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Thursday, June 05, 2008

Think Your Gas Bill is Bad? Be Glad You're Not a Cruise Line

There's been a lot of griping the past few months about the fuel surcharges that cruise lines have begun levying on customers. But just how high will they go?

In a new report released Tuesday, UBS analyst Robin Farley offers a detailed look at the impact of higher fuel prices on cruise lines, and it isn't pretty.

Farley estimates industry leader Carnival Corp., the parent company of nearly a dozen lines including Carnival, Princess and Holland America, will spend nearly $2 billion this year on fuel.

The number is nothing if not astounding, given that as recently as five years ago the company's total fuel bill amounted to less than $400 million. In just the last year Carnival's fuel bill is up by nearly $900 million a year -- more than it cost to build the much-ballyhooed Queen Mary 2.

Carnival's smaller rival, Royal Caribbean, is in the same boat, with a fuel bill that Farley estimates will hit $783 million this year, up from $198 million in 2003. Royal Caribbean's fuel bill is up nearly $250 million over the past year.

Put another way, last year fuel accounted for about 17% of expenses at the major lines, up from 11% in 2004, says Farley. And that percentage has rocketed even higher since.

"Since the beginning of 2008, fuel is up another 35-40%, placing additional pressure on costs, and we estimate fuel expenses could account for 20-25% of net cruise costs in 2008," she writes.
Farley says the soaring cost of fuel is the reason cruise line earnings haven't taken off this year, despite a rise in "net yields" -- the amount lines are bringing in per cabin. Net yields, she notes, are rising despite the slowdown in the economy -- a testament to the industry's strength during tough times.

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