Are charter rates too expensive?

Charter rates are set in order to mitigate operating expenses. Due to the fact that many owners look to achieve this revenue through six to eight weeks of charter, does this create an unrealistic charter rate? Is there a better model for creating variable seasonal rates?

Neil Moore
Director of Charter Management
Burgess Yachts

Generally speaking, published charter rates have remained static for the past three years and, in a number of cases, the published rates have fallen. For some yachts it is fair to say that their rates are still too high for the current market, but equally there are many yachts that have competitively priced rates. Those owners who are seriously offering their yachts for charter tend to price their yachts accordingly and react well to market variances.

The reality is that most charterers wish to undertake their charters during the months of July and August in the Mediterranean and so this restricts the opportunities to secure income. Many yachts already offer attractive low season rates and most owners are willing to be flexible during these periods to facilitate bookings. Therefore, charterers interested in low-season periods can usually secure a good deal. Supply and demand also has an influence on the equation: There has been a significant increase in the size of the charter fleet over the past five years and this, in turn, has given charterers an increased number of options to choose from when selecting their yacht. This, too, has impacted on charter rates but different owners will take different views depending on the volume of business they aim to attract.

Toby Maclaurin
Commercial Manager
OCEAN Independence

As the manager of the world’s largest charter fleet, we believe that while offsetting operating costs is a major factor in chartering a yacht, it bears no correlation to the charter rate set. In fact, very few yachts would claim to break even in terms of operating costs through their charter revenue – but it does, of course, help.

Charter rates are set by the general rules of supply and demand so it is the marketplace that dictates rates. This can be easily seen in the significant reduction in rates due to the economic climate over the past few years. So, in short, they are not artificially/too high. In terms of setting a rate, a charter manager will research the market for similar offerings and based on factors such as the number of cabins, flexibility of accommodation, the pedigree and age of the yacht, and the reputation of the crew will set a value that is correct for the market at the time.

Hein Velema
CEO
Fraser Yachts

New yachts are able to command a premium and can therefore charge slightly higher charter rates. On average, the rate for a relatively new yacht over 40 metres is equivalent to about eight per cent to 10 per cent of the annual running costs. This means that the owner will break even with around 10 to 12 weeks of charter. If a charter yacht is achieving 12 weeks of bookings per year, then the running costs should effectively be covered. However, this does not take into consideration the capital investment or depreciation costs. It is rare for a yacht to achieve 12 weeks, and pretty exceptional for it to secure more than this.

The problem of the charter model is the short season. More than 80 per cent of all charters take place in July and August, which are often also the months when the owner wants to use the boat. Owners are often prepared to negotiate reduced charter fees for low season charters but the demand is very limited. On top of that, the major winter destination, the Caribbean, is losing its attraction. We have seen a notable reduction in the number of enquiries for Caribbean charters and, perhaps as a result, we see less and less yachts heading there for the winter. Whilst there are now a few yachts heading to alternative regions such as the Indian Ocean and the Far East in winter, the numbers are not significant and charter bookings remain low.

In the majority of cases, the charter fees only offset a small portion of the annual running costs of a yacht. Owners have been known to reduce the rates significantly to secure bookings with the aim of keeping the boat and crew busy. Whilst this reduces the overall revenue, they would rather have some income than none at all. Not all owners are looking to fully cover their expenses with charters. They realise that charter will help with the costs but it is also good for the crew to remain motivated and active. Some owners put a value on their yacht that is out of proportion with the rest of the industry because they are extremely proud of their yacht and feel it is worth more. Unfortunately, but also understandably, they don’t tend get many charter bookings if their rate is out of line with the rest of the market.

DJ Kiernan
Director of Charter Marketing, Worldwide
Camper & Nicholsons International

The yachts that are priced correctly according to their competition are successful in today’s charter market. It is sometimes necessary to adjust prices, especially if the yacht is new to our charter fleet. Recently, we have raised the price of some of our yachts that have been doing extremely well. That said, we have advised a few of our owners against increasing their yacht’s charter rate if we do not believe it is in their best interest. Price is obviously an important element in the success of any charter program, and we study the competitive set carefully before any discussion on adjusting charter rates.

Conclusion
With charter rates now exceeding 1,000,000 euros per week on exceptional yachts, and typical charter rates adjusting according to what the market dictates, it is perhaps fair to say rates are not too expensive but geared towards the potential clients who want the unique level of privacy and exclusivity this delivers. However, as owners start to question the cost of ownership and whether they can generate a return to cover costs and even more, perhaps we will see some shifts in the charter business.

It has been suggested some owners have already sold and will spend their money chartering each year. However, if an owner wants to achieve more than 12 weeks then, in the way other industry’s offer price fluctuations according to seasonality and demand, the idea of 50 per cent discounts to fill the yacht out of season in the way some six-star resorts do, could be a useful way of keeping the cash flowing and the yacht moving. Convincing owners and brokers to take this route could be difficult, as no doubt the debate on how much marketing needs to be done to sell the ‘out of season’ weeks and the relative commission earned could be a stumbling block.

Also, we need to consider that if a yacht is on the charter market with a high-priced charter rate, this doesn’t mean it is trying to make money or cover its costs quicker. There may be issues like justifying commercial registration and also the desire by the beneficial owner to put off potential charter guests. So, to keep the authorities happy the yacht is for charter, with the owner only accepting a couple of charter clients that meet his/her criteria. As with most things in the world today, everything is up for negotiation and, if you do your homework, finding the right yacht with the right crew, a charter can never be described as too expensive.

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