Carnival Corp. (CCL) and Royal Caribbean Cruises Ltd. (RCL) are
feeling a bit seasick right now as the economy continues to hit
consumers.
However, while relief may not be on the way anytime soon, a few
silver linings do exist for an industry built on discretionary
spending.
To fill ships, the two largest cruise-ship operators by market
share are offering significant discounts to attract increasingly
more cost-conscious consumers who generally are making vacation
plans more last-minute. When they do cruise, they're usually
choosing shorter, less-expensive trips and typically spending less
onboard.
"It's going to continue to be a challenge for the remainder of
2009," Carnival Vice Chairman and Chief Operating Officer Howard
Frank said in an interview, after the company cut its 2009 earnings
view Tuesday. "I expect the soft economy will continue through
2010."
In the last 52 weeks, Carnival's shares, which recently changed
hands down 4.4% at $22.12, have been shaved about 45%, while Royal
Caribbean's shares, recently trading down 6.7% to $8.69, have lost
about 73%. By comparison, the S&P 500 is off about 38% during
the same time frame.
While this year will be tough, analysts say cruise lines are in
relatively better shape than other companies in travel and leisure,
as they are still profitable and have more flexibility to change
their prices and itineraries. Since fares typically include lodging
and most food, people also perceive cruises to be a good value.
For example, Carnival's Holland America brand is offering 50%
off the original price for select Alaska cruise tours, with
deposits also reduced by half. Rates start at $949 per person based
on double occupancy, for CruiseTour 11, a 12-day cruise with a
Denali tour.
Consumers seem to be responding to discounts, with two-thirds of
Carnival's order book filled and a 10% year-on-year increase in
booking volumes for the rest of 2009. Still, occupancy levels trail
last year's.
Prices will likely remain lower for some time, but the discounts
may not get much steeper, said William Blair analyst Sharon
Zackfia.
Indeed, after experiencing a "significant" dip in bookings in
mid-September and October, Royal Caribbean dropped its prices a
"reasonable" amount and began to see bookings stabilize in early to
mid-December, said Chief Financial Officer Brian Rice in an
interview.
Right now, the company is seeing a lot of activity for May and
June sails, with less for July, August and September. But it
doesn't necessarily see the need to reduce prices further.
"It's about having the right consumer at the right time," Rice
said.
Carnival also seems to have found a pricing "inflection point"
where consumers are acting, chief operating officer Frank said, but
prices are reduced. For Carnival's North American brands, like
Princess, Caribbean pricing is about 10% to 15% lower than last
year, while Alaska andEuropean ticket pricing is 30% to 40% less.
The pricing picture is somewhat better for European brands like
Cunard, with pricing down 10%.
Other economic factors that impact the bottom line - like oil
prices and foreign currency exchange - are keeping each other in
check as they are moving in opposite directions for now.
Until recently, higher fuel costs had hampered cruise lines'
results, but Carnival said this week fuel costs fell 45% on a
per-ton basis in its fiscal first quarter from a year earlier.
While the stronger dollar reduces cruise lines' costs, it also
hurts revenue, with roughly 40% and 50% of passengers on Royal
Caribbean and Carnival, respectively, hailing from outside North
America.
Still, oil and currency volatility is something to watch, since
"shifts are hard to project, and they have a meaningful impact,"
said Zacks Investment Research analyst Sean P. Smith.
For instance, Carnival said Tuesday a 10% change in the price of
fuel represents about $90 million, or 11 cents per share, impact on
2009 earnings, while a 10% change relative to the U.S. dollar would
have an impact of $120 million, or 15 cents per share.
Beyond keeping an eye on currency rates and oil prices,
investors have concerns about Royal Caribbean's ability to fully
finance two new Oasis-class ships, "the largest on the seas," each
costing north of $1 billion, and scheduled for delivery in November
2009 and fourth quarter 2010, said William Blair's Zackfia.
But both ships have Finnish government guarantees for up to 80%
of the financed amount, and Royal Caribbean is working with credit
agencies to increase that to a larger portion, Rice said.
"We're very confident we'll get the financing done, and we see
no need to access the capital markets," Rice said.
-By Kelly Nolan, Dow Jones Newswires; 201-938-4049;
kelly.nolan@dowjones.com