Strong European and Alaska cruise seasons helped Carnival Corporation overcome higher fuel costs and weakness in Caribbean demand in Q3. The company reported net income of S1.23 billion, or $ 1.49 per share, on revenues of $3.91 billion for its third quarter ended Aug. 31, 2006, compared, to net income of $1.18 billion, or $1.40 per share, on revenues of $3.60 billion for its third quarter of 2005.

For Q4, with advance bookings slightly behind last year, but with average pricing slightly higher. Carnival expects earnings to be in the range of $0.46 to $0.48, compared to $0.43 last year.

In addition, Carnival has been able to reduce its fuel consumption, which Chairman and CEO Micky Arison said he believes is sustainable with more improvements to come. That, combined with lower fuel prices and with most of the 8.5 percent capacity growth in 2007 coming in the more profitable European markets, has raised investors’ earnings expectations for Q4 and 07, which in turn has pushed the stock up, trading $48 at press time, from below $40 in August.

Beat Guidance

Carnival’s results were slightly better than its guidance, which, Gary Cahill, executive vice president and CFG, attributed to fuel costs that were lower than anticipated and better operating results. He said that the European brands performed very well and that the North American brands did well in Europe and Alaska.

While fuel costs were less than anticipated, they still represent a significant drag on earnings, according to Cahill, who also noted that Caribbean cruises are experiencing “significant price pressure.”

Cahill said that Carnival has been able to reduce fuel consumption despite adding more ships to its fleet. And, if fuel prices continue to drop or at least do not go back up, these savings may have a significant impact on Carnival’s bottom line.

Ticket yield was down 0.5 percent in Q3, according to Cahill, while onboard spending was up 1.6 percent. In North America, net revenue yield was down slightly due to the Caribbean pulling down Europe and Alaska.

The European brands experienced strong growth during Q3, according to Cahill.

More About Q3

Cahill also said that Carnival has refunded money to FEMA for the charters of two ships in the aftermath of Hurricane Katrina since the charter agreement was based on being earnings neutral.

Q4

According to Carnival, the upcoming quarter (Q4) may not face the fuel pressure of earlier this year. And while most of the new capacity has been introduced in North America so far, in 2007 that will shift to Europe. Capacity will be up 5.5 percent in Q4 compared to last year, but so far occupancy is lagging slightly behind. For the European brands, bookings are 1.8 percent ahead year-over-year, but are running 4.8 percent behind in North America.

In terms of pricing, the European brands are slightly ahead, while the North American brands are slightly behind last year.

Howard Frank, vice chairman and COO, attributed the lag in North America to hurricane concerns and a softening of the economy.

Q1 07

For Q1 Carnival expects the softer Caribbean to be offset by stronger performance by its European brands.

Capacity will be up 7.5 percent from last year and so far occupancy is tracking 3 percent behind, according to Frank. Occupancy is being pulled down by the Caribbean, which is miming 7 percent behind last year while the other North American markets running about the same as last year. European occupancy, however, is running 7 percent ahead. (Note: This may also be due to the European brands marketing their cruises earlier than before, which was not mentioned in the Q3 conference call. – Editor)

Pricing in North America is said to be slightly ahead of last year, with softer Caribbean pricing offset by stronger pricing elsewhere. Overall, European pricing is also ahead, with some brands well ahead, according to Frank.

He said: “We are concerned about continued softness in the Caribbean – due to softness in the U.S. economy, especially among middle class Americans, which is the main market for Caribbean cruises. For up-market cruises, bookings are solid.

“As we cycle through 2007, we expect profits to increase,” Frank added.

Arison agreed: ” I f we have a benign hurricane season, you will see better (Caribbean) results next year.”

“All the brands that are sailing in the Caribbean are looking at the situation,” Frank continued, “to see what can be done to strengthen demand. There will be aggressive pricing until demand picks up.”

Meanwhile, the cruise programs are in place for 2007 so i f there are any changes, they will come in 2008, according to Arison.

Carnival is also working on plans to create more destinations in the Caribbean, in order to offer a more diverse product, Frank added.

Q2 07

Capacity will be up 9.8 percent in Q2, with occupancy so far miming ahead of last year. Again, it is European bookings that are well ahead, offset by North American bookings which are slightly behind last year. Pricing, however, is up across the board.

But it is very early to offer predictions, Frank said, noting that bookings through the end of the year and the Wave Season will have a large impact on how Q2 turns out.

China

In China, Costa Crociere has had lower revenue yield than the average for the group, said Cahill, who added that while the company had budgeted with a loss, the losses were larger than expected.

“China has started out perhaps slower than we thought,” Frank said. “We may have been late going into the market – to get our marketing and distribution out and establish call centers. Pricing has been lower than we anticipated.

“We are now in the process of re-evaluating various aspects of the market and the onboard product. And we are holding off sending a second ship until we are certain of our product.” But Frank said he thought it is more of a marketing and distribution issue than about the product.

Alaska

Arison said that the Alaska head tax will be charged through to the passengers and that agents and passengers will be informed as soon as the tax becomes law. “We have not seen any impact yet,” he said, “but I think that may be different once we advise people. I think companies will take a hard look (at AK) for 2008 and beyond.”

Fuel

“Fuel conservation is clearly sustainable,” Arison said. “I think we can continue to improve.” Meanwhile, it is unclear i f Costa will continue its fuel surcharge, according to Frank, who said the company has been looking at a fuel surcharge in North America, but hoped that fuel prices would come down instead.

Swan Hellenic

Swan Hellenic has scheduled its last cruise in April after which its one ship, the Minerva II . will be transferred to Princess Cruises. Carnival is still looking for a buyer (for the brand) but will close it down if unsuccessful, Frank noted.

07

Passenger capacity will be up 8.5 percent for the year, with 7.5 percent in Q l , 9.8 percent in Q2, 10 percent in Q3 and 6.6 percent in Q4. For 2008, capacity will be up another 7.9 percent.

06

This year, Q3 revenues increased 8.3 percent which Carnival said was primarily driven by a 5.3 percent increase in capacity and an increase in revenue per berth day ($271.03 compared to $264.49).

However, operating expenses were up as well, which meant that operating income as well as net income on a passenger-day basis was down year-over-year.

With Carnival’s Q4 guidance, year-end results will be in the range of $2.71 to $2.73 compared to $2.70 last year.

For the first nine months of this year, Carnival has posted net income of $1.86 billion, or $2.25 per share, on revenues of $9 billion, compared to net income of $1.92 billion, or $2.29 per share, on revenues of $8.5 billion last year.