Despite Bad Year, Carnival Most Profitable Cruise Company in 2009

December 18, 2009
Earnings Call (6:24 p.m. EST) -- Despite sinking revenue and profits, cruise giant Carnival Corp. managed to earn $1.8 billion in profit during the year, making it the world's most profitable leisure travel company in 2009.

At the company's fourth quarter and full year earnings meeting, all manner of subjects were discussed, including Royal Caribbean's Oasis of the Seas' impact on Carnival's business, the continued struggles of Alaska and Mexican Riviera cruises, details of a long-awaited Princess Cruises new-build, a very strong European cruise market, and a projected dramatic increase in fuel costs in 2010 -- with a tiny caveat that there's always the "option to reinstate fuel surcharges" if oil prices skyrocket. And while there are still economic challenges ahead -- Carnival actually lowered its 2010 earnings forecast -- the company suggested that more buoyant results could be coming in the second half of 2010.

Do the Math

Carnival Corp. -- which owns 11 cruise companies in the U.S. and Europe, including Carnival Cruise Lines, Princess Cruises, Cunard, Costa, Holland America and luxury line Seabourn -- recorded net income of $193 million on revenue of $3.2 billion, a sharp drop in income as compared to fourth quarter 2008, when the company earned $371 million on revenue of $3.3 billion. The full year net income of $1.8 billion amounts to roughly $500 million less than the $2.3 billion Carnival earned for the prior year.

Despite the drop-off in revenue and income -- resulting from dramatically lowered ticket prices and far-better-than-average numbers in 2008 -- results for the fourth quarter beat Wall Street estimates. Carnival attributed the success to $170 million in cost-cutting measures, including the ability to keep dry-dock costs down (in recent years, the company has focused on updating its older ships rather than ordering new ones). The company also enjoyed improved onboard revenue in certain areas, with previously budget-conscious cruisers spending more on photos and gift shop items in particular. (Overall, however, onboard spending was still down from the previous quarter.)

In a nod to a Continental shift in cruise travel, Carnival's European cruise lines fared better than their U.S. counterparts, with European brands accounting for 49 percent of operating income despite comprising only 33 percent of the total capacity.

Deals or No Deals?

According to company executives, prices in general have not recovered as much as they'd like -- which means that we could continue to see a plethora of cruise deals, especially in the Mexican Riviera, where pricing is still very low. The line attributed the bottom-basement prices to a soft Southern California economy combined with negative perception of Mexico tourism (i.e. H1N1), and Carnival Corp. expects to reduce capacity there in the future.

Prices, however, which seemed to have bottomed out, may start creeping back up in 2010. And sure enough, we may already be seeing the upswing. According to Howard Frank, vice chairman and COO, there have been price increases in the more niche offerings, including longer exotic cruises (Holland America), luxury cruises (Seabourn) and world cruises (Cunard). Frank noted, "The higher end customer is feeling better about taking their vacations."

Future Tense: Alaska, New-Builds

Carnival continues to focus on the European market. In 2010 the conglomerate of brands will introduce six new cruise ships, with four large ships going to the European lines, an 11.9 percent increase in European capacity.

But while there are a number of Carnival Corp. new-builds on the horizon for 2010 - 2012 (including the just announced third ship in Carnival's Dream class, which will debut in June 2012), the order form for 2013 and 2014 looks painfully empty. "When we go into '13 and '14, we'll see significantly less capacity increase, both from Carnival and its competitors," said Micky Arison, Carnival Corp.'s chairman and CEO. About the addition of two Princess cruise ships to the new order list -- and rumors have been swirling that an announcement could come soon -- Carnival execs would only say that negotiations are ongoing.

On the destination front, there was the obligatory mention of pulling more ships out of Alaska, a destination the company has seen take an increasingly large bite out of its bottom line. Carnival recently announced that it would move two more ships out of Alaska in 2011, Princess' Royal Princess and HAL's Ryndam. Again, Arison: "Cost of operation is very high … and in July and August there are just a lot of other places with similar yields but higher profitability. Alaska is the highest cost operation we have anywhere, so it made sense to move ships out."

In one of the more interesting moments, Frank mentioned that projected fuel costs are expected to rise in 2010, to the tune of $368 million. In responding to a question about whether Carnival would consider hedging to cut fuel costs (unlikely), the Carnival Corp. exec noted, almost in passing, the line's ability to reinstate the dreaded fuel surcharge.

Interesting Moment: Oasis of the Seas Impact on Carnival Prices?

The most intriguing moment of the call came when two consecutive analysts asked how Oasis of the Seas, the massive (and massively innovative) Royal Caribbean cruise ship that has monopolized the industry's gaze, has affected Carnival's financials.

The answer from the Carnival bigwig was blunt. "We're not seeing any impact from Oasis. If there is any impact, and clearly we're not seeing it, it's in the additional exposure to the whole cruise industry. But the reality is that we have great mass-market brands and better prices. So the net effect is, if anything, positive."

In Case You Missed It

The company launched Carnival Dream, the first in the newest class of ship from Carnival, on September 21. Check out our first member reviews of the new ship.

--by Dan Askin, Associate Editor