Royal Caribbean 2009 Q2 Results

Royal Caribbean Cruises (RCC) attributed its first second quarter loss in recent memory to the lingering recession and the H1N1 virus, while building a strong earnings platform for the future, according to Chairman and CEO Richard Fain.

RCC’s guidance for Q3 is for net earnings from $0.95 to $1.00, compared to a pre-call consensus of $0.93, and actual earnings of $1.92 last year; and for the full year, the net earnings guidance is from $0.70 to $0.80, compared to a pre-call market consensus of $1.24, and actual earnings of $2.68 last year. RCC last cut is forecast in June.

The market reacted immediately by sending the company’s stock down more than 15 percent.


RCC reported a loss of $35. l million, or $0.16 per share, on revenues of $1.3 billion for the second quarter ended June 30, 2009, compared to net income of $84.7 million, or $0.40 per share, on revenues of $1.6 billion for the same quarter last year. The loss was lower than the market consensus of$0.12 per share.

The Q2 results included a $0.05 per share impact from the H1N1 virus and $0.11 from non-operating expenses related to foreign exchange adjustments and hedging ineffectiveness, according to RCC.

RCC stated that the impact of H1N1 was higher than previously estimated, including 1trnerary modifications and reduced demand on ships visiting Mexican ports, the delayed launch of cruises targeting Mexican nationals, and the cancellations of two cruises due to an H1N1 infection among crew members, with subsequent reduced demand for that ship due to publicity.

RCC summarized the full year impact of H1N1 as follows: $0.13 per share due to cancelled voyages and tours; $0.05 per share resulting from itinerary changes and an estimated $0.09 due to reduced demand for Mexican itineraries.

Fuel costs were down year-over-year and also benefited from energy reductions initiatives.

Adam Goldstein, president and CEO of the Royal Caribbean International brand, said that market conditions continued to be challenging in Q2. While occupancy was near historical levels, Goldstein said, pricing was significantly down along with onboard spending, especially gaming.

He noted that the yield pressure in Europe and Alaska was putting pressure on earnings, but was pleased with increased passenger sourcing in all European markets.

As for Alaska, Goldstein said that there was a material capacity increase in 2009, but still what he called a significant yield decline.

The volume of guests is constant in Alaska, according to Goldstein, and that may be misleading to local interests and politicians, because pricing is dramatically down, he said.

Dan Hanrahan, president and CEO of Celebrity Cruises, said the new Equinox is being shown to some 10,000 travel agents and press during the inaugural events in Europe. “Introducing the ship in the UK,” he said, “is key to Celebrity’s passenger sourcing when the new Eclipse will be dedicated to the UK market, starting next summer.”

He noted that the Solstice class is generating premium ticket revenues and higher onboard spending.

As for Q2, Hanrahan said that passenger volume was higher year-over-year, but pricing has been hit hard, particularly in Alaska.

Fain also commented that the Spanish economy continues to be a drag on earnings. He said the Spanish market suffered harder and earlier than the rest of Europe, so the hope was that Spain would also recover sooner. But that has not happened, Fain added, instead it keeps falling.

RCC’s Spanish brand, Pullmantur, also decided to delay its entry into the Mexican market with the Pacific Dream as a new product targeting Mexican nationals until 2010 and made a significant reduction in Pullmantur’s tour capacity in Mexico.

Pullmantur’s Ocean Dream subsequently had two voyages in the Caribbean disrupted due to H1N1 infection among some crew members. The ship has since experienced reduced demand as a result of the publicity in Spain.

Changing topics, Fain noted the appointment of Larry Pimentel as the new president and CEO of Azamara Cruises. Pimentel was most recently president of Seadream Yacht Club, and before that, president of Cunard Line and Seabourn Cruise Line.

Fain said that Pimentel’s role will be to create better awareness and better focus on the Azarnara brand and that the appointment will not result in any material changes in RCC’s cost structure.


Pricing for the first three quarters of this year has been running behind last year, according to Brian Rice, executive vice president and CFO.

“We are seeing lower bookings until four months before departure and then things pick up,” he said. ‘This has been consistent for all three quarters and we are seeing the same going into 2010. We are now entering the peak booking window for Q4.”

Goldstein noted that selling West Coast Mexico cruises continues to remain a particular challenge.

Meanwhile, he is looking forward to delivery of the Oasis of the Seas in some 13 weeks, and said he is “very pleased, seeing healthy bookings into 2010.”

Hanrahan said that pricing for Q4 and Q 1 was so far running behind last year at this point in time, but ahead of where the quarters finished.

“We are beginning the see early signs of recovery,” Fain continued. “Bookings and pricing are stable, as we continue to finance and expand the company. The market has stabilized and when it turns up, we will benefit.

“We are encouraged by Q 1 (20 J 0) and are slightly more than one third sold at this time. Pricing is modestly behind, but significantly ahead of where Q 1 (2009) ended. I am optimistic we will be ahead.”

However, RCC is taking a more pessimistic view of Spain, where unemployment has reached 18 percent, according to Rice.

Looking Forward

Commenting on the recently introduced Equinox, Fain said that the new ship along with her sister ship, the Solstice, that was introduced last fall, were the best received ships he can remember. And in the future, he said, almost half the RCC fleet will consist of Solstice-, Oasis- and Freedom-class ships, commanding higher ticket premiums and generating more onboard spending

According to Hanrahan, by next summer, the new Solstice class will make up 40 percent of Celebrity’s capacity.

While the company’s North American supply will be down slightly, according to Fain, with more new hardware, Americans will be willing to pay more.

“Acceptance of our product outside North

America is growing,” Fain continued. “Europe is 10 to 15 years behind the American market but on a similar growth trajectory, and Asia is virtually untapped. I am very bullish on the future acceptance of our product.”

Goldstein said that for 2009, 56 percent of the passengers on the RCC brands’ cruises in Europe are Europeans and that two-thirds are from non-U.S. markets. He said that the brands have been increasing the numbers of customers from outside the U.S.

For 2010, RCC will reduce its Alaska capacity by some 20 percent, while the Royal Caribbean brand continues to ramp up is capacity in Europe.”

While Celebrity will be dedicating a ship to the UK, Hanrahan said: “We are not making any significant strategic changes, however, the Solstice will be spending the summer sailing seven-day cruises in the Caribbean, the Century will continue her five-, fiveand four-day rotation in the Caribbean, and the Summit will be sailing to Bermuda.”

Uncertainties going forward include not only the economies of the U.S. and European countries, particularly Spain, but also the unpredictable flu issue.

As for building more ships, after the present orders are filled, Fain said, in today’s market the best strategy is margin expansion and not capacity growth.

Whether to build or not will be considered, Fain said, purely on what is in the best interest of shareholders.

The cruise industry is not about fighting for market share, he added, as all the lines market on the basis of brands and all the-ships sailing full.

In related news, TUI Cruises has released its winter 2009/2010 cruise brochure for Mein Schiff, However, the brochure also includes a segment of the Oasis of the Seas.

Liquidity and Cap Ex

As of June 30, 2009, RCC has $900 million including cash and the undrawn portion of its revolving credit facility. During the second quarter, the company repaid approximately $325 million of scheduled debt maturities.

In early July, RCC completed a $300 million senior unsecured notes offering, with proceeds used to reduce the amount outstanding on the company’s revolving credit facility.

With current ship orders, projected capital expenditures for 2009, 2010, 2011 and 2012 remain unchanged at $2.1 billion, $2.2 billion, $1.0 billion and $1.0 billion, respectively, according to RCC.

Projected capacity increases for the same four years are 5.2 percent, 12.7 percent, 8.6 percent and 2.8 percent, respectively.

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