Will U.S. Cruise Lines Reinstate Fuel Surcharges?

March 9, 2011
(6:15 p.m. EST) -- The "27 new threads a day" on fuel surcharges, as one Cruise Critic reader put it, tell the story: Cruisers are worried that rising oil prices will force lines to pass the added costs onto them.

Some already have. As various stimulants, including uncertainty in the Middle East, have pushed oil prices skyward, U.K.-based cruise lines including P&O Cruises, Cunard and Fred. Olsen have brought back supplements.

Even so, the message from U.S.-based companies Carnival Corp., Royal Caribbean Cruises, Ltd. and Norwegian Cruise Line is that they have no intention to follow suit. Curiously, all three companies have a clause stating that they reserve the right to reinstate surcharges if, under certain pre-defined circumstances, the price of oil exceeds $65 or $70 a barrel. Fuel has been above $65 for more than a year now.

At first sneeze, it's easy to understand why lines would want to reinstate. Skyrocketing fuel costs can flood a bottom line. For instance, increased oil prices negatively impacted Carnival's earnings by $162 million (20 cents a share) during the second quarter of 2010. According to the line's top brass, a 10 percent change in fuel price represents a $180 million impact to the company.

In a recent report, Leisure analysts from UBS, a financial services firm, estimated that if oil stays roughly where it is through 2011, Carnival Corp.'s full-year fuel costs per passenger day would increase by more than 30 percent, year over year. Royal Caribbean's fuel-related expenses would climb nearly as much.

Still, U.S. lines are hesitant to join their British counterparts. Part of it may be public opinion. The level of resentment over the last round of surcharges (in spring and summer 2008) reached fever pitch. To the chagrin of cruisers, lines across the industry adopted -- then increased -- fuel supplements. When the surcharges began to fade that fall, it was something of a hallelujah moment.

But while public rancor may serve as a deterrent for some lines, there may be another argument against reinstatement: Fuel surcharges don't really help the bottom line.

"We note that the implementation of any fuel surcharges across the industry would not likely offset increasing fuel expense," wrote leisure analyst Robin Farley in the recent UBS report. "Due to elasticity of cruise demand, any surcharge would likely have an impact similar to a price increase and may simply come out of ticket prices."

In other words, the lines charge as much as they can based on demand. Whether that total price appears in one column (ticket price) or two (ticket price + fuel surcharge) is somewhat academic.

But wait -- there may be one small benefit. If lines split the costs into two buckets, only one bucket (the ticket price) is subject to travel agent commissions. According to the UBS report, the amount of the cost that's been "reclassified into a 'fuel surcharge' bucket (which is not a commissionable item) would have a slightly positive impact on overall net yields."

Even so, if you're angering the public and the monetary impact is limited, why reinstate? The answer seems to be that U.S. lines don't want to.

There are other ways lines reduce fuel expenditures, too. One of the most effective is to refashion a ship's itinerary into a route requiring less steaming. This can significantly offset the impact of escalating fuel costs.

Unfortunately, no one's completely ruling anything out. "When you have these huge, fast spikes, it's easier to justify a fuel surcharge," said Howard Frank, Carnival Corp.'s vice chairman and chief operating officer, during the company's Q4 call. "But I don't see that in the cards, though -- not based on where we see fuel for this year."

We're hoping Frank's prognostication pans out.

--by Dan Askin, News Editor