Majestic Research

Bloomberg

Royal Caribbean Profit Falls as Fuel Crimps Growth

By Beth Jinks
Published: July 22, 2008

Royal Caribbean Cruises Ltd., the world’s second-largest cruise operator, said profit fell 34 percent in the second quarter because soaring fuel costs eroded gains from higher ticket prices.

Net income declined to $84.7 million, or 40 cents a share, Royal Caribbean said today in a statement. The Miami-based cruise operator said 2008 earnings would be lower than the full-year forecast it gave in April because of rising fuel costs.

The company will cut 400 jobs to help trim $125 million in annual spending. Royal Caribbean and larger Carnival Corp. countered higher fuel costs with passenger surcharges. Those fees aren’t enough to blunt bunker oil prices that surged 89 percent in the past year.

“Too much of our profitability is being eroded by the increase in fuel prices,’’ Chief Executive Officer Richard Fain said in the statement. “While our brands continue to attract premium prices even in this difficult environment, it is imperative that we find ways to reduce our costs.’’

Royal Caribbean fell $1.41 to $22.70 today in composite trading on the New York Stock Exchange before the Miami-based company released its results. The shares have plunged 47 percent this year, compared with a 20 percent drop at Carnival. Royal Caribbean had said it would release earnings early tomorrow.

Revenue Growth

Revenue rose 6.9 percent to $1.58 billion in the three months ended June 30, just below the average $1.59 billion predicted by 17 analysts surveyed by Bloomberg.

The average estimate of 22 analysts surveyed by Bloomberg was for profit excluding some one-time items of 41 cents. Royal Caribbean earned $128.7 million, or 60 cents a share, in the year-earlier quarter.

The average revenue per passenger per day, or net yield, gained 1 percent in the quarter based on results from its lines Royal Caribbean International, Celebrity Cruises, Pullmantur Cruises, Azamara Cruises and CDF Croisieres de France. Spanish brand Pullmantur was “weaker than expected,’’ the company said. The operator said yield will climb at least 3 percent in 2008.

“They’re still able to grow their net yields in this challenging consumer environment,’’ Matthew Jacob, an analyst with Majestic Research LLC in New York, said an interview today. Majestic doesn’t rate or own the stocks it researches. “It’s just the oil prices they have to contend with, and unfortunately it’s hard for them to have an answer to that.’’

Fuel Costs Rise

While hedging about half its fuel costs, Royal Caribbean said it spent $224 million on bunkers in the second quarter, 30 percent more than its projection of $172 million in April. Based on current oil prices, the company said it will pay $772 million for fuel this year, a 13 percent increase from an earlier estimate. It expects to spend $890 million in 2009.

Royal Caribbean predicted full-year earnings of $2.55 to $2.65 a share, lower than the $2.85 to $3 range it forecast in April. It projected third-quarter profit of $1.65 to $1.70.

“This forecast is virtually unchanged from that provided at the beginning of the year and at the end of the first quarter, except for the direct increase in fuel costs,’’ Fain, 60, said.

Analysts predict average 2008 profit excluding some items of $2.73 based on 26 estimates and third-quarter earnings of $1.70 based on 18 projections.

Royal Caribbean will pay about $15 million in restructuring charges in the third quarter.

Bunker fuel, used by ships, climbed 89 percent in Singapore in the past 12 months ended June 30, to $709.50 per metric ton from $375.50. Royal Caribbean buys contracts that lock in prices to reduce swings in costs.

Fuel Surcharges

The company raised fuel surcharges to $10 per traveler per day on Royal Caribbean International and Celebrity Cruises, and $15 for Azamara Cruises, from June 30. It had imposed a $5 fuel surcharge in November and increased it to $8 in April. The tariffs don’t fully recover this year’s increases, Chief Financial OfficerBrian Rice said April 24.

Carnival began charging North American cruise passengers $9 a day last month, from the $5 surcharge it had imposed since November. On June 19, the company said full-year earnings will be lower than it previously projected as onboard spending falls and higher fuel costs persist.

Royal Caribbean expects to base 30 percent of its ship capacity outside the U.S. next year, from 18 percent in 2008, Fain said June 18 in an interview.

Royal Caribbean has seven ships under construction. Presently, its 37 ships travel to about 380 destinations. Capacity will increase 5 percent in 2008, it said.