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Discounts, Lower Fuel Costs Bolster Carnival's Earnings

March 24, 2009 By: Susan Young


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Falling fuel prices helped Carnival Corp’s first quarter earnings navigate a steady course through choppy waters. In fact, the company said stronger than expected net revenue yields on close-in bookings and lower than anticipated net costs— down 9.2 percent when fuel was factored in— helped it achieve first quarter earnings that were better than expected.

Carnival Corp. reported a net income of $260 million on revenues of $2.9 billion for its first quarter ending February 28. That compares to net income of $236 million on revenues of $3.2 billion for the same quarter a year ago.

One big reason? Fuel per metric ton was $276 in the first quarter of this year, versus $499 per metric ton for the same quarter a year ago.

“Considering the economic climate, achieving higher quarterly net income is quite remarkable,” said Micky Arison, Carnival Corp. chairman and CEO. He said that lower revenue yields resulting from consumer skittishness to book was offset by the fall in fuel prices from the previous year’s levels. “Our continued focus on cost controls also played a meaningful role in our ability to achieve such positive results,” he said.

But the news isn’t all gleeful. While recent bookings for the first three quarters of 2009— those taken since the start of the calendar year— are running 10 percent ahead of the same period a year ago, those bookings are also being made at highly discounted fares, as agents are well aware.

More importantly, “cumulative advance bookings” (those made in all periods) for the first three quarters of 2009 are lagging behind last year’s levels. They reflect a much shorter booking curve and lower rates than in the past.

Still, “it has been a solid Wave Season thus far, despite the challenging economic environment, with several of our brands achieving record booking volumes,” noted Arison. “As we had anticipated, people continue to book cruise vacations while seeking the best possible value. Our brands have responded with a variety of pricing initiatives designed to provide our guests with the most value for their vacation dollars. Though pricing is down significantly we continue to fill our ships by reaching people who might not have otherwise considered a cruise vacation.”

But why not just keep prices a bit higher and let some cabins sail empty? That’s not an option said many cruise industry executives— including Stein Kruse, president and CEO of Holland America Line, and Gerry Cahill, president and CEO, Carnival Cruise Lines— speaking at the Cruise Shipping Miami conference in Miami Beach last week. Why? Cruise fares are just one part of a line’s overall revenue pie. Much of the cruise industry’s revenue also comes from onboard spending for spa treatments, shore excursions, gift shop purchases, drinks and other onboard services. So having full ships gives cruise lines a better chance of retaining more of that revenue.

In its earnings report today, Carnival Corp. said that it expects yields to continue to decline for the year, based primarily on further deterioration in the U.S. and European economies. The company now forecasts a 16 to 18 percent decline in net revenue yields for the full year 2009 compared to the full year 2008. One reason cited by Carnival was weakening of foreign currencies against the U.S. dollar.

But Arison remains confident that the fundamental long-term drivers of the company’s business remain intact. “To enable us to overcome challenges in these difficult times, we have focused on maintaining tight cost controls and a strong liquidity position,” he said. “The discipline instilled in our cost conscious culture is a particular advantage as our cost containment initiatives continue to mitigate the pressure on revenue yields.”

Carnival Corp. has 16 ships under construction. They’ll be delivered through 2012 at a cost of $9 billion. Most ship deliveries will be funded by Carnival Corp. via cash from operations. In addition, the company said that cash from operations, committed financing and available cash are sufficient to fund all its cash requirements for all of 2009.

Carnival Corp. is in the advantageous position of not needing any new financing this year. But it plans to look for low-cost opportunities to enhance its liquidity. At the end of the first quarter 2009, the company had $3.7 billion of liquidity, which includes $1.8 billion of available cash and undrawn credit lines, as well as $1.9 billion of committed ship financing facilities. In addition, Carnival continues to have the highest credit rating in the leisure industry.


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