European discounting hits RCL earnings

RCL cruise shipJULY 26, 2012 — Larger than anticipated discounting in Europe contributed to Royal Caribbean Cruises Ltd. (NYSE, OSE: RCL) today reporting a second quarter net loss  of $3.6 million), or $0.02 per share, versus net income of $93.5 million, or $0.43 per share, in 2011.  

The company said that business demand remains solid in the Caribbean and Asia, but that the discounting required in Europe had resulted in a one percentage point decline to the midpoint of the company's Constant-Currency Net Yield expectations for the year.  The company has been able to offset more than half of the yield declines through additional spending reductions.

"The steady drumbeat of negative news emanating out of Europe is certainly having an impact," said Richard D. Fain, chairman and chief executive officer.  "As a result, we are seeing pluses and minuses in the different geographical markets – North America is holding up reasonably well; Asia is a big plus; but Europe is a pretty consistent minus.  Overall we have seen about a 100 basis point drop in our yield projections, but we expect to offset over half of this decline with lower spending."

"It is hard to distinguish how much of the pressure in Europe is connected to the Costa Concordia incident and how much is due to the economic roller coaster," said Brian J. Rice, executive vice president and chief financial officer.   "Our sense is that the former is no longer having a major impact on our bookings especially amongst experienced guests.  However, the timing of the incident left a big gap during our peak booking period and filling that gap is disrupting our normal booking patterns."


Earnings Guidance

Taking into account current fuel pricing and currency exchange rates, and the factors detailed above, the company currently estimates 2012 earnings will be in the range of $1.70 to $1.80 per share.  For the third quarter it currently estimates that third quarter 2012 EPS will be within a range of $1.40 to $1.50.  

Fuel Expense

The company does not forecast fuel prices, and its fuel cost calculations are based on current at-the-pump prices, net of hedging impacts. Based on today's fuel prices the company has included $213 million and $899 million of fuel expense in its third quarter 2012 and full year 2012 guidance, respectively.

Forecasted consumption is now 58 per hedged via swaps for the remainder of 2012 and 54 percent, 38 percent,  22 percent and 7 percent hedged for 2013, 2014, 2015 and 2016, respectively.  For the same five-year period, the average cost per metric ton of the hedge portfolio is approximately $526, $568, $619, $595 and $582, respectively.

In addition to the fuel hedges, the company also has fuel options to further protect against escalating fuel prices.   The company currently has options expiring in 2013 at a strike price of $90 bbl that cover an estimated 9 percent of 2013 consumption.  The company says that, at today's bunker prices, its outstanding hedges (swaps and options) are "in the money" by about $70 million.

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