Unexpected drop in fuel prices helps cruise line bottom lines

One of the things that has quietly gone right in the cruise industry in 2014 has been the cost of fuel, which has dropped despite rising tensions in several key oil-producing regions, most notably the Middle East and Russia/Ukraine. (Click here or on the image for a larger view of a chart of fuel oil prices by refiners for the last 10 years.)

How long that price reprieve can last remains a pivotal factor in the profit picture for the major cruise companies.

Active fighting between Israeli forces and Hamas and the downing of a passenger jet in the ongoing conflict along the Russia-Ukraine border might normally be expected to raise fuel costs.

The continuing civil war in Syria and expansion of the radical Islamic State group in Iraq are also potential risks for oil production in the Middle East.

Yet, in the second quarter, fuel was the only major expense to decline at Carnival Corp., the world’s largest cruise company. Carnival reported $527 million in fuel costs, down from $555 million a year ago.

On average, fuel cost Carnival $657 per metric ton in the 2014 second quarter. That was down 3.7% from the same quarter in 2013.

What has changed the oil price picture in recent months has been the glut of domestic oil flowing from fields in West Texas and North Dakota.

Surging output in both those areas has reduced the dependence on oil from foreign sources, making geopolitical upheavals less influential.

At Norwegian Cruise Line, the windfall is being plowed back into product improvements and strategic marketing initiatives, CEO Kevin Sheehan said in a recent conference call.

The drop in fuel prices, he said, “has enabled us to say, ‘Let’s step back and invest in making sure all of the learnings from Norwegian Getaway are parceled out across the fleet.’”

Among the takeaways from the Getaway, he said, are additional training programs for crew to increase the line’s customer service scores. New food programs and some of the initiatives bundled under the Norwegian Next program of improvements are also being paid for with fuel savings.

Sheehan said some dollars have also been earmarked for “smart marketing” programs that the cruise line will unveil in the near future.

Norwegian’s fuel consumption per average cruise day dropped 5.1%, even though the company bought more fuel overall because of the addition of the Norwegian Getaway to the fleet in January.

Norwegian paid $622 per ton for fuel in the quarter ended June 30, down from $686 a year earlier.

Those prices take into account the effect of hedges, which enable cruise lines to lock in delivery of fuel at a certain price in the future. In several months, if the prices rise or fall, the cruise line can still pay whatever price it previously agreed to.

At Royal Caribbean Cruises Ltd., fuel costs have decreased slightly over the past three months, company officials said, and its brands’ fuel needs for the rest of 2014 are 55% hedged at an average cost of $612 a ton.

Norwegian has hedged 76% of its fuel needs for the second half of the year. It projects its average fuel cost for 2014 will be $635 a ton.

Another development easing the pressure on fuel costs has been the increased deployment of air pollution scrubbers on cruise ships. The scrubbers trap sulfur from diesel engine exhaust.

Under tighter pollution standards adopted by regulators at the International Maritime Organization, cruise lines had faced the threat of paying millions of dollars more for fuel starting next year in order to buy the more expensive low-sulfur oil mandated in certain cruise regions.

The regions, known as Emissions Control Areas (ECA), include coastal waters in the U.S. and Canada, including almost all of the areas in which cruise ships sail on Alaska itineraries.

As an alternative, the International Maritime Organization has allowed cruise lines to achieve the same or similar results by retrofitting older ships with emission scrubber technologies and building them into new vessels.

In a recent conference call with analysts, Carnival Corp. CEO Arnold Donald reported, “We have rolled out our leading-edged scrubber technology on a dozen more vessels so far this year in order to mitigate the higher cost of fuel under the pending ECA requirements.”
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Follow Tom Stieghorst on Twitter @tstravelweekly.