Deviating from its expected record-setting earnings course, last week Carnivals Corporation posted lower net income for the first quarter of this year compared to last year, citing increased fuel costs, and reported that bookings and pricing have been slightly below last year since February. The slowdown is more Caribbean- than seasonal market-oriented, however, according to Carnival, which said that with the exception of the Caribbean, other markets are performing well.

For the full year Carnival said in its quarterly conference call that it expects earnings per share of $2.90 to $3.00, down from its previous guidance of $3.00 to $3.10. Carnival later issued a statement saying that earnings were expected to be negatively impacted in the range of $0.04 to $0.05 due to the cancelled cruises and repairs of the fire-damaged Star Princess.

Ql

Carnival reported net income of $280 million, or $0.34 per share, on revenues of $2.5 billion for Ql 2006, compared to net income of $345 million, or $0.42 per share, on revenues of $2.4 billion for 2005.

Ql 2006 earnings were reduced by $0.02 per share due to a non-cruise investment write-down and a litigation reserve, according to Carnival. Higher fuel costs amounted to $82 million due to a 63 percent increase in prices year-over-year.

According to Carnival, Ql 2006 revenues were up approximately 3 percent, in line with the company's capacity growth during the quarter. But that also means that pricing and onboard spending must have remained flat compared to last year.

Q2

For the second quarter. Carnival expects net revenue yields to be flat to up slightly, compared to last year, and forecasted earnings per share to be approximately $0.48 to $0.50, before announcing the $0.04 to $0.05 per share impact of the Star Princess. Last year, Carnival posted earnings of $0.49 per share. With a 5.7 percent increase in capacity over last year, pricing in North America is up year-over-year, while slightly down in Europe, but up overall.

Q3 and 4

Capacity will be up 5.1 percent in Q3, with load factors so far up 10.4 percent in Europe, but down 5 percent in North America. Alaska and Europe bookings are particularly strong, according to Carnival.

The Caribbean, however, is weaker, year-over-year, which Carnival Chairman and CEO Micky Arison attributed to the impact of last year's hurricanes which put New Orleans, out of service, as well as caused significant damage in Cozumel, a major port of call on Western Caribbean itineraries.

And, while the Caribbean is a principal sailing region for the company, and is expected to continue to be so, the percentage of Carnival’s cruise capacity devoted to the Caribbean has slowly been declining and will continue to decline, said Arison. The main issue is that there are not enough quality ports in the Caribbean, he said. Howard Frank, vice chairman and COO, added that the company is looking for new destinations, new ports and new experiences for passengers in the Caribbean.

Carnival also stated that it is taking longer than anticipated to absorb the three ships, which were charted to Federal Emergency Management Agency, back into service. Capacity will be up 5.7 percent in Q4, with load factors in North America so far running behind last year, but ahead in Europe, according to Frank.

He said it is the softer Caribbean market that is responsible for the lower load factors in North America. Arison added that all the brands are performing very well outside of the Caribbean.

Year 2006

Looking forward, Arison said in a prepared statement that the company's cumulative advance bookings for the last nine months of 2006 are in a solid position, with both occupancy and pricing up slightly over comparable levels last year. Overall pricing is nicely ahead of last year, commented Frank, who noted that North American pricing is well ahead of last year, while in Europe, pricing is slightly below last year, but load factors are well ahead.

"Although this year's wave season may not have been as protracted as the 2005 wave, our bookings for the year are in good shape, and we expect to see positive yield growth for the year," Arison said.

The wave periods over the last couple of years have been very protracted, according to Arison, who said that this has not been true historically. Thus, in 2006, the wave period retuned to a more traditional booking pattern.

Onboard revenue growth has also slowed down, which Gary Cahill, executive vice president and CFO, said was expected. He said Carnival did not believe the previous rate of onboard revenue growth was sustainable over the long term.

Revenues are also expected to be impacted by the 0M2 going into drydock for pod repairs, since the ship generates higher per diems than the rest of the fleet. Reported after the call are also possible pod problems on the Sensation.

In addition, the lower end of the cruise market seems to be impacted more, according to Carnival, whose executives attributed that to the effect of increased fuel prices (home heating oil and gasoline) and lower consumer confidence.

Carnival expects net revenue yields for the last nine months of 2006 to increase 1 percent to 2 percent compared to last year. Net cruise costs, including fuel, are expected to be flat to down slightly.

Earnings per share for the full year 2006 are forecasted by Carnival to be from $2.90 to $3.00, before the impact of the Star Princess. Carnival's shares were listed as high as $50.10 on March 22, the day of the earnings announcement, but dropped to $48.80 the following day and then to $48.05. At press time, Carnival was listed at $47.33. The 52-week low/high has been $45.78/$56.14. The average 12-month forecast is $59.82.