Thursday, September 18, 2008

Fuel Supplements Remain: The Cost to Cruise...and How Farming Gives the Answer.

Every morning at 7:00 a.m. I enjoy my "Breakfast with the Farmers" at the local coffee shop. You never know what is going to be the topic or topics of the day. And, readers, you need to stay with me on this one. It will all come together; I am not just rambling!

Yesterday we were discussing the best way to install a French drain near a paddock...only to be interrupted by a phone call: One of the guys just shot the first 8 point buck of the season and we had to come outside to see it in the back of his truck. Then it was back inside to discussing Charley and Arnold, a gentleman farmer's two pet pigs and how they soon would transform from pets to dinner.

Today the topics were much different. One farmer asked us to guess what he was quoted per ton for a common fertilizer. Another guessed something he thought was outrageous: $600. Wrong: It was over $1,000. The farmers are thinking about accepting lower yields next year by not fertilizing this fall, as net they just might make more money...or at least not lose any.

Then another farmer said his diesel fuel supplier called offering him "off road" diesel for $3.10 a gallon. The farmer, actually be quite astute said, "Last year when oil was at $100 you were charging $2.49 a gallon. Oil is now $96, so you are way too high. Call me back when the price drops more." (We see the same thing at the gas pump, don't we?!)

Someone then noted that "off road" diesel was selling for less than home heating oil; which, of course, made no sense since it is a far more refined product. (Home heating oil has far more sulfur and particulates in it.) The reason was then given: The home heating oil companies purchased futures contracts and were saddled with the contracted for higher prices.

I then started thinking about the fuel supplements which the cruise lines are charging. Both Carnival Corp. and Royal Caribbean have stated in the just the past few days that they will not be reducing (or, heaven forbid) eliminating the fuel supplements now because the oil market is so volatile. I think it is a bit more than that, however.

Just as the guy who is selling the fertilizer today is incorporating the past months effects on his operating costs and just as the diesel fuel company is charging 25% more despite the current oil prices and just as the the home heating company is still being charged more (though they guessed months ago the price was a good one) so they have to charge you more, the cruise lines' operations and costs are not tied directly to the present day oil prices.

Also keep in mind that there was a good bit of hedging that the dollar would continue to drop, so many contracts might well have been priced keyed to the Euro. With dollar much stronger at present (which is based on the unexpected weakness in the European economy, rather than confidence in the U.S. one), the cost for the purchaser can also have increased since it now takes more Euros to equal a dollar.

So whether the cruise lines have longer term contracts or shorter term deliveries, the cost of fuel, lubricating oils, etc. are still much higher despite the current drop in oil prices. And with the current incredibly volatile market conditions, it would be reckless to simply key the fuel supplement only on the price of a barrel of unrefined oil. (There is, of course, another option: Quietly raise cruise prices to cover this fluctuating cost. I am not liking that idea at all and, to be sure, I am certain the cruise lines know that you don't either.)

As Laurel was chided by Hardy (am I dating myself), "Well, Stanley, this is another fine mess you have gotten us into!"

UPDATE:  Carnival Corp. just posted its earnings for the Third Quarter 2008 and they are quite strong.  On the issue of fuel supplements Carnival Corp stated:  Based on current spot prices for fuel of $598 per metric ton, full year 2008 fuel expense is now forecast to increase by $678 million compared to 2007, which will have the effect of reducing full year 2008 earnings by $0.83 per share. The existing fuel supplements in place, if entirely incremental, are expected to offset approximately 25 percent of the $678 million fuel price increase for 2008. With current supplements remaining in place for 2009, and assuming current spot prices stay in place for all of 2009, the company estimates that approximately 43 percent of the cumulative increase in fuel costs since 2007 would be offset.


Simply stated, the fuel supplements have only addressed 25% of the increase in fuel from 2007 and it is projected that if things stay the same they will still only offset 43% of next year's increased fuel costs (still compared to 2007).  It seems that we will be keeping the fuel surcharges for quite a long time.