with a set of cabins, of any type, and they would buy the available cabins at a steep discount and sell them (or not) at whatever price they could. Seven Seas received a fixed price per cabin, didn’t have to arrange airfare for the guests and were paid if a guest occupied the cabin or not.
In analyzing vacation packages traditionally sold through wholesalers, Seven Seas had found that 75% of what was purchased by the wholesalers resulted in families in the cabins on average and that guests who booked through the wholesaler purchased fewer supplemental services. The wholesale contribution values are showing in Table 5 - Wholesale Passenger Premium Service Sales (average).

Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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Unit
Type
1A
1B
2A
2B
2C

Average
Wholesale Alcohol
Rate
profit / Unit
$2,000
$155
$1,800
$125
$1,400
$125
$1,400
$75
$1,000
$75

Average
Premium
Average Spa Meal profit / profit / Unit Unit
$200
$175
$125
$125
$75
$125
$0
$80
$0
$65

Table 5 - Wholesale Passenger Premium Service Sales (average)

Specialty Tour Operators
Seven Seas had experimented with specialty tour operators in the past, those operators who assembled a package to market to a particular clientele and who sold from specialized mailing and member lists.
What Seven Seas found most appealing about this type of sale was the premium attached to the package. By selling a specialized program, say “gourmet food and fine wine”, Seven Seas could charge a higher rate, attract a group, sell a number of cabins and because the groups tended to be premium clientele they spent more than the average guest in some of the supplemental services Seven Seas offered. The speciality tour operator expected to have access to a fixed number of cabins, only the premium cabins (1A, 1B and 2A) and they charged Seven Seas a flat fee of $28,000 to set up and market the event and a commission of $1,500 per cabin sold. Seven Seas’ was responsible for booking airfare for the guests and the contract called for the provisioning of 12 cabins of each type (1A, 1B and 2A). On average Seven Seas had found the tour operator sold 80% of the cabins, with the remaining cabins going unoccupied. Speciality tour operators required a minimum of 8 weeks of selling time before a voyage, and on average Seven Seas had found that 12 weeks lead time had the best probability of selling out.
The specific average premium service contribution can be found in Table 6 - Speciality Tour Passenger
Premium Service Sales (average).

Unit
Type
1A
1B
2A
2B
2C

Premium
Tour
Rate
$6,500
$6,000
$5,000
N/A
N/A

Average
Alcohol
profit / Unit
$450
$325
$275

Average
Premium
Average Spa Meal profit / profit / Unit Unit
$400
$250
$300
$250
$250
$200

Table 6 - Speciality Tour Passenger Premium Service Sales (average)

Seven Seas Cruise Vacations – Occupancy Management – © 2012 M. Sparling, All Rights Reserved

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Discount Web Agents
The final channel that Seven Seas had sold excess capacity through was discounted web agents, who sold cabins through various travel sites and services. These web sites tended to attract couples without children, who were looking for an inexpensive vacation booked at the last minute.
To help manage some of the variables in the cost of her packages, Pamela had established three rules for dealing with discount web agents:
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First she would never discount a premium unit, only selling 2C units through this channel;
Second she would opened it to couples or singles only, no children; and
Third she wouldn’t provide airfare to bookings through this channel – getting to the cruise terminal in the port of Miami was the responsibility of the buyer.

She paid the discount web agent a 10% commission on the base rate of each cabin sold and found that they could sell on average 38 cabins at a discounted rate. What she had found was that discount buyers consumed premium services above the average of her equivalent buyers. The specifics of the contribution from discounted fares can be found in Table 7 - Discount Web Agent Passenger Premium
Service Sales (average).

Unit
Type
1A
1B
2A
2B
2C

Premium
Discount
Rate
N/A
N/A
N/A
N/A
$1,425

Average
Alcohol
profit / Unit

Average
Premium
Average Spa Meal profit / profit / Unit Unit

$250

$105

$135

Table 7 - Discount Web Agent Passenger Premium Service Sales (average)

ERP Management Reporting
“There are three things that I wish I had to make my decisions easier.” Pamela said while returning her freshly cleaned glasses to their rightful spot.
“First, I’d like to have a summary report that shows what the composition of the future weeks bookings are. How are sales by unit type and where those reservations came from. I’d also like to be able to compare any number of weeks sales and occupancy / vacancy to understand comparable ratios. If I had that I could at least understand what the big picture is, rather than having to work that out from the reservation system report.”
“I’d also like a management decision tool that would show me three scenarios, based on the available options I have to sell inventory for a given week. What would my revenue be for each scenario and, based on cost, what is my forecast profitability.”

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“Finally what I would really like is modifications to our ERP solution that could take the available capacity I have to work with for any given period and have the system solve for me the best solution that maximizes my profitability - what we could do with the available cabins. While a computer won’t know all the variables that a given week might have, the combination of the reports I’ve described and an analysis model would sure help me feel more confident about the decisions I make on any give
Tuesday.”
“If I had these operating management tools I would feel these decisions were less gambling and more business. Can you help me with something like that?”

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