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WIKI ANALYSIS
Royal Caribbean Cruises is the world's second largest cruise operator by number of ships, behind leader Carnival (CCL), which operated 88 ships. [1][2] Royal Caribbean operates 38 ships and has 92,300 berths to over 400 destinations, while carrying over 3.97 million passengers in 2009.[3] RCL operates its ships under the brand names Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Cruises, and CDF Croisières de France.[3]
RCL's total revenues were $5.9 billion in 2009 compared to total revenues of $6.5 billion in 2008. Financial results have been negatively affected by the economic environment including the high unemployment rates in certain markets. This challenging economic environment has strained consumer discretionary spending, which in turn has caused a diminished demand for cruises and tours to Mexico and the Caribbean.
Business Overview
Business & Financial Metrics
2010 Second Quarter Overview
For the second quarter of 2010, RCL's net income increased to $60.5 million compared to a net loss of $35.1 million.[4] Revenues also improved to $1.6 billion in the second quarter of 2010 compared to $1.3 billion in the second quarter of 2009, as a result of capacity increases and yield improvements.[4] For the six months ended this second quarter, RCL reported a $148 million net income, compared to a $71.3 million net loss. Almost all of this increase in net income is due to better economic outlook.[4]
On the costs side, operating expenses increased by 12.5% to $1.09 billion.[4] Despite this increase, operating costs were lower than expected due mainly to strong cost control, energy conservation measures, expense timing and currency fluctuations. With higher usage of the cruise ships come higher operating expenses, though in the case of RCL operating expenses grew by only 12.5% while revenue grew by 23%, the reason for the dramatic increase in net income.[4]
Like with other cruise companies, RCL hedges aggressively. The company's fuel consumption is 47% hedged for the third quarter of 2010. Forecasted consumption is now 48% hedged for the remainder of 2010, 55% hedged in 2011, 50% hedged in 2012 and 20% hedged in 2013.[4] Improved fuel consumption efforts resulted in the quarter's fuel expenditures being approximately $6 million better than previous calculations.[4]
RCL maintains optimistic forward guidance, citing stable economic environment and gradually increasing cruise ship demand.[4]
2010 First Quarter Overview
For the first quarter of 2010, RCL's net income increased to $87.4 million from a $36.2 million loss one year ago.[5] Revenues also improved to $1.5 billion from $1.3 billion in the previous year's quarter.[5]
The company had multiple surprises during the first quarter earnings season. Due to cheaper prices as a result of decreased fuel prices, demand for cruises jumped in comparison to expectations.[5] Due to this, the yield rate increased to 2.6%, well above the expected 2.0%.[5] The company provided better-than expected forward guidance as well, with full-year yield improvement of up to 6%.[5]
Decreased fuel prices and better-than-expected fuel hedging and fuelmanagement practices decreased net costs by 2.2%.[5] The company has currently hedged 50% of all its expected fuel expenses for the 2nd quarter.[5] Forecasted consumption is 48% hedged for the remainder of 2010, 53% hedged in 2011 and 40% hedged in 2012. With such high hedging ratios, the company is fairly secure against oil shocks.[5]
2009 Overview
The impact of the global recession was more significant in the first quarter of 2009 than in fiscal year 2008. Revenue fell by 7.24% to $1.325 million, but operating income fell 67.83% and net income dropped by 147.9%, as RCL had a $36 million loss.[6][6] This loss can be attributed to onboard and food expense increases of 6.00% and 9.41%, respectively, as well as an Amortization and Depreciation expense increase of 12.43%.[6]
While RCL was able to post operating income of $55.1 million, the company once again a net income loss in 2Q09--a $35.1 million loss compared net income of $84.7 million in 2Q08.[7] Despite a small increase in passenger cruise days of 1.8%, passengers carried fell by 5.3%, which led to a 14.8% fall in revenue for 2Q09.[7] RCL was able to cut back on cruise operating expenses by 11.5%; however, this was not enough to compensate for the comparably larger fall in revenue.
Amid fears of H1N1 Influenza and a global recession, Royal Caribbean's net income fell by 44.1% to $230 million in 3Q09.[8] By 4th quarter 2009, net income was $3.4 million despite a 7% reduction of non-fuel costs, and a 10.5% reduction of net cruise costs since 4th quarter of 2008. [1]
Business Segments
- Royal Caribbean International: The Royal Caribbean International segment offers cruise options that appeal to the widest market in RCL's brand portfolio, ranging from the contemporary to premium customer segments. With over 20 ships and 51,200 berths, the Royal Caribbean International segment offers various cruise lengths and destinations depending on the target segment.[9]
- Celebrity Cruises: Unlike the Royal Caribbean International segment, the Celebrity Cruises segment is geared only toward RCL's premium customers. This segment has 9 ships and 16,650 berths, and features options not offered in other segments, such as live grass.[9]
- Pullmantur: This segment exclusively services Latin American and Spanish markets, and with six ships and 8,650 berths, targets the contemporary customer segment.[9]
- Azamara Cruises: The Azamara Cruises segment features only 2 ships, and is intended to serve the luxury and premium customer base of RCL. The segment's first full year of operation was 2008, and it targets the North American, U.K., and German markets.[9]
- CDF Croisières de France: This segment specifically targets the French market and the contemporary customer base, and received its first ship, the Bleu de France, through a transfer from the Pullmantur segment.[9]
- TUI Cruises: The agreement to complete TUI Cruises, a joint venture with TUI AG in which RCL has a 51% stake, was reached in April 2008. The segment uses one ship, which it received from Celebrity Cruises, and will operate in the German contemporary and premium market.[9]
Trends & Forces
- Demand may contradict availability of Ships: A total of 27 new ships are on order for delivery through 2013 in the cruise industry, four of which are RCL ships.[10] The current worldwide economic environment has led to lower cruise prices and lower onboard purchases, all of which have adversely affected our revenues. The further growth in capacity from these new ships, without an increase in the cruise industry’s share of the vacation market, could further depress cruise prices and compound our ability to achieve yield improvement.
- Continued financial viability of travel agents. Most of the company's sales come from travel agents who arrange cruises on behalf of clients. The travel agency business is not necessarily what it used to be. Given the emergence of internet-based travel bookings and direct to consumer models of selling airline tickets, their business in general has declined.[10] Because the company depends on a broad base of going-concern travel agents, any prolonged slump or major consolidation in the travel agency business could adversely impact the company. Furthermore, if travel agents force the company to increase commissions in order that they compete successfully, the company can see major pressures on margins. The approximate 10% commissions offered to travel agents as an industry standard is one of the company's largest variable costs.
- Discretionary income and brand diversity. Cruise lines compete for the discretionary income of consumers. Cruises and vacations are discretionary purchases, luxury goods enjoyed only when income is available for spending after necessities are covered. Thus, the discretionary income levels of the company’s customer base can have a substantial effect on the company’s sales. Not surprisingly, the company operates in places like the United States and Western Europe, where the per capita discretionary income is on average higher than in many other countries. Royal Caribbean in particular offers somewhat more upscale cruises and may be even more exposed to luxury purchasers than competitor Carnival (CCL). Furthermore, RCL has fewer brands than Carnival (5 vs. CCL's 11). This provides fewer opportunities for price discrimination and demographic targeting, which could exacerbate the effect of changes in household incomes, economic activity, or consumer trends. Also, while the company continues to expand internationally, it has more modest international operations than Carnival (CCL), providing it with less exposure to some more rapidly growing markets. In short, RCL is less diversified than CCL.
- Aging baby boomers. As the baby boomers continue entering retirement, the company stands to benefit from the tailwinds of an increase in senior traffic, as it derives a large percentage of its income from passengers over 55. It is likely that seniors may continue to gravitate toward warmer-weather vacations. Coupled with the fact that retirement means more time to one’s self, and for many baby boomers, time to travel, the company has significant demographic tailwinds working in its favor.
- Rising oil prices and reliance on American business. Rising oil prices have important negative effects on the company. First, one of its largest inputs is fuels for its cruise liners, so unhedged increases that cannot be passed on to customers will have a negative impact on margins. Second, high oil prices lead to lower discretionary household income, which, as discussed previously, is an important driver for the company. The effects of rising oil prices may be worse for RCL than CCL because of the falling US dollar. RCL has fewer ships in Europe and does not have the same brand awareness and history of foreign operations market. Because the company relies more heavily on American passengers and because Americans have taken rising oil prices on the chin more than Europeans have, the company can feel the effects more than competitors.
Competition
The company competes against a number of smaller cruise line operators, and one significantly larger market leader.
Carnival (CCL): Carnival Cruises is the largest operator of vacation cruise ships in the world. With 81 cruise liners carrying over 7 million passengers worldwide in 2006, the company commands around 44% of the global cruise industry.] The company makes money from ticket sales as well as on-board revenue from gambling, shore excursions, bar revenues, and other amenities/[11]
While it does not enjoy the same magnitude of economies of scale that Carnival does, with the second largest number of ships and capacity, the company spreads much of its corporate overhead over a larger cruise liner base and has respectable margins, since it can do things like leverage size for more favorable purchases of on-board equipment and supplies. The company also competes against smaller competitors including Star Cruises (which operates Star Cruise Line and Norwegian Cruises) and Mediterranean Shipping Company (which operates MSC Cruises and Disney Cruise Line).
Footnotes
- ↑ 1.0 1.1 SeekingAlpha: RCL 4th Quarter 2009 Earnings Call
- ↑ 2008 CCL 10-K, pg. 3
- ↑ 3.0 3.1 Wikinvest SEC Files: RCL 2009 10-K, Item 1, Business
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 RCL Investor Relations: Second Quarter Earnings
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 2009 1st Quarter RCL Press Release
- ↑ 6.0 6.1 6.2 RCL 1Q09 10-Q, pg. 1
- ↑ 7.0 7.1 RCL 2Q09 10-Q
- ↑ RCL 2009 3Q 10-Q
- ↑ 9.0 9.1 9.2 9.3 9.4 9.5 RCL 2008 10-K, pg. 2-3
- ↑ 10.0 10.1 Wikinvest SEC Files: 2009 RCL 10-K, Item 1A, Risk Factors
- ↑ Wikinvest Stock Summary: CCL
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