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Company: Carnival (CCL)
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  Macroeconomic reasons; increased competition; inflexibility

CCL is 100% dependent on discretionary spending by its customers, both at time of ticket purchase and onboard.

Ticket purchase is a "big ticket" item, more than $1000 per person. Company's main market is over-55s. Over-55s are one of the population segments most affected by current macroeconomic conditions, as a large proportion of income or future income expectations comes from savings and retirement plans - savings income is massively down due to low interest rates and universally low investment yields; retirement plans are devastated by late-2008 market falls.

Passengers onboard in 2009 will have reduced income to spend for similar reasons.

Ticket sales in January 2009 reported to be low.

Company will have to discount (or competitively increase sales agent commissions) to keep making sales.

Some passengers will be persons who purchased heavily discounted last minute tickets, with correspondingly less disposable income to spend onboard (and in some cases behavioural issues causing negative experiences for other passengers - in the UK cruise market, P&O, one of CCL's brands, experienced problems like this in December 2008).

Even if company does not initiate discounting, major competitors (RCL and Star) are in a financially worse position, facing customers with similar falling disposal income, and so likely to have to discount tickets aggressively to maintain or gain market share.

All cruise companies' costs are mainly fixed (fixed number of berths) which leads easily to discounting mindset, as a berth sold for $1 is better than an empty berth. But discounting reduces perceived value of core product.

Costs are mainly fixed, in particular ships owned must continue to be operated, there is very little flexibility to 'idle' ships. If ships are operated then fuel costs are invariable regardless of number of berths sold.

Heavy capital investment in ships (including future ships to be purchased) inevitably has to be funded or part-funded by outside sources, despite company's stated intention to meet all capital costs from internally generated cashflow. Finance will be more costly in 2009 and beyond, noting also company's credit default swap (CDS) price is on a rising trend. Key point is that finance is secured on the capital assets (the ships). Capital value of ships must inevitably fall, like US housing market but more so, because there will be zero market for second-hand cruise ships - this will be especially a problem for CCL as if CCL is selling ships then who will buy (RCL etc will be in worse position). In March 2009 the bottom has dropped out of the second hand market for cargo ships; passenger ships will only be a question of time. These massive ships will end up being a huge 'white elephant'.

Airlines and hotel chains have been heavily marked down since mid-2008, yet CCL share price is still strong in mid-2009 (only approximately 20% down from its peak). CCL mid-term is in even worse position than airlines - airlines can easily cut costs by cutting routes (noting that airplane depreciation is mainly a question of hours flown, not age of airplane, so cutting routes also cuts depreciation). Cruise company, with massive capital investment in ships, does not have the same flexibility to cut routes.

CCL business model is built on steady passenger number growth, good operating margins. Both will be wiped out by macroeconomic conditions. Revised forecasts could come as soon as results announcements on March 24.

All IMHO, DYOR etc.

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