Royal Caribbean 2007 Q3 Earnings

Royal Caribbean Cruises (RCL) reported record net income for the third quarter ended Sept. 30, 2007 of$395.0 million, or $1.84 per share, on revenues of $1.9 billion, compared to net income of $345.4 million, or $1.63 per share, on revenues of $1.6 billion for the third quarter last year. The company’s previous guidance for Q3 was in the range of $1.75 to $1.80 per share.

RCL also raised its guidance for the year to the high end of its previous guidance from $2.80 to $2.85, compared to $2.94 last year, $3.26 in 2005 and $2.26 in

For 2008, booking levels and ticket prices are up compared to the levels achieved at the same time last year, according to RCL.

Better Than Expected

The Q3 results were better than expected, mainly due to stronger late bookings driving better yields, said Brian Rice, CFO and executive vice president, in RCL’s Q3 earnings conference call. He said that Q3 produced the highest revenue yields in the company’s history.

Higher fuel costs were offset by hedging and more efficient operations, according to Rice. Fuel costs per passenger day were down 1.9 percent year-over-year.

Capacity was up 4.9 percent in Q3 07 compared to last year, excluding Pullmantur which was acquired late last year, and 13. 7 percent with the Spanish brand.

For the nine-month period ended Sept. 30, 2007, net income is trailing 2006 due to RCL’s QI earnings being impacted by the acquisition of Pullmantur and the soft pricing environment in the Caribbean.

Nine-month earnings for this year are $532.6 million, or $2.49 per share, on revenues of $4.7 billion, compared to net income of$587.3 million, or $2.70 per share, on net income of $4.1 billion for the first nine months of 2006.

The stock went up nearly 9 percent immediately following the company’s Q3 conference call, and was trading at $43.15 at press time. It had dipped as low as $35.90 in September. The average 12-month target price is $48.27.


RCL’s guidance for Q4 is from $0.32 to $0.34 per share, with capacity up 4.7 percent, and 13.6 percent, including Pullmantur. Last year, Q4 earnings were $0.22 per share.

While there was still inventory available at press time, Rice said the company’s brands are booked further along than they were last year at this time and at significantly higher prices.

In addition, in a prepared statement, RCL Chairman and CEO Richard Fain noted the strength of the late season European itineraries and the continuing recovery of the Caribbean pricing environment.


For next year, RCL’s capacity will be up 4.8 percent, driven by the Liberty of the Seas and the full year deployment of the Freedom of the Seas, but excluding Pullmantur, and 12.4 percent, including Pullmantur.

Q1 is shaping up nicely, according to Rice, who said the quarter will meet or exceed the yields achieved in Q1 2007.

At this point, bookings for Q1 are up significantly over last year, with prices also being up, according to RCL, and for Q2, bookings are up with prices up as well, but less so than for Ql .

Growth Strategy

Fain noted the launch of the company’s new French brand, CDF – Croisieres De France – which he said is designed exclusively for the French market.

Rice noted that approximately 19 percent of the company’s revenues will come from outside North America in 2007 and that this is expected to increase to about 20 percent in 2008.

Rice added that there will continue to be growth in Europe and in Latin America, and the company will continue to diversify.

While there are no specific plans to target other national markets at this point, Fain said that RCL will look at opportunities if markets generate high enough returns. There are plenty of opportunities out there, he said.

Adam Goldstein, president of Royal Caribbean International commented on the brand’s growth strategy, which includes geographic expansion of both itineraries and passenger sourcing.

Goldstein noted the Spendour of the Seas being deployed in South America this winter season as well as the Rhapsody of the Seas sailing in Asia and the Legend of the Seas out of the Dominican Republic. He said he expects positive year-over-year net revenue yield for these ships for the winter season. Dan Hanrahan, president of Celebrity Cruises, said the brand has enjoyed solid business in Alaska and Europe and noted the continued focus on cost containment.

Two of the eight gas-turbine ships in the Celebrity and Royal Caribbean fleets have so far each had a diesel engine installed, with all eight slated to be completed before the end of 2008. The installation cost is estimated from $16 million to $17 million, according to Rice, who said the savings in fuel costs are approximately $7 million per ship per year.

According to Hanrahan, fuel consumption has been reduced not only by installing the diesels, but by taking steps across the board such as installing window veneers, using new hull paints, and by being careful when designing itineraries. At lower speeds, the diesel engine will not only provide the hotel power, but also power for the propulsion, Hanrahan said.

Capacity Growth

RCL will have 12. 4 percent capacity increase in 2007 (including Pullmantur), with a total of 25.1 million available passenger cruise days.

For 2008, the capacity will increase by another 6. 4 percent; 9.3 percent in 2009; 11. 4 percent in 2010; and 6.4 percent in 2011, for a total of34.6 million available passenger cruise days. In addition, RCL will look at the markets, and if there is an opportunity and a (building) price on terms that will generate good returns, more ships may be ordered for deliveries before 2011, Fain said.

He added that the company does “not have enough ships to satisfy all itineraries with so many markets opening up that offer opportunities.”


Commenting on the passenger head tax being considered in Mexico, Goldstein said that the Mexican government has not yet decided on the tax, nor the amount, or when ic will be imposed, if there is a tax.

There is also support for getting more ships to call in Mexico and more passengers going ashore, spending more money, according to Goldstein, instead of making the industry a tax issue.

The message the industry is trying to convey worldwide is that more ships will bring more passengers who will spend more, Goldstein said, instead of looking at the ships as a source of tax revenue.

Despite the reported economic woes in the U.S., Rice said the cruise brands’ customer markets are showing strong resilience and that business has been healthy. He added that the company’s pricing structure is also very flexible if there are changes in demand.

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