By
David Mott |
The global economic recession has proved fertile ground for cruise industry analysts as they attempt to explain any recovery, current or forecast, to their investor clients. But there has been one aspect of the cruise operation – the future price of oil – that they have never been able to predict with any confidence and probably never will while current markets prevail.The price of oil is influenced both by market trading factors, which tend to be cyclical, and by geopolitical considerations like the Arab Spring, which are not. The latter are not a problem in themselves, but do raise considerable doubts about the future availability of oil in certain areas, mostly the Near and Middle East.
Fuel has now become the largest single cost for cruise operators, at between 15 and 20 per cent of total expenses. Royal Caribbean, for example, says that every 10 per cent change in the oil price, up or down, affects its profits by US$9 million. Given that the oil price has been as high as US$150 a barrel and as low as US$30 in recent history, and that these are rarely straight-line movements, the volatility of it all must be hard to cope with. Also, in 2015, lines will be required to burn greater quantities of better quality fuel oil, distillate, which could be an average of 50 per cent more expensive, to meet tougher emissions limits.
There are three main strategies the industry employs to combat expensive fuel – hedging (buying forward), fuel surcharges and operational economies, particularly in voyage planning. The concept of hedging is not universally popular. While Royal Caribbean has been quite heavily committed to it in recent years, hedging over 50 per cent of its future fuel requirement, Carnival Corporation & plc has not and has only dipped its toe in the hedging water in the last 18 months. Explaining his caution, chairman Micky Arison famously said: “Don’t forget, someone has to pay the hedger.”
The forward buying technique involves the company hedging in making a guess, albeit a well-informed one, on the price of oil in three or six months’ time. There are also two main reasons for going into it – to make a profit, which few companies will talk about as it is speculative, and more importantly to level out the peaks and troughs in the price. “All companies like to have reasonably level costs to work with,” says David Dingle, managing director of Carnival UK and a member of the main Carnival board, who has made a study of fuel issues. At Carnival Group, fuel for all 10 operating subsidiaries is bought centrally.
The second technique is to charge passengers a fuel surcharge on tickets. A number of companies with such surcharges outstanding have not reimposed them even though the current oil price of over US$100 is well above the level, normally about US$70 a barrel, at which lines have said they might do so. Surcharges are not popular with lines because under modern consumer law, the extra charge must be made known to the passenger. Also demand, while improving, is still fragile in the wake of recession and the imposition of extra costs could quickly backfire on lines in terms of losing hard-won passengers. All in all, surcharges are considered a blunt instrument and can even be seen as unfair when companies are already hedging.
The final major conservation method is to change the nature of itineraries without making it too obvious to the passenger. Ships steaming more slowly and therefore more economically is one technique. Going hand in hand with that is the introduction of shorter and slower trips with more time in port. Onboard there are also things which can be done to reduce running costs, like only operating air-conditioning when it is needed. Historically it would be operating all the time, whether it was needed or not. Other electrically-driven machines on board can be realigned in the same way. Laundry equipment is sometimes mentioned in this context.
Dingle says he thinks it is important to understand what exactly is happening with fuel and emissions regulations over the next couple of years. Ships in Europe are already required to burn distillate, producing sulphur content of just 0.1 per cent of total emissions, in European ports in designated areas. But in 2015 they will be required to burn distillate at sea as well, instead of the current low-sulphur fuel, which produces 1.0 per cent of emissions. In Europe the designated areas are, broadly, most of the North Sea, the Baltic and the Channel but there are none, as yet, in the Mediterranean.
In the US and Canada there is a 200-mile zone around the whole coast in what is a rare show of unanimity in maritime legislation between Europe and the US. Ships, which can switch between fuels, have historically burned the traditional heavy fuel with a sulphur limit of 3.5 per cent when not in these designated areas. Dingle also sees some future in the fitting of scrubbers, which clean normal heavy fuel to the required purity levels, but are often dubbed unreliable and expensive to fit. “Nobody would want to fit them without being convinced of their worth,” says Dingle, “but there is a growing confidence in them and they are often fitted as a trial on one engine. The question is whether in future they will improve sufficiently to make a business case for retrofitting in older ships. The premium on the dearer distillate could be an average of 50 per cent dearer and even up to 70 per cent more depending on where you take on fuel and who you are.”
These words find resonance with Francesco Balbi, MSC Cruises’ environmental coordinator, who says that, with its vast fleet of cargo and container ships and a dozen cruise ships making it the second largest shipping group in the world, his company is in a privileged position in all price negotiations. It is a significant point which is not made much of in the general debate on the price of fuel. As in all market cultures, the best price goes to the customer with the biggest account. So when it comes to buying greener fuel there is no doubt that the big cruise operators are likely to fare a lot better than their smaller brethren. It is for this reason that the big groups buy centrally for all their operating subsidiaries.
This is an abridged version of an article that appeared in the Spring/Summer 2013 edition of International Cruise & Ferry Review. To read the full article, you can subscribe to the magazine in printed or digital formats.