Yacht Cost Mitigation Defined
Mitigating yacht cost line items is a tricky business. The objective is to reduce the impact of the overall cost profile of the yacht by way of a blend of controls and offsets. The challenge is to do so in ways that minimise unintended consequences and optimise around quality of ownership experience.
We’ll break this down into two main sections: Cost controls and cost offsets.
The challenge of implementing cost controls is relatively more straightforward for owner-operated vessels because, without crew, several additional layers of complexity and costs are removed. So, beginning the analysis by addressing the factors that are not directly crew-related, the main areas of concern are fuel, the “yacht tax”, insurance, MRO (maintenance, repair and operations), and regulatory changes.
Fuel, for active yachts at least, is a significant expense line item. More important than managing the cost at the time of purchase through contract negotiation or hedging, it is critical to dial in the sweet spot on the fuel curve. An extra knot or two can double or even triple the litres per hour burn rate.
The fabled “yacht tax” is another area that has a significant impact on yacht cost, even if it is often death by a thousand cuts. The “yacht tax” phenomenon is the (unashamed and often unchecked) price inflation of goods and services based on the owner’s perceived ability to pay. Contemporary procurement strategies can inform an effective mitigation process and improve transparency. Sunlight is definitely the best disinfectant when fighting grift and padding.
Many insurers have recently recalibrated the risk profile of yachts and either restructured policies and premiums or exited. Hurricanes Harvey, Irma and Maria (HIM) sent shockwaves through the insurance underwriting and reinsurance system. It is now essential to communicate with the underwriter to identify any factors that may have prevented an insurer from quoting. For example, many are requiring cybersecurity plans to be in place to quote. At the very least, some of these requirements can trigger discounts once implemented.
The MRO section on the expense report is where experienced owners’ eyes settle first. Quite apart from the non-negotiable aspects of routine maintenance, unexpected repairs to complex systems can blow a hole in OpEx budgets. MRO strategic planning must navigate the tension between running preventative care and accepting outliers, and deeper-tissue proactive maintenance systems that are more expensive but minimise outliers.
With a shift to a permanently crewed yacht, the yacht cost mitigation challenges become more complex. Crew costs are almost certainly the highest fixed recurring operational cost. That said, some of the highest crew-related costs can be second-order, such as costs triggered by getting the crew recruitment process wrong. Beyond the more obvious cost of churn, recruitment, provisioning profligacy and liability, the impact of sub-optimal MRO work can be enormous.
A permanently-crewed yacht’s draw on marina utilities is significant. The “yacht tax” on electricity and water provided by marinas is non-trivial. Unfortunately, there are few leverage points to reduce the rates, especially in marinas with waiting lists. That said, even modest changes to things like air conditioning settings and zoning can have a meaningful impact on cost without undue effect on crew comfort.
Some of the more artful yacht cost mitigation strategies are not designed to reduce costs but to offset them. Here various hedging strategies come into play, as well as efficiently monetising the charterability of the yacht.
Fuel and Forex Hedging
The two main hedging opportunities are fuel and forex. The fuel hedging opportunity is relatively straightforward because oil prices drive fuel costs for diesel-powered yachts, and the commodity markets offer direct hedging instruments. In contrast, the design of forex hedging is primarily driven by circumstance. The obvious use case is where a yacht spends part of its time in the Mediterranean and part of its time in the Caribbean. In that scenario, the yacht’s point-of-sale OpEx is split between Euros and US Dollars. Significant currency shifts can make or break budgets.
Assetising and Monetising Charter
Monetising the charterability of the yacht is another fairly routine cost offset strategy. In most scenarios, the collected revenue is strongly net positive of the impact of the additional hours and usage of the yacht. If the vessel has a dual season itinerary, there is the additional benefit of potentially generating inflows of the ‘right’ currency as something of a natural hedge.
If we can help further unpack any of this, please do not hesitate to reach out.