Rising fuel prices and increasingly stringent environmental legislation are two of the industry’s biggest challenges. Andrea Ashfield asks Bob Lintott, chairman of the International Bunker Industry Association, how operators can maximise profitability while ensuring compliance.
The cost of fuel represents a huge financial outlay for cruise operators, with fluctuating prices that can be difficult to predict. In June 2011, Carnival Corporation announced that prices had increased by 35% to $673 per tonne in the second quarter of 2011, up from $498 per tonne over the same period in 2010.
Likewise, Royal Caribbean revealed that it spent $511 per tonne in the first quarter of 2011. Coupled with the increasingly complex web of environmental legislation designed to reduce sulphur emissions and improve the industry's environmental standing, the volatility of fuel prices remains a constant concern.
Despite these difficulties, Bob Lintott, chairman of the International Bunker Industry Association (IBIA), thinks operators are becoming increasingly adept at recouping the cost of fuel.
In the past, he says, cruise lines sought to offset the cost by introducing a controversial fuel supplement. The surcharge was levied by a number of cruise lines in 2008, when the price of crude oil soared to almost $150 per barrel.
The move prompted criticism from passengers, and even led to an investigation by the Florida attorney general's office into possible price collusion between cruise lines. By the end of the year, operators began to withdraw the charge, and it has not been reintroduced, although the price of oil remains high.
"The fuel surcharge was unpopular and has not been imposed since, so one has to assume that the cruise industry has found other ways of recovering increasing fuel costs," says Lintott. "It has to be passed on to consumers somehow."
Fuel price hikes also make high rates of occupancy increasingly critical, he adds.
"High-priced fuel and half-full cruise ships are a recipe for disaster," he says. "If ships are full then the relative cost of fuel is not so critical, as it can be reclaimed through ancillary charges."
Operators are also focused on efficiency measures such as reducing the need for air-conditioning, and finding ways to cut down on electricity and water usage.
A cleaner future
By 2015, the IMO will insist that ships sailing within designated emission-control areas such as the English Channel, Baltic Sea and US coastal waters must switch to fuel with a sulphur content of no more than 0.1%.
The regulations also state that by 2020 cruise ships must burn fuel with a sulphur limit of 0.5%, no matter where in the world they are operating. Some cruise leaders fear the resulting rise in costs could prove disastrous for the industry.
"I would imagine that legislation imposed by the various entities who are trying to control emissions is a minor nightmare," says Lintott.
"There is a potential for side effects if you legislate to deal with one facet of fuel quality, rather like having a balloon filled with water. If you squeeze one end, you move the contents elsewhere without altering the overall volume."
In this case, Lintott believes the changeover to cleaner fuels could create some challenging side issues.
"Without championing sulphur, it does have some lubricating properties," he says. "However, one of its hazards is the production of acid during combustion. If you are chopping and changing between high and low-sulphur fuels, managing the neutralisation of this acid is tricky.
Excess neutralising alkali can be as corrosive as excess acid and can lead to accelerated engine wear. This should become less of an issue if legislators can agree on a practical world standard."
In terms of cleaner fuel, different options are available to the cruise industry, each with its own advantages and drawbacks.
"It depends on how much the customer is prepared to pay, but the most efficient in terms of cost is to continue using heavy fuel," Lintott explains.
"The next option is to move to gas oil, which is twice the price of marine fuel with little significant increase of efficiency or decrease in consumption. It could well put the cost of cruising beyond the reach of a significant number of potential customers."
Another option is liquefied natural gas (LNG). In 2013, Viking Line will launch a large cruise ferry powered by LNG. With no marine emissions and low aerial emissions, the ship is designed to have a minimal impact on the waters in which it sails.
The 57,000t vessel will be one of the most environmentally friendly of its size, and will carry 2,800 passengers and 200 crew. Likewise, ferry company Torghatten Nord is to launch four new ships that will be equipped to use LNG and is converting three existing vessels.
While LNG is considered to be a clean alternative, it is not without its problems.
"Some ships are burning LNG, but it is not available everywhere," says Lintott. "It is not really practical unless and until there is a comprehensive infrastructure in place to supply it."
Changing fuel types in order to comply with differing legislation around the world is costly can also take its toll on a ship's engines, warns Lintott.
"Switching from one kind of fuel to another may look good on paper, but in practice, unless an engine is set up for maximum efficiency each time fuel is changed, you could be creating a bigger problem than you are trying to solve," he says. "The intention is not without merit, but the practical effect - particularly over short distances - may be only marginal at best."
Further innovation in the development of cleaner fuels may well occur as a result of pressure from outside the industry.
"I think it is dependent on politicians, because the marine industry is the tail end of the oil industry," he explains.
"We burn what is left when everybody else has taken the more profitable stuff; however, in creating the fuel that we are mandated to burn by whichever legislative body makes the rules, refiners and blenders may also be creating other hazards that in their turn need to be handled, stored or disposed of as a result of necessary changes in the refining process."
Created in 1992 to represent the bunker industry, the IBIA's members include owners, bunker suppliers, charterers, traders, brokers and port authorities. It also represents the industry at the IMO, acting as a consultative non-governmental organisation. The IBIA also aims to educate members and non-members about the most important issues facing the bunker industry.
"For reasons that we are endeavouring to remedy, the membership comprises more suppliers and service providers than ship owners and operators," Lintott says. "We would like to attract more people from the operating side of shipping and, although we have good representation from the cruise industry, new members are always very welcome."
As demand for cleaner fuels continues to grow, he believes the biggest issue ahead is not for the bunker industry, but for refiners.
"If there is future legislation designed to control the quality of fuel, it is the refiners who will really have the problem," he explains. "In order to produce low-sulphur fuels, refiners need to actively remove the sulphur. Bunker suppliers take refined products and blend them to meet accepted specifications."
For the shipping industry, Lintott expects to see more legislation governing the type of fuel that cruise ships can burn.
"The challenge will be meeting the ever-increasing legislation that is designed to control the quality of fuel and its ultimate emissions," he says.
Whatever happens, rising fuel costs and related environmental legislation look set to dominate the industry agenda for many years to come.