Royal Caribbean Reports Higher 2Q Profit, Sees Softness in Eastern Med

Royal Caribbean Reports Higher 2Q Profit, Sees Softness in Eastern Med

Royal Caribbean Cruises Ltd. (RCCL) reported second quarter net income for 2011 was $93.5 million versus $53.7 million in 2010. Revenues improved to $1.8 billion in the second quarter of 2011 compared to $1.6 billion in the second quarter of 2010 as a result of capacity increases and yield improvements.

The company - which operates Royal Caribbean International, Celebrity Cruises, Pullmantur, Azamara Club Cruises, CDF Croisieres de France, and TUI Cruises through a 50 percent joint venture - said net yields for the second quarter of 2011 increased 3.8 percent, but would have been 9.8 percent if Mediterranean sailings were excluded. Costs in the second quarter of 2011 were virtually flat on a constant-currency basis and most expense categories performed better than expected. NCC excluding fuel increased 2.3 percent.

While RCCL said most of its product groups are performing at or above prior expectations, it said ongoing pressures from events in the Eastern Mediterranean have reduced constant-currency net yield expectations for the year by 150 basis points since April. Full year 2011 net yields are expected to increase approximately 5 percent. Excluding Mediterranean sailings, yields are expected to increase approximately 8 percent.

RCCL reported its second quarter 2011 results but also announced some revisions to its results because management identified an error in the previous accounting treatment of interest expense relating to its amortization of certain financing fees and has revised its past financial statements to reflect the correct accounting. Second quarter earnings per share (EPS) was 47 cents before the interest expense revision. After adjusting for the revision, the company reported earnings of 43 cents per share which is the midpoint of previous guidance range of 40 cents to 45 cents.

Excluding the interest expense revision, full year 2011 EPS guidance is now expected to be $3.05 to $3.15, reflecting a 10 cent reduction to prior guidance on continuing pricing softness for Eastern Mediterranean sailings, partially offset by strong cost savings. The Interest Expense Revision is forecasted to reduce 2011 EPS by 20 cents resulting in full year 2011 EPS guidance of $2.85 to $2.95.

According to RCCL, at-the-pump fuel pricing declines have lagged those of WTI (West Texas Intermediate) oil during the quarter resulting in second quarter fuel pricing very similar to earlier calculations at $599 per metric ton.

During the quarter and prior to the market declines in WTI pricing, the company monetized a portion of its WTI option portfolio thereby realizing a significant portion of the first quarter’s marked-to-market gains. As a result of these actions, the net marked-to-market valuation of fuel options was immaterial in the second quarter.

For the full year, RCCL expects net yields to improve approximately 5 percent on an as-reported basis and 2 percent to 3 percent on a constant-currency basis. For the third quarter, the company expects net yields to improve approximately 5 percent on an as-reported basis and 1 percent to 2 percent on a constant-currency basis. Excluding Mediterranean sailings, third quarter net yields are expected to increase approximately 11 percent (approximately 9 percent on a constant-currency basis).

RCCL said ongoing conflicts in the Eastern Mediterranean and a spillover effect continues to create hesitation around travel to the region. Some of this was already evident at the time of the company’s last guidance. But during the second quarter, the civil unrest in the Eastern Mediterranean expanded to other areas, including Syria and Greece, and the level of concern amongst travelers grew as tensions in the region dominated the headlines.  

RCCL noted that with the exception of the Eastern Mediterranean, it continues to observe strong demand for its products, especially the Caribbean, Alaska and Northern Europe. The company said the strength of this demand (both rate and volume) reinforces that Eastern Mediterranean pricing softness this summer appears to be geopolitically related and that the economic demand for company’s cruise products is strong.