Royal Caribbean won't add fuel surcharges as oil prices spike: Will other cruise lines follow?

Will cruise lines bring back fuel surcharges to offset the soaring cost of oil?

One of the world's largest cruise companies, Royal Caribbean Group, on Friday told TPG it won't be doing so, even if oil prices continue pressing higher. But it's unclear, for now, whether other major cruise companies will follow Royal Caribbean Group's lead.

"A lot may depend on how much hedging each cruise company does for its fuel purchases," Mike Driscoll, editor of Cruise Week, told TPG on Friday, noting that some -- but not all -- major cruise companies have locked in relatively low prices for fuel this year using futures contracts.

Royal Caribbean Group, the world's second-largest cruise company, for instance, came into 2022 with more than half of its fuel needs for the year locked in at lower prices, according to a 10-K filing with the U.S. Securities and Exchange Commission.

The world's third-largest cruise company, Norwegian Cruise Line Holdings, also came into 2022 with a significant amount of its fuel needs (42%) hedged at lower prices, according to recent financial disclosures. However, the world's largest cruise company, Carnival Corporation, had no fuel hedges coming into the year.

Royal Caribbean Group is the parent company of Royal Caribbean, Celebrity Cruises and Silversea Cruises, and a partial owner of Germany-based TUI Cruises and Hapag-Lloyd Cruises. Norwegian Cruise Line Holdings is the parent company of Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises.

Carnival Corporation is the parent company of Carnival Cruise Line, Princess Cruises, Holland America and six other major cruise brands.

The hedges at Royal Caribbean Group and Norwegian Cruise Line Holdings "considerably soften the blow of rising fuel prices," Driscoll said, noting the companies had locked in rates for fuel at prices far below current levels.

Related: The ultimate guide to picking a cruise line

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The cost of West Texas Intermediate oil, a common benchmark, spiked above $130 a barrel on Tuesday (a 13-year high) but has since dropped back to around $110 a barrel. That's up from around $76 a barrel at the start of the year.

In an investor presentation in February, Norwegian Cruise Line Holdings noted it had locked in prices for some of the heavy fuel oil that it uses at an average cost of $48.36 a barrel.

Heavy fuel oil typically costs less on a per-barrel basis than West Texas Intermediate oil or another major oil benchmark, Brent Crude oil. Cruise lines sometimes use another grade of oil to power ships called Marine Gas Oil, as well as (on a small but growing number of ships), Liquified Natural Gas.

Both Royal Caribbean Group and Norwegian Cruise Line Holdings have some of their fuel needs hedged at lower prices all the way into 2023.

The situation is 'fluid'

Cruise lines are high fixed-cost businesses, and even relatively small changes in fuel prices can have a significant impact on their profits. Fuel is one of the biggest costs of doing business for lines, accounting for nearly 20% of operating expenses at some cruise companies.

The fine print in cruise ticket contracts at many lines gives them the right to levy fuel surcharges on customers when oil prices are high. At many lines, the cutoff is at $65 or $70 per barrel. But cruise lines have rarely imposed such surcharges.

The last time fuel surcharges in the cruise industry became widespread was when oil prices spiked in late 2007 into 2008. At the time, major brands such as Royal Caribbean and Carnival added fuel surcharges of $5 to $10 per person, per day, which generally applied to the first and second passengers in every cabin.

The fine print in cruise contracts says such fuel surcharges can be levied upon passengers even if they have paid for their cruises in full. In other words, even if you lock in the price of a cruise well in advance of a sailing, and pay it all off, you could still see an added bill for fuel arrive at the last minute when you sail.

Still, cruise lines are hesitant to add such fuel surcharges as it can create bad will among customers -- something that cruise lines particularly don't need now as they try to bounce back from an industrywide, pandemic-related shutdown that lasted more than a year.

The addition of fuel surcharges also could cut into the perceived value of a cruise.

Related: 6 ways you can ruin your cruise in an instant

"The cruise lines need to emphasize they are a good value as they complete their return to service, particularly during these difficult economic times," Driscoll noted. "Fuel surcharges are not going to be seen by consumers as being a good value."

Driscoll, a longtime industry analyst, said cruise lines "may have nowhere to go in this instance" when it comes to adding fuel surcharges.

Still, he said he was hesitant to speculate about what could happen with fuel surcharges because even the executives he talked to at big cruise lines weren't sure about what's to come.

"Yesterday, when I asked one top cruise [executive] about fuel surcharges, he replied, 'we honestly don't know, because the situation is so fluid,'" Driscoll noted.

Driscoll also said that back when cruise lines added fuel surcharges after the oil spike of late 2007 into 2008, many cruise lines did far less hedging of fuel prices than they do now.

In addition, oil prices have yet to hit the levels seen in late 2007 and 2008, when adjusted for inflation. In 2008, the West Texas Intermediate benchmark for oil prices peaked at around $146 a barrel. That's around $192 in today's dollars, adjusted for inflation.

At around $110 a barrel as of Friday, oil prices are still far below such levels.

Such factors are likely among the reasons that Royal Caribbean Group is swearing off fuel surcharges even as oil spikes.

"We won't be imposing fuel surcharges," Royal Caribbean Group spokesperson Jonathon Fishman told TPG on Friday in an emailed response to questions about the topic, offering about as definitive a statement as can be. He said the company would be putting out an official statement on the topic later in the day.

A spokesperson for Carnival Corporation did not have anything on the record to say about the possibility of fuel surcharges at the company's brands. A spokesperson for Norwegian Cruise Line Holdings did not immediately respond to questions from TPG about the topic.

Even if cruise lines don't impose fuel surcharges, it's likely that cruisers will feel the pain of rising oil prices in one way or another over the coming months if oil continues its march higher.

With not just prices for oil but prices for all sorts of things soaring as the highest inflation rates in decades take hold across the nation, cruise lines will be looking for ways to pass on their increased costs of doing business.

"Whether fuel surcharges are added or not, it would seem that the cost of taking a cruise in general increasing in one form or another is a strong possibility," Driscoll said. "It may not be reflected in ticket prices but in prices on board -- [the cost of] specialty restaurants, private island attractions, etc."

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