Determining Fair Charter Value
By Mike Vaughn
Determining the fair market value of a vessel for charter is probably more difficult than determining fair market value for sale. In a previous article (Market Evaluation) I discuss determining the value of a vessel for sale purposes.
In this article we will discuss the value of a vessel on the charter market.
There are a variety of issues that will affect the charter rate issue. First, is the type of charter bare boat/demised or voyage/time charters.
A demised charter is a charter in which only the vessel is chartered. The charterer provides crew, fuel, food and all necessities.
A voyage or time charter is one in which the owner provides the vessel with all operating equipment, people and fuel.
In this article I am primarily concerned with setting rates on bareboat/demise charters.
The issues that must be addressed are:
- Revenue producing capacity of the vessel
- Condition of the vessel
- Age of the vessel
- Design characteristics
- The market in which it will operate
- Supply and demand
We will assume that the vessel is of reasonable age, designed to do the job required and is in good seaworthy condition.
The two most important elements are revenue producing capacity and supply and demand. By supply and demand, I mean are there other vessels actively available for charter that are comparable.
In determining revenue capacity you must look at such things as the number of passengers or the amount of cargo. In an excursion vessel with a USCG certificate for 400 passengers, we must determine how much each position is reasonably worth.
To do this, we must look at the market. If the market is a short haul ferry trip, the seat will have a limited value. On the other hand, if it represents an overnight cabin vessel, then it will of course be worth much more.
The only way to determine this is to look at the market place. What are similar operators charging for the trips?
There are certain “rules of thumb” which I use and are based upon experience and guesswork. An overnight vessel must produce a profit of $80.00 to $100.00 per berth per day.
A cruise vessel of 300 passengers then must produce roughly $30,000 per day of gross profits. Consequently, the vessel must be chartered in the range of about $40.00 per berth per day. Assuming that the charterer can sell his berths in the range of $200.00 per day, per berth, his cost of operating would be roughly $60.00 per berth per day allowing him a daily operating expense of $18,000.00 per day for fuel, food, maintenance, insurance, and crew. The charter rate would be $12,000.00 per day.
This formula works well if the ship is booked at 100%. The danger arises at the level of 150 passengers. Below that number, the vessel is working at a loss. Consequently, can the charter rate be adjusted to allow a greater allowance for profit? To do this you must base all computations, not on a 100% occupancy rate, but upon a rate that reflects what the market actually can produce. By adjusting the occupancy to 70% and allowing the charter rate to reflect the $60.00 rate against 210 berths rather than 300 berths, we would arrive at a charter rate of $12,600.00 per day rather than $18,000.00 per day.
This type of negotiation leads to wide variations in charter rates. Many times an adjustable rate can be agreed upon by using occupancy rate, engine hours, and overall hours of operation as a key to either increase and decrease the rate.
The bottom line in negotiating a charter rate is the value to the parties involved. Obviously, there is a rate at which it is not worth the owner's time and trouble to have the vessel operating. Conversely, there is a point at which the charterer cannot make economic sense with an unrealistically high rate. The middle ground produces an agreement that will benefit both parties.
In concluding, remember, consider all options before entering into the agreement, make a realistic evaluation of the costs of the operation and provide a good margin of safety.
Exit Strategy: It is important in all agreements to discuss the “What if” issue. The what if everything goes wrong problem should be recognized and addressed beforehand.
Both sides should have a realistic idea of how to determine if the project has failed and how they can work together to minimize the affect on both parties.