Since Royal Caribbean Cruises (RCL) reported fourth quarter and year-end earnings for 2006 on Feb. 6, RCL’s stock prices have dropped from more than $46 on Feb. 2 to below $41 at press time. While RCL reported a record fourth quarter, earnings for the full year were down compared to 2005, but more importantly, RCL presented a tempered outlook for 2007.

Carnival Corporation shares have also fallen since the beginning of the month, going from above $52 to below $49 at press time.

2007

RCL Chairman and CEO Richard Fain commented in the company’s earnings call that the “Wave period has been less than hoped for and that the pricing in the Caribbean has not been robust, especially for the first half of the year,” compared to (pricing in) Europe and Alaska.

Fain said the lower priced products have been under price pressure since mid 2006.

However, he added that “it would be a mistake to extrapolate Q l on the rest of the year.”

Adam Goldstein, president of the Royal Caribbean International brand, added that the Wave has been less robust for the first half of the year, but that the second half looks better. He said that there was aggressive discounting in the three-, four- and seven-day Caribbean market. “The Wave period is still important, but not as critical as it used to be,” he said.

Brian Rice, executive vice president and CFO, forecasted earnings per share in the range of $3.05 to $3.20 for 2007.

Pullmantur

RCL’s recent acquisition, Spanish cruise and tour operator, Pullmantur, will be reported on a two month lag, starting in Q 1 2007.

Rice commented that Pullmantur was a value brand in the Spanish market, generating lower revenues than Royal Caribbean and Celebrity Cruises.

With more seasonal operations, Pullmantur will have negative impact on RCL’s earnings in QI and Q2, but “provide a nice windfall in Q3 and Q4,” Rice said.

Fain added that Pullmantur’s occupancy has been lower, and that its yield management has not been as sophisticated as RCL’s, and that its operation is much more seasonal. “Pullmantur has a very strong summer and an extremely weak winter,” he noted.

Pullmantur also has much closer-in bookings than Royal Caribbean or Celebrity.

RCL executives would not release any specific numbers, except to say that “Pullmantur’s contribution will be material.”

Rice also commented that Pullmantur’s fleet was equal to only 7 percent of RCL’s capacity before the acquisition – or one of its biggest vessels.

The Spanish market is young and growing, according to Rice, who said it was too early to provide any specific growth projections.

He added that the European markets tend to be stronger (than North America) right now.

Deployment

Goldstein said Royal Caribbean is extending is European season and is sourcing more passengers in Europe as well.

RCL provided 2007 deployment for its three brands as follows: 51 percent will be in the Caribbean this year, compared to 56 percent last year; 21 percent will be in Europe, compared to 14 percent last year; 7 percent will be in Alaska, the same as last year; 3 percent will be in Bermuda, compared to 4 percent last year; 6 percent will be on the Mexican Riviera, compared to 8 percent last year; and 12 percent will be in other markets, the same as last year.

While Europe is up dramatically, this is partially due to Royal Caribbean and Celebrity having more and larger ships and longer seasons there, but also due to the inclusion of Pullmantur.

This year’s focus on Europe was also partially attributed to the yield pressures in the Caribbean.

Dan Hanrahan, president of Celebrity, commented that in terms of pricing, “Alaska is holding its own compared to last year, and we are happy with what we are seeing in Europe so far.”

Goldstein said that both volume and pricing are picking up for the fall in the Caribbean and that there is strong growth in volume for Q4.

Forward

According to RCL, the company will grow its passenger capacity by 12.2 percent in 2007 (including the addition of Pullmantur), 9 percent in 2008, 6.9 percent in 2009 and 7.8 percent in 2010 – not including the second Genesis option – which expires in March.

“This is a growth industry,” said Fain. “We are looking at more growth. We want to be in a position to grow as the industry grows.”

2006

RCL reported net income of $633 .9 million, or $2.94 per share, on revenues of $5.2 billion for the year ended Dec. 31, 2006, compared to net income of $716 million, or $3.26 per share, on revenues of $4.9 billion for 2005.

According to Fain, higher fuel costs increased operating costs by $112 million in 2006, which reduced earnings per share by $0.51.

Fain also noted the company’s initial guidance, provided last February, was in the range of $2.95 to $3.15, and that the $0.11 difference to the midpoint of that range ($3.05) can be attributed to fuel.

Hanrahan noted that the extended European season had been particularly helpful for Celebrity’s results, and the line will again be extending the season into the fall.

Ticket revenues were $3.8 billion in 2006, compared to $3.6 billion in 2005. Ticket revenue per passenger, per day, was $160.96 last year, compared to $15 5. 72 the previous year.

Onboard and “other” revenue was $1.4 billion in 2006, compared to $1.3 billion in 2005, or $58.32 per passenger, per day, last year, compared to $55.81 in 2005.

Q4

RCL reported net income of $46.6 million, or $0.22 per share, on revenues of $1.2 billion for the fourth quarter ended Dec. 31, 2006, compared to a loss of $3.6 million, or $0.02 per share, on revenues of $1.0 billion for the same period last year.

According to Rice, the strong Q4 result, which he said was the best Q4 result in the company’s history, was achieved despite an 8.8 percent increase in capacity.

Ticket revenues were $831.7 million for Q4 this year, compared to $738.5 million last year, or $136.35 per passenger, per day this year, compared to $131.13 last year.