Costa Concordia Accident To Hit Carnival Corp. EarningsJanuary 16, 2012 By: Susan Young
Carnival Corp. and USB Analyst Estimate Impact
Early today, Carnival Corporation, the parent company of Costa Cruises, and USB Warburg's financial analysts addressed the financial impact of Friday's Costa Concordia accident.
Carnival Corp.'s press release to Travel Agent was sent at 2:07 a.m. Eastern time, while Robin Farley, a cruise industry analyst for USB Warburg, sent her initial assessment of the financial impact at 1:42 a.m. Eastern time
The statements addressed factors that will have a financial impact on Carnival Corp.'s 2012 financial earnings. Both were timed to arrive prior to the opening of the New York and London Stock Exchanges, where Carnival (CCL) shares are traded.
“With the tragedy still fresh, it is difficult to know what the impact on future bookings may be,” Farley told her investors. She said European-sourcing brands now comprise 37 percent of Carnival Corporation’s fleet, and Costa itself is about 16 percent of the fleet if measured by available passenger cruise days.
“Still we must assume that there will be some degree of impact on bookings across all cruise lines, at least initially,” Farley told investors. She also said Costa Concordia’s 3,000 passenger capacity means it is 1.5 percent of CCL’s total company capacity.
So USB Warburg estimates that removal of ship from the company’s fleet could represent 9 cents of lower earnings per share annually, but since 10 percent of Carnival’s 2012 fiscal year has already passed, the impact is reduced to about 8 cents per share.
She also says the company will take a one-time hit of 9 cents per share in fiscal year 2012 for insurance deductibles and other one-time costs.
In putting out its statement, Carnival Corp. focused on people first. “At this time, our priority is the safety of our passengers and crew,” said Micky Arison, chairman and CEO, Carnival Corporation. “We are deeply saddened by this tragic event and our hearts go out to everyone affected by the grounding of the Costa Concordia and especially to the families and loved ones of those who lost their lives. They will remain in our thoughts and prayers.”
But, in accordance with financial disclosure requirements, the company needed to provide investors with information on the potential impact of the accident.
Carnival Corp. said it has insurance coverage for damage to the vessel with a deductible of approximately $30 million as well as insurance for third party personal injury liability subject to an additional deductible of approximately $10 million for this incident.
What's the ship worth? Farley said Costa Concordia was delivered to Carnival Corp. in July 2006 at $575 million, so the book value of the ship currently stands at $485 million.
However, while the company’s investment in the ship hardware is covered by insurance if the ship cannot be repaired for some reason, at the same time, the company self-insures for loss of the use of the vessel. So it will not receive any funds to make up for loss of 2012 bookings and revenue from the ship.
As for the status of the vessel, Carnival Corp. said a damage assessment is under way to determine how long the ship will be out of service, but that it expects Costa Concordia to be out of service for the current fiscal year -- if not longer.
While the ship may seem a total loss to many who see the dramatic news media photos of the ship on its side, maritime experts say that’s not the case. Since the ship was grounded and did not sink in deep water, it likely can be salvaged.
Typically, in such situations, the hull damage is patched, the water pumped out of the ship, and then the ship would return to a more upright position. Then it could be towed to a shipyard for repair.
Carnival Corp. said with the ship out of service for all of the fiscal year ending Nov. 30, it expects the impact to 2012 earnings for loss of the vessel’s use will be $85 million to $95 million or 11 cents to 12 cents per share.
The cruise company also said it anticipates other costs to the business that are not possible to determine at this time.
Farley noted that “the timing of the incident could be particularly disruptive given it is early in Wave season, which is the highest booking volume period of the year for cruise lines.”
She did note, however, that most of the February quarter for Carnival Corp. is already in the so-called penalty period for close-in sailings.
Skittish consumers who cancel at this point for cruises that will sail within the next two months may lose their investment, unless they have the right type of insurance. So that could hold down booking cancellations for close-in voyages.
So she indicated that Carnival Corp. probably wouldn’t see the impact of major cancellations in the first quarter of its fiscal year, although the second quarter could be more troubling.
Farley also said the accident could cause downward pressure on Royal Caribbean Cruises Ltd.'s (RCCL) bookings as well.