Deals or No Deals? Royal Caribbean Speaks Out at Earnings Call

November 4, 2009

Earnings Call
It was a rough but profitable third quarter for Royal Caribbean Cruises Ltd. -- during a summer period that's traditionally been the most lucrative for the world's second largest cruise company. At the company earnings call yesterday, executives discussed the economy's impact on cruise bookings, explained how Oasis of the Seas fits into the financial equation, and said that while fourth quarter 2009 will be rough, there's reason to be cautiously optimistic for 2010 and beyond.

Do the Math

RCCL -- which owns several cruise companies including Royal Caribbean, Celebrity Cruises, Azamara Cruises, Spain-based Pullmantur and France-based CDF Croisieres -- announced a profit of $230.4 million, or $1.07 per share, ahead of Wall Street estimates of around $1 per share. Earnings were down 44 percent from the third quarter of 2008, when the company earned $411.9 million, or $1.92 per share. In the third quarter, ships are still being filled -- at 105 percent capacity taking into account third and fourth berths -- but at substantially lower fares.

While returns were better than forecast, Royal Caribbean Chairman and CEO Richard Fain noted that he was "not happy with the returns we're generating," adding that he didn't think any CEO would be happy. Fain said that RCCL expected to "give the upside we enjoyed in the third quarter back in the fourth."

Deals or No Deals?

So are the incredible cruise deals consumers have been experiencing soon to be a distant memory? It's difficult to say. Brian Rice, Royal Caribbean's Chief Financial Officer, suggested that we may "be seeing early signs of a possible expanding booking curve, but it is still quite contracted by normal standards," adding that pricing will remain more consistent than it did a year ago -- when cruise consumers saw bottom-basement pricing. "We don't expect that sort of rapid acceleration of discounting we saw last year," said Rice.

Even holiday cruises, which typically demand a premium price, haven't been immune to the economic downturn. RCCL's holiday sailings have required more discounting than anticipated, meaning that there are still some deals to be found for cruisers looking to getaway over Christmas.

Many of the questions were geared toward Oasis of the Seas -- which surprising to many, hasn't yet sold out its first revenue cruises, set to begin on December 1. So will prices come down to fill the ship's 6,000-plus total berths? In the short term, the answer is no. Royal Caribbean CEO Adam Goldstein confirmed that, at this point, the company is "not prepared to engage in discounting practices seen across the industry." Goldstein added that inaugural buzz might just do the trick in closing the booking gap.

Richard Fain put things in perspective, noting that part of RCCL's yield management strategy is "not selling out" cabins. His justification: If you sell out too quickly, you've priced the product too low. Interestingly, many of Oasis' upper-tier cabins are actually sold out for the December sailings and beyond -- an indication, Fain suggested, that these cabins (Loft Suites, etc.) were priced too cheaply.

Future Tense

Executives were loath to get into too much in terms of long-term specifics, but they were confident to see year-over-year improvements in revenue to come first quarter and full year of 2010. The more long-term confidence was not shared for fourth quarter of 2010, with Rice admitting that the "traditionally weaker fourth quarter will be worse than anticipated." Royal Caribbean expects a loss of 5 cents a share in the fourth quarter.

Interesting Moment

Top dog Richard Fain didn't care much for Wells Fargo analyst Tim Conder calling the older core ships in RCCL's fleet "legacy" ships. Some context: In short, Conder was asking if the company's newest offerings -- the Solstice- and Oasis-class ships, which are demanding premium cruise fares -- would hurt pricing on the older RCCL ships, which comprise the bulk of the fleet. If everyone wants to cruise on the brand-new Oasis of the Seas, fewer people will choose the 17-year-old Majesty of Seas, and pricing for Majesty could suffer. CFO Rice said it wasn't a concern -- but Fain didn't leave it at that, taking umbrage to the term "legacy." The Chairman and CEO wanted folks to be respectful of the older family of ships, which he considered better than comparably aged ships from other lines. Tim apologized (ah, semantics).

In Case You Missed It

Notable events that took place in the quarter included the launch of Celebrity Equinox in the U.K. and the sale of Pullmantur's Atlantic Star (the former Sky Wonder), which had been laid up in Europe.

Miscellaneous Numbers

By 2013, Oasis-, Freedom- and Solstice-class ships will make up about half of the fleet.

Non U.S. guests accounted for 43 percent of capacity in third quarter.

The third quarter fuel expense was $146 million.

--by Dan Askin, Associate Editor

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