Royal Caribbean Cruises LTD. (RCC) reported net income of $81.7 million, or $0.42 per share, on revenues of $821.7 million for its second quarter ended June 30, 2001, compared to net income of $108.3 million, or $0.56 per share, on revenues of $680.7 million for its second quarter last year.

Results were impacted by an 8.8 percent decrease in net revenue yields, combined with the cancellation of eight weeks of sailings due to technical mishaps aboard four RCC vessels. “That was one hell of a three months,” commented RCC CEO Richard Fain, citing both the “significant decrease in yield” stemming from a 30 percent capacity expansion during a period of economic weakness, as well as “the extraordinary spate of technical problems… an exceptional string of bad luck.” “You can imagine how frustrating it is when all of these things happen during such a short amount of time,” he continued, summing up the broader industry/economic picture by stating, “This was a difficult three months and it will end up being a difficult year – we all knew we had to take a hit at some point, and that there would be a period of difficulty, but that is scant comfort when you have to live through it.”

Second-quarter results would have been $0.07 per share less had it not been for a one-time gain of $14 million from the receipt of insurance proceeds related to unspecified claims. Excluding the impact of the insurance claims and mechanical failures, net income was $93.7 million, or $0.49 per share, down 13.5 percent from 2000. Including all items, net income decreased 24.6 percent compared to last year.

Despite these declines, RCC’s earnings exceeded analysts’ 2Q expectations of $0.31 per share, precipitating a 12 percent rise in RCC’s share value on the day the results were announced. Additionally, several financial analysts upped their RCC rating to “Buy” or “Strong Buy.”

RCC reported net income of $134.2, or $0.70 per share, on revenues of $1.5 billion for the first six months of 2001, compared to net income of $213.8 million, or $1.11 per share, on revenues of $1.4 billion for the first six months last year.

Looking forward, RCC executives said they were comfortable with analysts’ consensus target of $1.65 for the full year, forecasting that yields would decrease during the third quarter and increase dcring the fourth, equating to an overall two to three percent decrease in yields during the second half of 2001.

RCC will mitigate the full-year impact of yield decreases with an aggressive cost-containment initiative, which is expected to decrease total operating costs per potential passenger cruise day by one percent. CFO Richard Glasier said the following cost-cutting procedures had been implemented: (1) to cut fuel consumption, itineraries have been revised to optimize speed between ports, technology has been utiiized to more efficiently control onboard climate, and the hulls have been scrubbed and propellers polished to reduce drag; (2) Onboard staffing costs have been cut by improving employee productivity through better scheduling; and (3) SG&A expenses have been cut by consolidating two call centers into one; by reviewing any position left open by a departing employee to see whether it can be left unfilled; by consolidating the new vessel design and construction supervision; and by decreasing travel costs by cutting down on out-of-town meetings.

Cost-cutting procedures were counterbalanced, however, by higher-than-normal fuel expenses, and by startup costs associated with the new Royal Celebrity Tours operation in Alaska, said Glasier. In addition to the pricier fuel market, Glasier noted that RCC vessels were increasingly using gas­ turbine propulsion, which requires a higher grade of fuel. “Historically fuel costs have been two to 2.5 percent of our revenues. This year they are three to four percent,” said Glasier.

On a region-by-region basis, the company declared the “peak Bermuda season, Alaska and Europe especially challenging.” RCC President Jack Williams noted, “Our growth was significantly outpacing industry growth during the second quarter, which combined with softer market conditions, forced us to lower our prices.”

RCC increased overall capacity 31 percent during the second quarter (48 percent for Celebrity Cruises; 25 percent for Royal Caribbean International (RCI)). In Europe, said Williams, RCL capacity increased 68 percent, with the market also “impacted by the ongoing Mideast crisis and the Hoof and Mouth Disease scare.” Alaska capacity increased 34 percent (50 percent RCI; 16 percent Celebrity) amid “very competitive pricing”; while the seven-night Caribbean sector saw a 15 percent capacity increase; and the short-cruise market (both in the Caribbean and West Coast) jumped 26 percent.

Of those sectors, only the seven-night Caribbean market moved in a positive direction, with single-digit yield improvements courtesy of the market’s positive reception of RCI’s Voyager-class ships and Celebrity’s Millennium-class vessels.

Williams also noted moves made to improve performance in the company’s “new markets” sector, which is comprised of the Aruba cruises and the “Celebrity Voyages” program on the Celebrity side; and for RCI, the “Royal Journeys” program, cruises from Seattle and Gulf ports, plus the South American program and the Europe for Europeans program aboard the Splendour of the Seas. “Some of these programs needed modification, some needed elimination,” he said. “The Gulf ports are performing quite well and we will be adding more capacity there next year. The Aruba program has been eliminated, while the Royal Journeys program has been modified, and is showing improvement in load factors after modification.” (Australia/New Zealand cruises were more heavily emphasized, and next year, the Royal Journeys vessel, the Legend of the Seas, will cease its Athens-Mideast­ Indian Ocean repositioning to Asia, and will simply sail an Alaska-West Coast-Hawaii-Australia/New Zealand run).

Finally, Williams addressed concerns about the “teething problems” of the new onboard management system on the Radiance of the Seas. A graph provided by RCC showed that the vessel scored dramatically below the fleet average in terms of customer satisfaction following its introduction. “We did in fact have a few bumps in the road,” confirmed Williams, “but now the ship is now exceeding the fleet average on a weekly basis, and it is one of the best performing ships in the fleet.”