Carnival creates plan to back away from surcharges

Almost one year after Carnival Corp. became the first major cruise company to slap a fuel surcharge on its passengers, it also became the first to come up with a plan to roll them back.

In the wake of plummeting oil prices, Carnival Corp. said that beginning in 2010, its six cruise brands that serve the North American market would eliminate fuel surcharges and would instead raise ticket prices.

Fuel supplements on 2008 and 2009 cruises might also be dropped or reimbursed as a shipboard credit if fuel prices fall below $70 and stay there for 25 days until five days prior to the cruise. (See sidebar at right.)   

Coincidentally, crude oil fell below $70 last week for the first time in 15 months. That is down more than 20% from one year ago and more than 50% from its record high of $147 in July, according to the New York Mercantile Exchange.

"If fuel prices stabilize below $70 a barrel, we will be able to effectively eliminate a separate fuel supplement," Bill Harber, director of marketing for Carnival Corp., said in a statement. But he also cautioned that fuel prices could go higher, in which case Carnival Corp. would maintain or reinstate a fuel supplement. "But the company is hopeful that the goal of eliminating the fuel supplement can be achieved."

The last time fuel fell below $70 was in June 2007. Ira Eckstein, who is president of Area International Trading and trades on Nymex, predicted that crude oil prices would likely fluctuate between $65 and $80 through the end of this year.

The affected Carnival Corp. brands -- Carnival Cruise Lines, Cunard Line, Holland America Line, Princess Cruises, Seabourn Cruises and Costa Cruises -- implemented a $5 per person, per day fuel supplement in November 2007. Since then, Carnival raised the surcharge to $7 in April and to $9 in June, the level at which it has remained. Seabourn, Carnival's luxury line, raised its fee to $15 per person, per day. 

Other major brands matched, with variations. NCL Corp. charges passengers $11 per person, per day. Royal Caribbean Cruises Ltd. charges $10 per person, per day for Royal Caribbean International and Celebrity Cruises sailings and $15 for Azamara Cruises; other cruise brands charge comparable fees.

Travel agents applauded Carnival's decision, with several saying that fuel supplements should have been folded into the cost of a cruise and been commissionable.

"It is a great decision and one that should never have to be made," said Brad Tolkin, co-chairman and co-CEO of World Travel Holdings (No. 17 on Travel Weekly's 2008 Power List). "We all face changing costs in our business. True, government taxes should be noncommissionable. Costs that impact the core product should always be passed on as a commissionable item.

"WTH, as a distributor, likes to consider ourselves a partner in helping our vendors fill their ships. My concern is that Carnival's announcement came with a 'hedge' position. We totally understand their need in the future to possibly implement a surcharge for fuel. However, don't cut the heart out of the very person you ask to sell your product."

Carnival Corp. has said that it does not want to charge fuel supplements but that the volatility of fuel costs has made it difficult to fold the surcharge into the cost of the cruise.

Carnival Corp. spokesman Tim Gallagher said that as fuel prices have dropped, consumers and travel agents have been questioning at what point surcharges drop, too.

"We've known it is $70 for quite a while -- since we implemented the supplements," Gallagher said. "As they came back near that level, we felt we needed to publish an official policy on it. When oil is at $140 or even $95, what is the point of talking about $70? It was way too volatile and premature to answer that question. It's no longer premature. Now is the time."

Amounts at brands' discretion

Carnival Corp.'s decision to raise prices across all of its brands in 2010 reflects overall inflationary pressures on cruise lines, including the cost of fuel and other commodities.     

But while the decision to phase out the surcharges in favor of a general fare increase was a corporate decision, Gallagher said each brand would individually determine how much of an increase to adopt.

"We don't want to have supplements, we don't think travel agents like to deal with supplements. We'd like to get away from them," he said. "But if we are going to eliminate fuel supplements, then we need to take a pricing increase in 2010 to allow us to recover at least a portion of the cumulative fuel costs over the last few years."

In Carnival's Q3 2008 earnings call, CEO Micky Arison said that the fuel surcharge had covered only 25% of the additional fuel cost that the company had incurred.    

UBS equity analyst Robin Farley said it was "unlikely that 2009 crude oil prices will reach the threshold for reimbursement of surcharges already paid." She also noted that fuel surcharges do not add much to Carnival Corp.'s revenue line, since they simply replace part of the ticket price.

Agents such as Tolkin said they were hopeful other cruise lines would follow suit. Whether they actually will was yet to be seen as of last week.

Royal Caribbean Cruises Ltd. said in a statement that it was "hopeful that the recent reductions in fuel prices will stay with us or come down further. However, we continue to see considerable volatility in fuel price movements around the world during these extremely turbulent times. We will continue to closely monitor and assess the appropriateness of the fuel supplement we charge, in light of the fuel pricing environment and our fuel-related costs."

NCL Corp. did not return requests for comment on whether it was considering rescinding its fuel supplements.

Tim Rubacky, director of corporate communications for Prestige Cruise Holdings, parent of Regent Seven Seas Cruises and Oceania Cruises, said PCH was "monitoring the situation with great interest" and needed to "further assess conditions and pricing to ascertain if they will balance out and start showing signs of long-term stability. As we are assessing the global markets -- we purchase fuel around the globe -- we are finding that there is some notable disparity." 

That disparity in part comes from the crack spread, a term used by the oil industry to denote the difference between the price of crude oil and the price of refinery products such as gasoline or diesel fuel. The crack spread is determined by the cost of refining and distributing a petroleum product.

Eckstein, of Area International Trading, said that prices start to come down as current inventories run low.

A $70 barrel of oil, he said, translates into about $1.50 or $1.60 wholesale fuel prices. The consumer usually pays about 70 cents on top of that at the pump.

Florida investigations

During the one year that cruise lines have been charging the fuel supplements, the Florida attorney general's office opened one investigation into claims that cruise companies colluded when setting the extra fuel fees and another into the legality of the cruise lines' having assessed the surcharges retroactively.

Those came after seven cruise companies and the Florida Caribbean Cruise Association were named in a civil lawsuit filed by a New York resident, also alleging that the cruise lines had engaged in collusion and had levied unreasonably high fuel surcharges.

Carnival Corp. ended up refunding about $40 million in retroactive fuel supplements to passengers, and RCCL $21 million.