Cruise Gains & Losses: NCL's Third Quarter Earnings

December 7, 2009
Earnings Reports

(6:41 p.m. EST) -- A mid-November earnings release from Norwegian Cruise Line reported that Q3 profits for the cruise line had shrunk significantly year over year, but the line appears well positioned to emerge in good financial shape after the recession. The operator managed to earn $85 million during a summer period that's traditionally been the industry's most lucrative. Not surprisingly, NCL's recent earnings report focused on the positives, including impressive occupancy rates, successful cost-cutting measures and the upcoming launch of its innovative new-build, Norwegian Epic, due out in 2010.

NCL Background

Unlike Carnival Corp. (Carnival, Princess, Costa, etc.) and Royal Caribbean Cruises Ltd. (Royal Caribbean, Celebrity, Azamara, etc.), NCL is not a publicly traded company in the U.S. It's half owned by Apollo Management LP, a private equity firm, and half owned by Genting Hong Kong (formerly Star Cruises), which is publicly traded on the Hong Kong stock exchange. Genting's portfolio includes land-based resorts, cruise ships, casinos and entertainment venues. The fact that NCL is not a publicly traded company may mean that NCL is not really required to even issue a public earnings report -- reps did not respond to a request for comment -- and the line did not have a traditional earnings call, where analysts have a forum to ask executives tough financial questions. Both Royal Caribbean and Carnival have such calls.

Earlier in November, part-owner Genting caused somewhat of a stir when it issued its own earning report, in which it warned investors that these are rocky times for the cruise business, saying "there is no assurance that cash flows from operations and additional financings will be available to fund our future obligations." In other words, there's the potential that the line will run out of money. Still, Genting's statement is standard language for earnings reports. In order to comply with Sarbanes Oxley, an act passed in 2002 that requires companies to publicly account for their earnings, Carnival and Royal Caribbean have used similar language in their recent reports to point out potential, even if unlikely, outcomes to investors.

Do the Math

Net income in 2009 was $85.6 million on revenue of $550.7 million -- compared to net income of $171.2 million on revenue of $639.0 million in 2008 -- representing a drop off of roughly 50 percent year over year. That's not great news, but the line accounts for much of this drop by pointing to foreign currency fluctuations (a significantly strengthened euro in 2009 cut into revenue). This drop may look bad, but it's due in large part to the numbers from 2008 being inflated by foreign currency values.

The good news: ships sailed at 114.8 percent occupancy, higher than both Carnival and Royal Caribbean. In standard industry terms, 100 percent would be filling every cabin with two people -- so many a third and fourth berth was in play for NCL. The bad news is there's a reason why every cabin was filled: NCL was pricing fares so cheaply that it was nearly giving cruises away. Indeed, in the statement, the line said that the decrease in net yield was primarily due to weakness experienced in ticket pricing versus 2008.

Another factor negatively impacting the line's revenue was the departure of Norwegian Dream in November 2008, which meant the cruise line had fewer overall cabins to sell. In earnings report-speak, NCL addressed that by saying there was a 5.7 percent decrease in capacity days, which is computed by multiplying the double occupancy per cabin number by the number of cruise days.

On the up side, net cruise cost per capacity day decreased 20.1 percent in the third quarter of 2009 compared to the same period in 2008. How did NCL cut costs so dramatically? According to the line, it was primarily due to lower fuel costs, but other factors, including reduced crew payroll (again, as a result of Norwegian Dream's departure) and lower ship operating expenses, were also cited.

Finally, the line is on track for the summer 2010 launch of Norwegian Epic, the upcoming new-build featuring such industry first as an Ice Bar, studio cabins and a wacky tube waterslide that relies on centrifugal force.

Deals or No Deals?

If you want to nab one of cruising's lowest base fares, you should definitely keep an eye on NCL, which is still offering some pretty deep discounts, particularly for close-in cruises.

If you look at Cruise Critic's NCL deals section, you can still find plenty of weeklong sailings for between $300 and $500.

In its statement, NCL noted that "recent booking activity indicates that the pricing environment continues to stabilize and that the consumer recognizes the value of cruising as a vacation option." In other words, it's saying that fares will go up.

Future Tense

The year 2010 may be a litmus test for NCL because the line's profitability will depend somewhat on the success of Norwegian Epic, the bold (and expensive) new vessel due out in summer 2010.

The line also recently announced that it had closed on a re-financing package comprised of a $750 million secured revolving credit facility -- whereby they had to put up four ships as collateral -- along with $450 million in senior secured notes (at 11.75 percent). Proceeds are being used to retire certain indebtedness and for transaction fees and expenses. The rates at which NCL secured the loans are significantly higher than similar loans currently held by Carnival Corp.

In Case You Missed It

NCL said goodbye to Norwegian Majesty, which sailed its final cruise for the line at the end of October. Majesty has been sold to Louis Cruise Lines, where it will be renamed Louis Majesty (saves money on the hull work, no?).

--by Dan Askin, Associate Editor