Fuel costs

[Corfe Mixture]

Followers of Carnival share price will have seen it rise quite significantly in the last few weeks. The reason given for this is the anticipated beneficial effect of the fall in oil price on profits.

 

But what does this mean for the client?

 

Maybe we will all be given some additional OBC, in lieu of a fuel refund, but somehow I doubt it.

 

I guess the best we can hope for, given this extract from booking conditions...

 

"The fare for your Package can be varied due to changes in transportation costs such as fuel, scheduled air fares and other airline cost changes which are part of the contract between the airline (and their agents) and Princess, government action such as changes in VAT or any other government imposed changes and currency changes in relation to an exchange rate variation. In the case of any small variation, an amount equivalent to 2 per cent of the fare for your travel arrangements, which excludes insurance premiums and any amendment charges, will be absorbed for increases and retained from refunds. For larger variations this 2 per cent will still be absorbed for increases but not retained from refunds. In either case there will be an administration charge of £1 per Passenger, together with an amount to cover agents' commission. If this means the Passenger has to pay an increase of more than 10 per cent of the fare for the Package, the Passenger may cancel the Contract and receive a full refund of all monies paid, except for any amendment charges or insurance premiums"

 

......is that they will not try to add a fuel surcharge to the current sale prices when OPEC stops fighting and the price of crude goes back up again.

Edited December 7, 2014 by Corfe Mixture

[coldinerie]

Recall the fuel up charge of a few years ago due to high oil prices, when are we going to see a reduction in price due to low oil prices??? Just sayin.....

[paul929207]

Recall the fuel up charge of a few years ago due to high oil prices, when are we going to see a reduction in price due to low oil prices??? Just sayin.....

There has not been a fuel surcharge for years. The cost of fuel is built into the price of the cruise. I am not holding my breath for a refund or credit.

[Cruise Raider]

It might explain why you see such great pricing on some cruises. After all, if they can get the going rate, they won't reduce the prices even though they may be able to with all the savings in fuel costs. If not selling so well, you can find some awesome deals. All that with the stock prices going up....NICE!!

[CruiserBruce]

There has not been a fuel surcharge for years. The cost of fuel is built into the price of the cruise. I am not holding my breath for a refund or credit.

 

Agree. On the Carnival family there hasn't been a fuel charge in many years. Like the airlines, some of this savings will fatten the bottom line, and it also allows the cruise lines to be more flexible about price, if they need to be.

[LMaxwell]

Lower fuel prices results in lower expenditure by consumers on necessary household items and gasoline. This means more disposable income. This in turn means more people with more money to spend on like to haves, such as vacation. You will not see prices being reduced as demand increases.

[BruceMuzz]

Recall the fuel up charge of a few years ago due to high oil prices, when are we going to see a reduction in price due to low oil prices??? Just sayin.....

 

Fuel is by far the biggest cost a cruise ship has. On many discounted cruises today, your fare pays only for the fuel and the food. All the other costs; Payroll, R&M, Mortgage, Cost of Sales come out of what you spend onboard. And of course, the ship hopes to make a profit with what is left.

 

In 2005, bunker fuel was costing us about US$300 per metric ton.

My ship burns about 900 metric tons every 7 days = $270,000

 

That fuel price has increased steadily over the past 10 years.

 

Today, bunker fuel is running around US$700 per metric ton where we are sailing.

My ship still burns about 900 metric tons every 7 days = $630,000.

 

The price we charge you for cruising with us is the same as it was in 2005.

We are eating the extra $1.4 Million in fuel charges every month.

 

And you want us to lower your cruise fare????????

[Corfe Mixture]

Fuel is by far the biggest cost a cruise ship has. On many discounted cruises today, your fare pays only for the fuel and the food. All the other costs; Payroll, R&M, Mortgage, Cost of Sales come out of what you spend onboard. And of course, the ship hopes to make a profit with what is left.

 

In 2005, bunker fuel was costing us about US$300 per metric ton.

My ship burns about 900 metric tons every 7 days = $270,000

 

That fuel price has increased steadily over the past 10 years.

 

Today, bunker fuel is running around US$700 per metric ton where we are sailing.

My ship still burns about 900 metric tons every 7 days = $630,000.

 

The price we charge you for cruising with us is the same as it was in 2005.

We are eating the extra $1.4 Million in fuel charges every month.

 

And you want us to lower your cruise fare????????

 

Really.

 

Thank you for that information which adds more power to the argument. I will take you at your word that our cruise fare only pays for the fuel.

 

Your comparison of cruise prices over the period 2005 to 2014 does not hold valid as there are many factors other than oil which affect market price, most notably supply and demand for the product and, in case you have not noticed we are just coming out of a severe recession which forced everyone, irrespective of their industry to respond to market pressures at a time when the industry was already committed to adding lots of capacity.

 

On the subject of bunker oil prices, check this out.

http://www.oil-price.net/en/articles/oil-price-drops-on-oversupply.php

 

The article was written in October and states:

 

'In June of 2014 the Brent Crude Oil Price hit $115 per barrel and many oil market insiders were predicting higher prices. Other analyst however, called a peak, and their predictions proved to be correct. By the beginning of October 2014, the Index dropped to $95 and predictions of further falls down to $90 or even $80'

 

Since then, the cost of Brent Crude Oil has fallen to $68 per barrel, which represents a fall of 41% over the June Price.

 

Are you seriously trying to tell us that Princess are not benefitting from this fall in crude prices?

 

As you hark back to the days of 2005, you might be interested to note that the article also states that:

 

"Back in 2005, the US had to import 60 per cent of its supplies from abroad. That demand boosted the coffers of oil suppliers and made the control of major oil producing regions vital to US economic stability and so central to American foreign policy. By 2014, however, the USA only needs to import 30 per cent of its oil consumption"

 

Despite what you tell us about the price YOU are paying for bunker oil, the fact of the matter is that for most ships, since July 2014, the Bunker World Index, which for those who don't know, is the bunker oil equivalent of the Dow Index, has fallen from over 1400 to just 1000 and the dollar price of a metric ton of bunker oil, just since September, has fallen from $600 per metric ton to $430 per metric ton

 

http://www.tsacarriers.org/calc_bunker.html

 

Are you seriously saying that 'your ship' is still paying $700 per metric ton?

 

The stock market clearly does not think so as the drop in oil price has resulted in the Carnival share price going up from 2155p (on October 13th) to over 2800p (sorry, I'm in the UK and only see the LSE share price which is quoted in pounds). That is an increase of 30% in less than two months.

 

I also think that you are looking at the matter from one very narrow point of view. The concept of overhead contribution of apparently loss making aspects of a product line is one of the first lessons of any management accounting course and no sensible business model tries equate one element of revenue against one very specific element of cost. It cannot be done and, if you try, you can very easily end up destroying an otherwise profitable business.

 

I appreciate that you are 'the font of all knowledge' on these matters but are you seriously saying that if the price of bunker oil at the time the brochure was produced had been $68 and this had subsequently gone up by 70% to $115 then Princess would have eaten that increase.

Edited December 8, 2014 by Corfe Mixture

[BruceMuzz]

Really.

 

Thank you for that information which adds more power to the argument. I will take you at your word that our cruise fare only pays for the fuel.

 

Your comparison of cruise prices over the period 2005 to 2014 does not hold valid as there are many factors other than oil which affect market price, most notably supply and demand for the product and, in case you have not noticed we are just coming out of a severe recession which forced everyone, irrespective of their industry to respond to market pressures at a time when the industry was already committed to adding lots of capacity.

 

On the subject of bunker oil prices, check this out.

http://www.oil-price.net/en/articles/oil-price-drops-on-oversupply.php

 

The article was written in October and states:

 

'In June of 2014 the Brent Crude Oil Price hit $115 per barrel and many oil market insiders were predicting higher prices. Other analyst however, called a peak, and their predictions proved to be correct. By the beginning of October 2014, the Index dropped to $95 and predictions of further falls down to $90 or even $80'

 

Since then, the cost of Brent Crude Oil has fallen to $68 per barrel, which represents a fall of 41% over the June Price.

 

Are you seriously trying to tell us that Princess are not benefitting from this fall in crude prices?

 

As you hark back to the days of 2005, you might be interested to note that the article also states that:

 

"Back in 2005, the US had to import 60 per cent of its supplies from abroad. That demand boosted the coffers of oil suppliers and made the control of major oil producing regions vital to US economic stability and so central to American foreign policy. By 2014, however, the USA only needs to import 30 per cent of its oil consumption"

 

Despite what you tell us about the price YOU are paying for bunker oil, the fact of the matter is that for most ships, since July 2014, the Bunker World Index, which for those who don't know, is the bunker oil equivalent of the Dow Index, has fallen from over 1400 to just 1000 and the dollar price of a metric ton of bunker oil, just since September, has fallen from $600 per metric ton to $430 per metric ton

 

http://www.tsacarriers.org/calc_bunker.html

 

Are you seriously saying that 'your ship' is still paying $700 per metric ton?

 

The stock market clearly does not think so as the drop in oil price has resulted in the Carnival share price going up from 2155p (on October 13th) to over 2800p (sorry, I'm in the UK and only see the LSE share price which is quoted in pounds). That is an increase of 30% in less than two months.

 

I also think that you are looking at the matter from one very narrow point of view. The concept of overhead contribution of apparently loss making aspects of a product line is one of the first lessons of any management accounting course and no sensible business model tries equate one element of revenue against one very specific element of cost. It cannot be done and, if you try, you can very easily end up destroying an otherwise profitable business.

 

I appreciate that you are 'the font of all knowledge' on these matters but are you seriously saying that if the price of bunker oil at the time the brochure was produced had been $68 and this had subsequently gone up by 70% to $115 then Princess would have eaten that increase.

 

This week in Sydney Australia, we paid US$700 per metric ton of bunker fuel.

Two weeks earlier in Yokohama Japan, we paid US$750 per metric ton.

I do not work for Princess and have no knowledge of the prices they pay.

But I can tell you that the prices of bunker fuel are the last to change - up or down - in response to changing world oil prices.

 

Fuel cost alone comprises over 65% of our total operating costs.

Cruise fares alone are over 65% of our total revenues.

It is very difficult not to compare these 2 factors.

The profit margin in between these two is razor thin - with incredibly large investment.

If one element goes up or down - even by a small amount - we stand to gain or lose a great deal of money.

Edited December 8, 2014 by BruceMuzz

[frac]

Really.

 

Thank you for that information which adds more power to the argument. I will take you at your word that our cruise fare only pays for the fuel.

 

Your comparison of cruise prices over the period 2005 to 2014 does not hold valid as there are many factors other than oil which affect market price, most notably supply and demand for the product and, in case you have not noticed we are just coming out of a severe recession which forced everyone, irrespective of their industry to respond to market pressures at a time when the industry was already committed to adding lots of capacity.

 

On the subject of bunker oil prices, check this out.

http://www.oil-price.net/en/articles/oil-price-drops-on-oversupply.php

 

The article was written in October and states:

 

'In June of 2014 the Brent Crude Oil Price hit $115 per barrel and many oil market insiders were predicting higher prices. Other analyst however, called a peak, and their predictions proved to be correct. By the beginning of October 2014, the Index dropped to $95 and predictions of further falls down to $90 or even $80'

 

Since then, the cost of Brent Crude Oil has fallen to $68 per barrel, which represents a fall of 41% over the June Price.

 

Are you seriously trying to tell us that Princess are not benefitting from this fall in crude prices?

 

As you hark back to the days of 2005, you might be interested to note that the article also states that:

 

"Back in 2005, the US had to import 60 per cent of its supplies from abroad. That demand boosted the coffers of oil suppliers and made the control of major oil producing regions vital to US economic stability and so central to American foreign policy. By 2014, however, the USA only needs to import 30 per cent of its oil consumption"

 

Despite what you tell us about the price YOU are paying for bunker oil, the fact of the matter is that for most ships, since July 2014, the Bunker World Index, which for those who don't know, is the bunker oil equivalent of the Dow Index, has fallen from over 1400 to just 1000 and the dollar price of a metric ton of bunker oil, just since September, has fallen from $600 per metric ton to $430 per metric ton

 

http://www.tsacarriers.org/calc_bunker.html

 

Are you seriously saying that 'your ship' is still paying $700 per metric ton?

 

The stock market clearly does not think so as the drop in oil price has resulted in the Carnival share price going up from 2155p (on October 13th) to over 2800p (sorry, I'm in the UK and only see the LSE share price which is quoted in pounds). That is an increase of 30% in less than two months.

 

I also think that you are looking at the matter from one very narrow point of view. The concept of overhead contribution of apparently loss making aspects of a product line is one of the first lessons of any management accounting course and no sensible business model tries equate one element of revenue against one very specific element of cost. It cannot be done and, if you try, you can very easily end up destroying an otherwise profitable business.

 

I appreciate that you are 'the font of all knowledge' on these matters but are you seriously saying that if the price of bunker oil at the time the brochure was produced had been $68 and this had subsequently gone up by 70% to $115 then Princess would have eaten that increase.

This poster does not understand the economics of running a 'Capital Intensive' business.

Edited December 8, 2014 by frac
spelling error

[Corfe Mixture]

This poster does not understand the economics of running a 'Capital Intensive' business.

 

Really!!

 

Perhaps, I did not express it well, but I was coming from the point that just because you have a high fixed cost element to your cost structure, you should not try to directly match elements of your revenue to serving those cost items.

 

The point I was making, obviously unsuccessfully, was that the objective of maximising overall revenue, particularly in a capital intensive business where, as with airline flights, once the 'opportunity to sell' has passed, it is lost forever and that performance is better served by working on the principal that it doesn't matter how you break down the individual client revenue, as long as you maximise that revenue.

 

 

IMHO the effect of this in the cruise industry where, unlike an airline flight, there is an extended timeframe where you have opportunities to earn additional revenue from your captive clients, trying to get the largest element of client revenue to directly match the largest cost item is unlikely to be the best strategy.

 

This is why Princess work hard to get folks on board in the expectation that the margin on onboard spend will offset any discounting on the basic price and that, as a result trying to match individual the fixed costs against the fixed element of revenue is rarely a good idea.

 

If the point you were making was that the nature of capital intensive industries require major capital decisions to be made well in advance of the revenue earned by that capital, then I would have to agree. However, I would still argue that the cost of servicing the capital debt is simply another fixed cost element and that trying to match a fixed element of revenue against this cost is unlikely to be the best pricing policy.

 

FWIW, my career was in a capital intensive manufacturing industry, where there was a high degree of engineering development cost, supplemented by non-recurring engineering costs and, for certain, except when dealing with the Government, any attempt at pricing in a manner which revealed the non-recurring engineering costs to clients would not have been a good pricing strategy. In fact, I turned around two businesses who had failed in certain export markets simply because their pricing policy had revealed the non-recurring engineering costs which had resulted in clients perceiving that they were subsidising the business' product development costs.

[frac]

Impressive

[frac]

Although I understand the points in question I would like to apologize the the poster and the forum for my response. The forum is a place to learn neat stuff about cruising and the great things it brings about. My response had no place here. Happy cruising and smooth seas.

[Corfe Mixture]

Although I understand the points in question I would like to apologize the the poster and the forum for my response. The forum is a place to learn neat stuff about cruising and the great things it brings about. My response had no place here. Happy cruising and smooth seas.

 

No apology necessary,

 

My post, to which you were responding, was overly simplistic and you did nothing more than walk through a door I left wide open.

 

Your response had the effect of making me think about expressing myself better and for that I should thank you.

Edited December 8, 2014 by Corfe Mixture
grammar - remove use of both simplistic and simply in same sentence.

[frac]

Thanks

[SteveH2508]

This may sound over simplistic/naive or whatever.

 

The cruise lines must surely exercise future options on fuel oil (probably 2 years in advance as that is how long out they price their cruises).

 

They got it wrong so they are locked into higher prices than are currently available for fuel oil - or am I just assuming that the financial 'wizards' are less smart than their magic wands/pointy hats/black cats/toads?:rolleyes:

[Corfe Mixture]

This may sound over simplistic/naive or whatever.

 

The cruise lines must surely exercise future options on fuel oil (probably 2 years in advance as that is how long out they price their cruises).

 

They got it wrong so they are locked into higher prices than are currently available for fuel oil - or am I just assuming that the financial 'wizards' are less smart than their magic wands/pointy hats/black cats/toads?:rolleyes:

 

The following extract from the third quarter results announced on 3rd October, before the recent sudden collapse in oil prices, seems to confirm your thoughts are right in part.

"Our exposure to market risk for changes in fuel prices substantially all relates to the consumption of fuel on our ships. We use our fuel derivatives program to mitigate a portion of our economic risk attributable to potential fuel price increases. We designed our fuel derivatives program to maximize operational flexibility by utilizing derivative markets with significant trading liquidity and our program currently consists of zero cost collars on Brent.

 

All of our derivatives are based on Brent prices whereas the actual fuel used on our ships is marine fuel. Changes in the Brent prices may not show a high degree of correlation with changes in our underlying marine fuel prices. We will not realize any economic gain or loss upon the monthly maturities of our zero cost collars unless the average monthly price of Brent is above the ceiling price or below the floor price. We believe that these derivatives will act as economic hedges; however, hedge accounting is not applied. As part of our fuel derivatives program, we will continue to evaluate various derivative products and strategies."

 

So they are using derivatives, as opposed to futures, and the stockmarket appears to be working on the assumption that the fall in oil price has dropped below the floor price and will result in lower than expected fuel costs and higher than forecast profits.

[skf]

Here's an idea...the cruise lines should feel no need to reduce prices or give rebates, because their customers are so happy to be saving on gasoline for their cars.

[Thrak]

I'm looking at pricing for Disneyland. Hotel, meals, park admission... Cruising is cheaper. Why would they lower their prices?

[skf]

Cruising is cheaper. Why would they lower their prices?

We took a 10-day from NYC to FLL on Royal. Oct 25. The plan was to hang around with our two sisters-in-law afterward, but Pete saw a great deal on a 4-day from FLL to Cozumel which turned out to more fun & much more affordable than hotel in FLL.

 

Not Elite but having fun working on it...

We are Elite but the girls were first-timers so we each booked an inside cabin with one of them. Then we switched Cruise Cards and cabins and gave them our Elite benefits. (Shh...don't tell!)

 

Steve

Edited December 9, 2014 by skf

[AZbeachboy]

The real question here is if they have sur-charges and have set prices at certain levels based on oil prices, then why does it not work the other way around?

[caribill]

The real question here is if they have sur-charges and have set prices at certain levels based on oil prices, then why does it not work the other way around?

 

It usually does, but Princess does not have (and has not had for a while) any fuel surcharges.

[BruceMuzz]

This may sound over simplistic/naive or whatever.

 

The cruise lines must surely exercise future options on fuel oil (probably 2 years in advance as that is how long out they price their cruises).

 

They got it wrong so they are locked into higher prices than are currently available for fuel oil - or am I just assuming that the financial 'wizards' are less smart than their magic wands/pointy hats/black cats/toads?:rolleyes:

 

The major cruise operators stopped trying to exercise fuel options about 10 years ago. The market has becoime so volatile that every time they tried the options, they got burned.

Almost everyone is buying now on the spot market.

[SteveH2508]

The major cruise operators stopped trying to exercise fuel options about 10 years ago. The market has becoime so volatile that every time they tried the options, they got burned.

Almost everyone is buying now on the spot market.

 

Ah - I get it - fuel price goes up - passenger could pay extra - fuel price goes down - Kerching - extra profit! Win-Win for the cruise line:rolleyes:

[BruceMuzz]

Ah - I get it - fuel price goes up - passenger could pay extra - fuel price goes down - Kerching - extra profit! Win-Win for the cruise line:rolleyes:

 

Absolutely un-American if you ask me.

Does your business purchase fuel options for your vehicles or do you also buy on the spot market?