May 20, 2003
Tough quarter for Star Cruises
Compared with the quarter ended March 31, 2002, Star's group capacity increased by 9.5% from 2,088,942 to 2,286,507 capacity days and revenue increased by 11.9% from US$ 368.0 million to US$ 412.0 million. But EBITDA decreased by 6.2% from US$ 74.0 million to US$ 69.5 million and operating Income fell by 27.7% from US$ 35.8 million to US$ 25.9 million.
The quarter's net loss of $ 2.2 million compared with a net income of US$ 6.3 million for the same quarter last year, when net income had included a charge of US$5.9 million in connection with the refinancing of a 5-year syndicated debt.
Net yield, defined as net revenue per capacity day after deducting such costs as commissions, air tickets and other direct costs was 2.3% higher.
During the first quarter of 2003, excluding fuel costs, the combined ship operating expenses and SG&A expenses per capacity day was 3.6% up as compared with the same period in 2002.
This increase was primarily due to increased environmental and security expenses.
In addition, shore costs per capacity day for this quarter were also slightly higher as compared with the same quarter in 2002 due mainly to expansion in the new China market from the second half of 2002.
Fuel costs were up by approximately 60% on a per capacity day basis and this sizeable increase over the first quarter of 2002 was responsible for approximately $11.1 million in negative variance to last year's first quarter result.
Star Cruises (excluding NCL)
Star Cruises (excluding its NCL unit) operated with 4.9% higher capacity as compared with the same quarter in 2002. Net yield was essentially the same as first quarter2002. Total ship operating expenses and SG&A expenses excluding fuel costs increased 8.5% as compared with the same period in 2002. Fuel costs were up by approximately 50% on a per capacity day basis accounting for approximately US$2.7 million in negative variance from last year's first quarter.
The results in Asia Pacific were affected by passenger cancellations and greatly reduced forward bookings as a consequence of the outbreak of Severe Acute Respiratory Syndrome ("SARS") especially in the core markets of Hong Kong and Singapore where SuperStar Leo and SuperStar Virgo were hubbed respectively.
These two ships were temporarily redeployed to Australia in April for one to three months. The strong bookings to-date in Australia have been "encouraging," says Star. Meanwhile, its "continuing focus on cost reduction will be further heightened."
Star says the SARS crisis continues to impact negatively the profitability of the Group in the second quarter.
However, with the disease slowly coming under control in Hong Kong and Singapore, it is expected that the two core markets will slowly return after the second quarter. "Our experience in Australia with the SuperStar Leo and SuperStar Virgo opens another market for the Group for a possible seasonal deployment there in the future," notes Star, which says he situation it is facing in the Asia Pacific region is "unprecedented but manageable."
For the first quarter ended March 31, 2003, NCL Group recorded an increase of 11.3% in capacity days compared to the first quarter ended March 31, 2002. This increase was due primarily to the introduction of the purpose built "Freestyle Cruising" ship Norwegian Dawn. There was also a negative impact on available capacity days of two major scheduled dry docks on Norwegian Sea and Crown Odyssey. 2003-first quarter net yield was higher by 3.6% from the first quarter in 2002. The NCL brand net yield was actually up slightly higher than this and the Orient Lines net revenue yield was unchanged from a year ago.
During first quarter of 2003, excluding fuel costs, total ship operating expenses and SG&A expenses were up slightly by 1.7% on a per capacity day basis as compared with the same period in 2002.
In large part this was due to the timing of advertising and promotion activities for Norwegian Dawn, with the NCL brand returning to television advertising (in the New York metropolitan market) for the first time in several years.
Fuel costs were up by over 60% on a per capacity day basis and this sizeable increase over first quarter of 2002 was responsible for approximately US$8.4 million in negative variance to last year's first quarter result. Accordingly, and in spite of a healthy increase in net yield in difficult circumstances, the NCL Group's EBITDA remained unchanged over last year on an absolute basis and just over 10% down on a per capacity day basis.
The number of bookings taken during the first quarter exceeded the number taken during Q1 last year, but not by as much as capacity is increasing for the year. Consequently the booked load factor at the end of the first quarter for Q2 onwards was significantly down on the position at the end of Q1 last year. Average booked per diems also declined significantly throughout the first quarter, with the forward impact being most pronounced in Q2.
"Since the end of hostilities in Iraq." says Star," there appears to have been a rebound in consumer willingness to book a cruise and the booking volumes during the latter part of April and the first two weeks of May have been well ahead of the same time last year. Pricing remains a challenge though there are some signs of stability returning."
Regarding SARS, extensive preventative measures have been put in place by NCL, in common with the rest of the North American cruise industry. The US Center for Disease Control (CDC) has been highly pro-active in seeking to contain any incidence of possible SARS and to prevent the spread of the virus into the US. The impact of the SARS crisis has been minimal on NCL's North American business as compared to Star's Asian business. The media focus on SARS generally has certainly had a depressing effect on the public's tendency to feel positive about the future and to make forward-looking vacation plans. However, no redeployment has been necessary and NCL's concentration on its Homeland Cruising program has been timely in this respect. So too has the Homeland deployment been helpful in a geopolitical climate in which North Americans are more reluctant to travel overseas for vacations.
Star notes that during the first quarter, Congress enacted legislation permitting NCL to embark upon a course of action that will lead to the company operating three modern cruise ships under US flag in coastwise trades (i.e. no requirement for foreign port calls) in Hawaii.
In a related development, and with a view to expanding our eventual US flag operations beyond Hawaii and beyond the three ships provided for by Congress, the Group recently purchased two documented US passenger ships, the s/s United States and the s/s Independence. The intention with these two old passenger liners is to convert them to modern cruise ships in a combination of US and European shipyards in a way that is more feasible, technically and economically, than building new cruise ships in their entirety in US shipyards.
The timing of such a major conversion project is under study but the Group remains focused in the immediate term on completing the first Project America ship now under construction in Germany and successfully introducing it and the re-flagged Norwegian Sky to Hawaii next year.
NCL today announced that Project America 1 will be named "Pride of America", reflecting the "Best of America" theme on board. The line's second Project America ship, currently sailing as Norwegian Sky, will be reflagged into the U.S. registry, and will be renamed, "Pride of Aloha" reflecting the strong Hawaii theme to be incorporated during a complete refurbishment in September 2004. The ships will sail under the company's new U.S. Flag brand--NCL America--with 100 percent U.S. officers and crew.