Cruise Line Earnings Report: Profits (and Fares) Rise as Ash Settles

April 28, 2010

Earnings Chart
(6:45 p.m. EDT) -- Cruise fares and revenue are on the upward march ... the majority of new passengers are coming from Europe ... the freak Icelandic ash cloud that shut down European travel and chomped into cruise revenue may actually benefit the cruise industry. These are just a few of a slew of topics -- financial and otherwise -- discussed this morning during Royal Caribbean Cruises Ltd's (RCCL) Q1 earnings call.

RCCL, parent company of Royal Caribbean, Celebrity Cruises and Azamara Club Cruises, beat most Wall Street estimates for the first quarter, posting a profit of $87.4 million on revenues of $1.5 billion. "We have clearly turned that corner," proclaimed Richard Fain, RCCL's Chairman and CEO. But while numbers represented a substantial improvement over Q1 2009, and executives and analysts alike were cautiously optimistic about the future, Fain added a dose of reality to the proceedings. "If it weren't for last year, we'd be viewing this year as a terrible year."

Do the Math

Going a little deeper into the numbers, the company's $87.4 million profit ($0.40 per share) includes an $86 million gain ($0.39) from a legal settlement between Rolls-Royce and RCCL (over a faulty pod propulsion system installed on Celebrity Cruises' four Millennium-class ships). Travel disruptions resulting from the volcanic ash cloud, which hindered cruise travel for roughly a week, had a negative impact on yield, carving roughly $0.05 per share from the bottom line, according to executives.

Either way, the Q1 2010 results compare very favorably to the Q1 2009 results, when the company reported a net loss of $36.2 million, or $0.17 per share. Going forward, the company offered guidance of $2.15 to $2.25 earnings per share, an improvement from previous company estimates.

On the topic of fuel, the greatest ongoing expense in cruising, costs were approximately $8 million better than previous calculations, resulting from better-than-expected consumption and the company's fuel hedging program, "which more than offset recent increases in at-the-pump pricing," according to a statement from the line. Fuel consumption during the first quarter of 2010 was 307,000 metric tons.

While the question of reinstating fuel surcharges didn't come up during the call, a spokesperson for the line told Cruise Critic on Monday that the company has "not made any changes to our fuel supplement policy in response to the increase in the price of fuel. We reserved the right to re-impose a fuel supplement at certain price points, but at this time, we have not done so."

Deals or No Deals?

Most of the talk during the call was focused on steadily rising prices (after last year's deals, there's no direction to go but up). But one analyst did ask if Allure of the Seas -- the second in the 225,282-ton Oasis class, and a ship that will add 5,400 berths to the Caribbean -- would be starting out at a lower price point than her sister ship. Adam Goldstein, Royal Caribbean's president, was coy. "Fundamentally they're the same ship being operated in the same way. Clearly these two ships have been for some time been commanding significant premiums … We'd expect that to continue, but we'll have to see as we get closer to the season."

Future Tense

While the company has been saying for the past few calls that the new-build boom of the 2000's is firmly behind us, executives spoke today about renewed investment in the company's older hardware. Fain noted that we may see more of the "less sexy investment in older cruise ships" going forward. For new cruise ship fans, Fain lectured on the act of balancing the current incentives to build -- stronger U.S. dollar (greater purchasing power at the European yards), more accommodating shipyards who are desperate for business, and massive response to new ships like Oasis of the Seas -- with industry demand and company cost control. "We will continue to grow," he noted, "but probably be at a pace slower than heretofore."

Case in point: Earlier this year, Celebrity Cruises announced that it would spend some $200 million on a multi-year renovation program of its four Millennium-class ships, starting with Celebrity Constellation, which is currently in dry dock in Hamburg (there's no concrete schedule yet for Celebrity Infinity, Celebrity Summit and Celebrity Millennium).

On the subject of passenger base, currently more than half of all the company's passengers are being sourced from outside of North America. The number of North American passengers has been flat for the past few years, and the great majority of Royal Caribbean first-timers are coming from Europe, South America and Asia, according to the line. The line expects more of this going forward as it continues to tap worldwide markets. For Royal Caribbean, half of the 22 ships will be based in Europe during summer 2011.

Interesting Moment

One analyst asked if there was any impact on forward bookings after the freak volcanic ash cloud shut down European travel. Adam Goldstein took the microphone, saying, "It appears that the booking situation is normal and people understand that that was a bizarre and apparently one-off event.” More interesting was Goldstein's subsequent suggestion that the bizarre event might make European drive-to cruise opportunities look all the more enticing what with the travel nightmare endured by air passengers.

In Case You Missed It

Celebrity Cruises launched its third Solstice-class ship, Celebrity Eclipse, this month at a huge event in Southampton. And in the corporate stewardship department, the line canceled a two-night pre-inaugural cruise for the brand-new vessel in order to transport 2,000 British holidaymakers, who were stranded in Spain after the volcanic ash shut down air travel, back home.

Miscellaneous Numbers & Facts

According to the line, a "mid-to-high teen" percentage of passengers book online, either directly through the Royal Caribbean Web site or through an Internet-based travel retailer. That number is expected to grow slowly, but at the same time, RCCL predominantly depends on travel agents to distribute the product.

Allure of the Seas, the second in the history-making Oasis class, is about six months from its December 1 launch.

On an interesting deployment note, Celebrity Silhouette, which will debut in summer 2011 as the fourth ship in the Solstice class, will offer 12-night Caribbean cruises out of Cape Liberty in Bayonne, New Jersey (following an initial series of Holy Land sailings out of Rome). Royal Caribbean basically built the Cape Liberty embarkation port from scratch, and executives called Silhouette's New Jersey deployment a recommitment to the Northeast United States.

--by Dan Askin, Associate Editor