5 Takeaways From Carnival Corp.'s Most Important Earnings Call Ever

March 11, 2012
(8 p.m. EDT) -- During a Friday earnings call underpinned by January's Costa Concordia accident and the more recent Costa Allegra fire, Carnival Corp. offered a candid look at how tragedy impacts business.

The company, which operates 10 cruise lines (including Princess Cruises, Costa Cruises, Holland America and Carnival Cruise Lines) sliced its 2012 profit forecast by about 40 percent -- some $900 million -- in the wake of the worst maritime disaster in modern cruise travel. Execs said 2012 had started off promising -- until the January disaster that left 32 dead and sent shock waves through the cruise industry.

During the first fiscal quarter of 2012, Carnival incurred a loss of $139 million, or 18 cents per share, compared to a gain of $152 million, or 19 cents per share, during the same period in 2011.

Here are five takeaways from the call:

The line is committed to Costa as a brand. After the January 13 accident, many industry pundits envisioned a re-branding or even shuttering of Costa, Europe's most successful cruise line. Since then, booking levels have plummeted -- so much so that execs separated Costa and the other nine Carnival Corp. lines when offering financial color. In the weeks following the incident, bookings fell 80 percent to 90 percent, year over year, and the line put all marketing on hold. Carnival Corp. is now forecasting that Costa will lose $100 million in 2012, in contrast to a previously forecasted profit of $400 million.

Still, execs argued they had reason to be optimistic. The most recent numbers show a marked improvement to 40 to 50 percent down versus the same time in 2011. It has since begun marketing the line again.

The executives added that there were relatively few cancellations, despite an offer extended to all upcoming Costa cruisers booked on any ship to cancel without penalty. "People, even in Italy, are seeing this as a one-time freak event, and they don't see it as an issue with the company or the brand or the management or the safety of the ship," said chief operating officer Howard Frank. Chairman and CEO Micky Arison told analysts that there was "no question" that Costa, with its 60-plus years in service, will come back "stronger than ever."

How long and how far it will have to climb is another question. Frank estimated that it will take up to a year before "normalization" occurs, but he declined to offer details on what the new normal would look like. That said, 2012 would be a year of "rebuilding, remarketing and retooling," he said. Execs revealed that Costa's strategy for the near-term will be to maintain the line on pricing, even if it means sailing with significantly less capacity. This is in an effort to preserve brand integrity and assure an "orderly market," said Frank.

And the new-build program continues in 2012. As another sign of its faith in the Costa Brand, Carnival announced that it's moving forward with the launch of the 2,984-passenger Costa Fascinosa. It's still set to debut in spring of this year.

Concordia's direct impact. Insurance companies now own the stricken vessel, which lies half-submerged off the Tuscan coast. Q1 expenses directly related to Concordia were $29 million, including a $10 million insurance deductible related to third-party personal injury liabilities. Carnival Corp. also posted a $515 million insurance recoverable, which offset the write-down of the net value of Concordia as the ship has been deemed to be a constructive total loss. Last week, Costa announced that it was reviewing six plans by salvage companies for the removal of Concordia; it will make the final decision public in late March or early April.

Bookings are way down across the brands, but that doesn't mean there are tons of deals -- yet. Booking patterns for North American brands -- Carnival, HAL, Princess and Seabourn -- in the seven-week period after the Concordia accident have been lower in the mid single digits, with slightly lower cruise fares. The weakest itineraries have been the European programs, with sovereign debt, high airfare and, of course, the Concordia incident hampering business. Unsurprisingly, the European brands (excluding Costa) -- Cunard, P&O Cruises and AIDA -- have suffered more than their North American counterparts. Barclays analyst Felicia Hendricks asked the execs if they were "comfortable that customers [booking Europe cruises] won't need a little nudge with pricing."

Arison responded that the discounting efforts will not be greater than last year -- though that's not to say there weren't incentives in the form of reduced air, lower deposits and onboard credit in 2011. "Clearly the pattern has been positive as we get further away from the incident," he said. "The Concordia incident has really fallen away as a major obstacle in selling cruises," added Frank. "It's come back to great value, great vacations."

"The expectation is that prices are going to get lower," said Arison, referencing the single biggest cruise deterrent offered in recent surveys conducted by the brands. "Once they see that's not the case, hopefully, they'll come off the fence and book their vacations."

In the Caribbean, pricing is "nicely higher" than a year ago for both the second and third fiscal quarters, said execs -- but there is more occupancy available than last year, signaling the possibility that close-in bookings may be discounted.

Costa Allegra is done. The fire-damaged Costa Allegra, which had to be towed to shore after it was left powerless and adrift in the Indian Ocean in February, will not sail again for Carnival Corp. "Repair cost will be more than it would cost to put her back in service," explained Arison. Execs added that, even before the fire, they were trying to sell the ship. "The price will obviously have to come down now," said Arison. There's a possibility that the company will sell the ship for scrap.

--by Dan Askin, News Editor