Fleet replacement decisions under demand and fuel price uncertainties

This paper proposes a real option model to investigate the fleet replacement timing decisions when a shipowner faces uncertain demand on various routes and uncertain fuel prices (both MGO and LNG prices). A multi-option least squares Monte Carlo simulation algorithm is utilized to find the replacement probabilities in future years and the expected NPVs of the cost savings after the replacement. The proposed model is applied to a chemical tanker shipping company. The case results indicate that the shipowner should replace all of his diesel-fuelled vessels with dual-fuelled vessels at one time, rather than replacing them one-by-one. Moreover, we compare the performance of two possible government policies, the vessel subsidy policy and the fuel subsidy policy. The sensitivity analysis indicates that in our case, the shipowner prefers the vessel subsidy policy, which brings him more cost-savings and allows him to make the earlier replacement decision. Alternately, the fuel subsidy policy is suitable for routes with a larger turnover volume if governments wish to see the more obvious policy feedbacks.