In 2008 the price of oil, one of the major cruise line costs, rose one and a half times above 2007 prices. Executives at the biggest cruise companies expect fuel woes to worsen in the short term, so they are becoming inventive in buying fuel cheaply, using less of it, and passing on costs to passengers. All the while they must navigate an international maze of environmental regulations that complements the goal of fuel reduction but also involves capital costs and design dilemmas created by a lack of universal standards.

Royal Caribbean Cruises Limited (RCCL), for example, has done well in curtailing its fuel costs. However, the cost is eating a growing share of its revenues: 7.5% in 2005; 9.2% in 2006; 8.9% in 2007, with likely growth in 2008 following the sharp rise in oil prices since mid-2007.

One attempt by the cruise industry to partially offset rising fuel costs backfired. Taking a leaf from the airline industry’s book, leading cruise liners last autumn introduced fuel surcharges for passengers, but by spring they had to refund them. The Florida Attorney General said the surcharges had not been properly disclosed in that many were assessed on passengers after they had booked their cruises. Carnival Corporation agreed to refund $40m in surcharges, while RCCL agreed to refund $21m in settlements with the attorney general’s office.

Surcharges revisited

After these teething problems in applying surcharges, cruise operators could apply surcharges to later bookings, as Carnival has done with bookings taken after 1 February. Shortly thereafter, both RCCL and Carnival announced an increase in future fuel surcharges. Instead of a typical $5 per passenger per day, RCCL will charge $8 a day and Carnival $7.

Brendan Corrigan, senior vice-president of marine operations at Carnival Cruise Lines, says the increase was not an attempt to recoup anticipated surcharge revenue lost in the Florida settlement. “This is an offset; it’s not paying for that increase [in fuel costs],” he says. “The context of this is that fuel prices today are about 60% higher than they were a year ago. We have lots of initiatives that can save half a percent here or 1% there, but we don’t have any invention that can save 60%. If we figure out a way to save 5% we’re opening bottles of champagne.”

Carnival recently announced that it paid, on average, 66% more or $486 per metric ton for fuel in the first quarter of this year, versus the first quarter of last year. RCCL says it has contained its fuel costs through hedging and expects a more moderate 16% increase in fuel expenditure this year. However, that is a $650m fuel bill, compared with a $250m bill just four years ago. At RCCL, fuel spiked by 47% between 2004 and 2005, followed by 30%, 17% and 16% annual increases to date. Sorry, there are no polls available at the moment.

Crude oil vs bunker prices

The relationship between the price of a barrel of crude and bunker prices paid by cruise operators is “in the long-term, fairly linear,” says Michael McNamara, RCCL’s assistant vice-president of global fuel supplies. Bunker prices are defined by weight, not volume – so priced in metric tons to even out sizeable differences caused by gravity and temperature at ports worldwide. Cruisers typically use the heavy residual product that refineries are left with after they remove gas oil, a cleaner type used in cars and home heating, for example.

There is increasing demand by cruise operators for oils that are further distilled to make them cleaner and typically lower in sulphur. What McNamara terms “higher demand on a fixed supply” has resulted in the cost of these distillates rising faster than the basic price of oil.

“In the first quarter of 2007, low sulphur oil was at a premium of $10- $25 a ton over regular fuel oil. In the first quarter of 2008, it’s at a premium of $70 a ton,” McNamara says, citing fuel oil with between 1.5% and 3.5% sulphur content sold out of Amsterdam. Low sulphur fuel must be used in the English Channel, the Baltic Sea and in various European ports under existing national and pending EU legislation.

Another type of clean fuel is marine-grade diesel, akin to automobile gas, which has doubled in price to $800 a ton, McNamara says. It must now be used, for example, within 24 miles of California ports. New fuels including distillates, biodiesel and soon natural gas mean new engines that can burn different types of fuel. John

Krousouloudis, senior vice-president of RCCL’s Celebrity and Azamara cruise lines, reckons that cleaner fuels may be 25% of what the industry consumes today. New engines are also more fuel efficient – a factor that explains why fuel consumption per passenger is not going up as much on RCCL’s newer ships.

All aboard for energy saving

“The big push for us now is to reduce fuel consumption, period,” Krousouloudis says. One of the most effective changes has been the use of exceptionally durable silicone coating on the hull. This prohibits marine growth that would impede the ship from cutting cleanly through the water. “About half of the ship’s fuel is used for propulsion, the rest for electricity, the A/C, cooking, etc,” Krousouloudis adds, “and we’re saving 5% to 6% of the fuel used for propulsion.”

A host of other measures include: changing thousands of lights from regular incandescent bulbs to light emitting diodes (LED); applying a window film to filter sunlight and thereby reducing the need for air conditioning; minimising the use of water in showers while using air so the pressure feels the same; and ensuring appliances not in use are promptly switched off. McNamara adds that future and futuristic possibilities include additives to make the oil last longer; smoke-stack scrubbers to make the ship’s emissions cleaner, as an alternative to buying costly clean fuel; biofuels; and even a return to wind power.

Corrigan says that two of the big things Carnival is doing to conserve fuel are curtailing itineraries and not rushing to get to port ahead of schedule, which uses more fuel than a calculated, steady pace. “A cruise may be the same number of days, but we’ve adapted itineraries so that instead of, for example, going all the way from San Juan [Porto Rico] to Aruba, we go San Juan to Barbados.”

Science friction

Saving fuel has become a science, he notes, and agrees with his counterparts at RCCL that the main challenge is a lack of global standards – a “nightmare” when it comes to upgrading equipment. McNamara says that sometimes you cannot even buy locally the fuel that the next destination on the itinerary requires.

Carnival plans no changes to how it buys fuel. “We will continue to buy on the spot market and we haven’t done any hedging,” Corrigan says. Exactly opposite, RCCL credits its containment of fuel costs to buying 18 months ahead and to hedging. This year it expects to pay 16% more for fuel than in 2007, compared with a 66% first-quarter to first-quarter increase at Carnival.

Hedging, emphasised by McNamara since his promotion to head of fuel procurement in mid-2006, has saved RCCL $68.6m on what it would otherwise have paid for fuel by year end 2007. If oil prices keep rising, there will be further savings.

“We try to have over 75% of our fuel purchased pre-planned.” McNamara says. He believes RCCL gets better terms by locking in early versus often “ridiculously high” prices when buying port to port. Purchase contracts do not fix the actual price 18 months ahead, but they tie the future price to a local index at the time the fuel is received.

However cruise operators procure fuel, they welcome the day when, aided by a stronger dollar, oil prices will moderate.

They are looking for clear-cut environmental standards. “There’s no consistency regarding the fuel a ship can burn,” says McNamara. “It’s really up to the personal preferences of anyone who feels they have jurisdiction. And, there are inconsistencies from country to country, but ships have to be able to move seamlessly.”