Carnival Corporation has reported net income of $129.6 million, or $0.22 per share, on revenues of $905.8 million for its first quarter ended Feb. 28, 2002, compared to net income of $127.9 million, or $0.22 per share, on revenues of $1,007.6 million for the first quarter of last year.

Carnival also reported carrying 772,000 passengers representing 5,201,680 passenger cruise days for a load factor of 102.8 percent in the first quarter of this year, compared to 786,000 passengers, 5,203,000 passenger cruise days, and a load factor of 105.2 percent last year.

Carnival attributed the lower revenues year-over­ year to significantly fewer passengers purchasing air travel and also to lower cruise ticket prices and occupancies. These reductions were partially offset by a 2.3 percent increase in capacity.

Also offsetting the lower revenues in 2002 was a significant drop in operating expenses.

In addition, the first quarter of 2002 did not include any losses from Carnival’s investment in Airtours, which was sold in June of 2001.

Commented Sr. V.P. of Finance and CFO Gerald Cahill: “We made up ground as we moved closer to each sailing and prices did not fall off. They stabilized.”

He said that the results were much better than the company had anticipated a few months ago and that the two months after 9/11 were “probably the worst months ever in the company’s history.”

Cahill also noted that only 19.9 percent of the passengers bought air in the first quarter of this year, compared to 31.1 percent last year.

Net yield was reduced by three factors, according to Cahill:

• A capacity increase in the contemporary segment, but a decrease in the premium and luxury segments.

• A stronger dollar vs. the Euro.

• The situation in Argentina, which hurt Costa Crociere. Cahill attributed the cost reduction to mainly what he called “small things,” including lower fuel prices. But advertising, security and insurance costs were not down, he emphasized.

Cahill added that the company had also been “tight on expenses after 9/11.”

He said he expected costs to be down on a per­ berth-day basis also in the second, third and fourth quarters but not by as much as in the first quarter. “We typically target a two percent cost reduction per berth day in any given year,” Cahill said.

Looking Forward

Looking forward, Howard Frank, vice chairman, said that bookings were strong, but behind last year. “We are catching up, but at somewhat lower prices,” he said.

“Generally speaking, business has turned around for all our brands,” Frank said. But he would not divulge load factors. Frank said that giving load factors without pricing was not meaningful. You can pick up load by reducing prices, he said, and suggested instead that yield was a better indicator.

Carnival expects yield to be down four to six percent in Q2 and Q3, but said that visibility for Q4 was difficult with the close-in booking pattern. However, for 2003, Carnival “anticipates some yield improvement,” according to its chairman, Micky Arison.

Cahill added that onboard passenger spending was also growing every year.

Commenting on the Wave Period, Arison said: “Generally speaking, the Wave Period tends to trend down after six or eight weeks, but we are now in week 11 and it continues.”

While bookings are not building – the peak was in January – the booking level is being maintained, Arison said, noting that the company is only now entering the peak booking period for Alaska and Europe.

He said that yield in the Caribbean was not a problem for the three major companies but that other companies may panic because of the close-in bookings.

Arison was optimistic about Europe, where capacity has been decreased and the Eastern Mediterranean dropped from itineraries.

“But if all the capacity goes back in 03 and if they cannot go to the Eastern Mediterranean, it will be difficult for Europe to absorb all the capacity,” Arison noted.

He also said that Costa derives most of its passengers from Italy, France and Spain and that most drive to the (embarkation) ports, which “makes Costa very strong in the European markets.”

Carnival expects to be less impacted by ship redeployments than its competitors. Frank said that Holland America Line (HAL) moved only one ship out of Europe to Alaska as did Seabourn Cruise Line and that Costa kept one ship in Europe this winter, while it retired the Costa Riviera.

For 03, HAL will have an almost normal year in Europe and Seaboum will return too, according to Arison.

However, European sourcing is a relatively small piece of business for the North American brands, added Arison.

Consolidation and Fleet Expansion

The regulatory processes are moving forward both in Europe and the U.S., according to Frank, who said that Carnival was still in the process of submitting data in the U.S. “We expect the process to come to fruition some time this summer at the earliest,” Frank said.

Meanwhile, Carnival Corporation will take delivery of three ships late in the year – two for Carnival Cruise Lines and one for HAL.

“We believe in growth in the North American market,” said Arison. He also said that some brands can grow faster than others.

“Clearly Carnival Cruise Lines has the potential to grow further at the rate it has,” Arison said, adding that he expects to order more newbuildings for the Carnival brand as well as for Costa in Europe.

“We see growth in the contemporary market segment in the U.S. and Europe,” Arison said. “That is our long-term strategy.”

Arison explained that exercising options is a function of when the company is happy with the exchange rates. “It is highly probable that we will exercise our options,” Arison said. “We have to find the most appropriate moment.

“We are continuing to talk to yards about new ships for 05 and 06.

“We try to manage capacity growth on the basis of what is most profitable for each brand,” Arison said, explaining that expansion was ”brand dependent.”

“It depends on how we see the potential for each brand,” he said, “on what the brand can absorb and what kind of return on investment that we see.

More Ships for 05 and 06

“We assume we will order newbuildings for Carnival Cruise Lines for 05 and 06,” Arison said.

“Carnival performed very well after the peak of 98/99. The other brands have been spotty,” he said.

Cahill added that the Carnival brand can probably absorb two new ships in the contemporary market every year while two ships a year in the premium market (HAL) can be too much.

Said Arison: “The premium market has seen large capacity increases and as the industry has homogenized the product, it is harder to get premium pricing.

“We hope the new ships with balconies will put HAL back on track,” he added.

Arison said he was hopeful that the Patriot, the former Nieuw Amsterdam, which was sold to American Classic Voyages (AMCV) and then returned to Carnival after AMCV went bankrupt, would be sold. But he added that HAL was also working hard to develop a program “in case we cannot sell the ship.”

In addition, Arison said he wanted “to kill any rumors about more ships for sale.”

He said the company had spent $11 million to upgrade the Holiday and that the Holiday and the Jubilee – the lowest capacity ships in the Carnival brand fleet – serve to find and develop new itineraries for the cruise line.

“We continue to invest in and upgrade those ships,” Arison underscored.

He also pointed out that Seabourn had been turned around after the company focused solely on its three sister ships.

Moving the Caronia to U.K. roundtrip cruises had also taken off dramatically, according to Arison, who said that “bookings were excellent.”

Estimating industry-wide growth, Cahill said that future capacity growth predictions should be moderated by two percent of the overall fleet being retired each year. Over time a two percent retirement record has been pretty accurate, added Arison, noting that it is not necessarily the weak or marginal players that take ships out of the market. “Big companies can also move ships out,” he said.

In other news, Carnival intends to submit a new stock option plan for shareholders’ approval at its April 15 annual meeting, allocating 40 million shares for management and supervisory level employees. There are presently approximately 588 million shares outstanding.

Interpretation:

Carnival did well in its first quarter of 02, although the key to its results was lower costs. Meanwhile revenue per day and net income per day continue a downward trend since 2000.

Drivers for future earnings will be increased scale of operations allowing Carnival to drive costs per day down even further.

No ships except the Patriot are supposedly for sale despite analysts’ reports to the contrary, but Carnival makes a point of saying that more ships may be moved out of the North American market.

If it is difficult to achieve premium-level pricing as Carnival states (above), that could imply a growing pricing challenge for a large segment of the North American cruise industry.

Also, the closer-in booking pattern gives less forward visibility and can impact pricing negatively.