Higher Fares, Fewer New Ships: Carnival Discusses Q1 Results

March 23, 2010
Earnings Call (5:15 p.m. EST) -- Cruise fares are gradually climbing, future ship orders will be slow coming, and the best deals to be had are in luxury cruising and Alaska. That was the word this morning from Carnival Corp.'s first-quarter earnings call.

With a challenging 2009 now in the past, the world's largest cruise company -- which operates 95 ships across 11 cruise lines that include Princess Cruises, Costa Cruises and luxury line Seabourn -- posted earnings of $175 million on $3.1 billion in revenue during the first quarter of 2010, a hefty plunge from the $260 million it earned on $2.9 billion in revenue in Q1 of 2009. Still, today's numbers beat Wall Street estimates, and the company bettered its outlook for full year 2010 -- thanks to improved booking trends, higher-than-expected pricing on last minute cruises and continued cost-cutting measures.

Do the Math

Despite falling profits, Q1 2010 revenue rose to $3.1 billion, up from $2.9 billion in Q1 2009. The company said the drop in profits, year-over-year, was partially attributable to much higher than average fuel costs and, to a lesser extent, currency fluctuations. Fuel prices increased 80 percent to $497 per metric ton for Q1 2010 from $276 per metric ton in Q1 2009. And, there's no end in sight to higher costs. The line expects fuel prices for 2010 to reduce earnings by some $119 million.

Regardless of the increased fuel costs, Carnival Corp. reaffirmed its position on the reinstatement of the dreaded fuel surcharges, which it cut in fall 2008. While the company reserves the right to reinstate the surcharge, execs said they have "no present intention to do so." According to the company, it's making every effort to cut back on fuel usage -- by way of itinerary changes and reduced speeds between ports. In the first quarter, fuel consumption per available lower berth day fell 3.1 percent.

Deals or No Deals?

It's no surprise at this point that cruise fares have been on the slow ascent. "Pricing and occupancy for the last nine weeks [during the so-called Wave Season] are higher in virtually all itineraries," stated Howard Frank, Carnival Corp.'s vice chairman and COO. "We've even seen pricing improvement in Alaska."

Alaska Cruise Deals. But, while Alaska pricing is showing some improvement, the line's management team said it's still well behind past levels. The Alaska cruisetour operation, which ties in land-based stints with standard cruise offerings, is, in fact, down again from last year. There are still great deals to be had, and, as we previously reported, shoulder-season Alaska cruises may prove to be the steal in 2010.

Luxury Cruise Deals. Execs noted that mainstream lines like Holland America and Princess Cruises have been rebounding price-wise, but Seabourn is a different story. Carnival's "six-star" luxury offering is the only brand where net yields are expected to decline in 2010. Frank half-joked that, for everyone listening in, "now is the time to book a Seabourn cruise." So why is Seabourn not following the pattern of improvement enjoyed by other Carnival brands? "The thing to remember with Seabourn," offered Micky Arison, Carnival Corp.'s chairman and CEO, "is that it's our highest priced brand, and for two decades, Seabourn had 600 beds. This summer, Seabourn will have 1,500 beds." Arison was referring to the addition of a pair of 450-passenger ships -- Seabourn Odyssey in June 2009 and Seabourn Sojourn in June 2010. So much added capacity so quickly may mean solid deals for consumers.

Future Tense: Alaska and New-Builds

In recent earnings calls, two of analysts' favorite subjects have centered on the decline of Alaska cruising and the death of new cruise ship orders -- and today's call was no exception.

Alaska Head Tax Saga. There were several comments about a proposed deal to reduce the Alaska head tax by 25 percent in exchange for cruise lines dropping a lawsuit against the state. (Alaska cruisers are currently subject to a $46 per person tax that was voted into place by state residents in 2006. Lines have summarily reduced capacity in Alaska, citing the head tax as one reason for doing so.) "Clearly, we're encouraged that the governor devoted time to come down here [to Cruise Shipping Miami, the world's largest annual cruise conference] and learn about the industry," said Canival's Arison. "If what he proposes passes, it's going to be too late for this summer to affect cruising, but depending on timing, I imagine we'd get the money back to passengers in the form of onboard credit … and, of course, it [an actual change to the policy] will affect pricing in 2011."

When asked if he thought the tax reduction would pass, Arison said, "I would think [given] the huge negative impact it had on Alaska … there's a likelihood -- and this is a guess on my part -- that it will pass."

Future New-Builds. In February, Carnival Corporation announced that it had signed a memorandum of agreement with Italian shipbuilder Fincantieri to construct two new ships for its Princess Cruises brand. Arison said that, while the deal isn't completely done, he hoped it would be finalized by April. But, beyond the Princess ships, execs cautioned that there is little else in the pipeline."We've been talking about the Princess deal for a very long time, and actually, we've been working on it for two years," said Arison. "We don't have another deal behind it -- we've spent all our time focusing on this deal … I don't expect anything very quickly after the Princess deal is finalized. We're not going to build ships that we don't need. Two or three ships going forward beyond '12 and '13 is probably the right number for us."

"As far as the competitive landscape, with the prices coming down, I understand some of our competitors are looking at potential projects," he added.

Interesting Moment: Europeans More Virtuous Than Americans?

One of the more lighthearted moments of the earnings call occurred when Tim Conder, an analyst for Wells Fargo, asked about the difference between spending habits of Europeans and Americans. Executives answered that, broadly speaking, Europeans drink more and gamble less than Americans, and overall, they spend less onboard.

Frank chimed in, "They're a much more virtuous population than the Americans." Amid laughter, Arison clarified that Frank was kidding.

In Case You Missed It

P&O Cruises' Artemis sale earned Carnival Corp. $100 million, buttressing the company's earnings in Q1. The 45,000-ton, 1,196-passenger vessel, which served as a pathfinder for P&O, was sold to MS Artania Shipping. The ship will continue to sail for P&O through mid-April 2011.

--by Dan Askin, Associate Editor