Carnival Corporation has reported net income of $380 million, or $0.46 per share, on revenues of 2.7 billion for its second quarter ended May 31, 2006, compared to net income of $388 million, or $0.47 per share, on revenues of $2.5 billion for tire second quarter last year.

Capacity was up 4.5 percent from last year and the occupancy rate was 105.4 percent, compared to 104.8 percent last year.

According to Carnival, Q2 earnings were down primarily due to higher fuel costs, along with price pressure in the short Caribbean cruise market.

For the six-month period. Carnival has reported net income of $631 million, or $0.77 per share, on revenues of $5.1 billion this year, compared to net income of $736 million, or $0.89 per share, on revenues of $4.8 billion last year.

Carnival's earnings forecast for the full year is in the range from $2.65 to $2.75 per share, compared to $2.70 last year.

Second Half
For Q3, occupancy and pricing are up in all the major markets, except the Caribbean, according to Carnival.

Howard Frank, vice chairman and COO said that Alaska is strong and that Holland America Line and Princess Cruises are doing particularly well in Europe, but that pricing for Carnival Cruise Lines are down in Europe year-over-year, which he attributed to the new Carnival Liberty being able to command premium pricing in her inaugural season last year.

For the European brands, Frank said occupancy is up, with solid pricing across the board. For Q4, pricing is holding up "nicely" for the European brands and for the North American brands in Europe and in the destination trades, but a softer Caribbean is driving down overall occupancy and pricing, Frank said.

Forty-two percent of the capacity of all the Carnival brands is in the Caribbean in 2006 and in 2007, according to Frank, including 12 percent in the short Caribbean market.

"We have not seen anything you would call weakness in any market except the Caribbean," said Frank, "but that does not mean you may not see tactical pricing in the fall."

Commented Micky Arison, Carnival chairman and CEO: "We must be careful not to over-react to temporary swings in demand. The short Caribbean market has been very good and there are only two players, us and Royal Caribbean (International).

"I would not give up on it yet. Besides, the short cruises on the Mexican Riviera are going gangbusters."

Onboard Spending
According to Arison, onboard spending is stronger aboard the North American brands than the European brands. "We are taking a number of different actions to increase onboard revenue department by department," added Gary Cahill, executive vice president and CFO, who said that the European brands are forecasting increased onboard revenue for the year.

Q1 07
For Q1 07, capacity will be up 8 percent year-over--ear, with occupancy so far down slightly in North America, but with pricing up, and occupancy considerable ahead in Europe, but with pricing down, according to Frank, who added that pricing was up overall.

Frank said that he expected "pricing to improve for the European brands as we get closer in on Q1 2007."

"The longer cruises and the world cruises, as well as Panama Canal cruises, are strong," Frank said. "The Caribbean is down, but not as much as this year, although it is still not robust. There is still a lot of business that needs to be booked for Q1, but it looks better than Q3 and Q4."

Changing Course
In 2007, Carnival will take delivery of four ships - two for North America and two for Europe. Out of 16 new ships presently under construction, 10 will be going to Carnival's European brands. And, by 2010, according to Frank, 36 percent of the company's capacity will be in Europe.

Arison also explained that the recent orders were part of ongoing arrangements with Meyer Werft and Fincantieri, with the Italian yard needing more time to design a prototype since the last multi-ship order was placed.

In the context of the different sizes of ships being built, Arison noted that each brand has a very different business model. "We are supporting Pier (Luigi Foschi, chairman and CEO of Costa Crociere)," he added, "and the size of his new ships (2,060 passengers) meets our hurdle (profit requirements)."

Company-wide. Carnival will have a 4.6 capacity increase in 2006, 8 percent in 2007, 8.4 percent in 2008 and 7.9 percent in 2009, with capital expenditures of $2.5 billion in 2006, $3.1 billion in 2007, $3.1 billion in 2008 and $2.8 billion in 2009.

Arison also said that Carnival has invested heavily in refurbishing existing ships, mentioning the Fantasy class and the Costa Victoria and Europa in particular.  "Product-wise we have consistently kept our ships very updated," he said, adding that his philosophy has not been to hype the ships as much as others (competing brands)."

"Our policy is to exceed passenger expectations by under-promising and over-delivering," Arison added.

China
According to Foschi, the brand's China operations are very encouraging.

"The July sailings are fully booked," he said, "and we are working on August. People tend to book holidays only 15 days in advance, so given that, we are already ahead of the average."

Frank said to keep in mind that Costa had a very late start-up with marketing and establishing call centers in China. "We are testing to see if we can get the demand going," he said. He would not comment on what kind of pricing Costa is achieving in the Chinese market.

"We do not go into anything we don't think will be successful," added Arison. "We will grow the China product eventually. We will be in a better position to talk about that a year from now."

This is early in the start-up phase and the ship will probably not be profitable, Arison said, adding that he is investing in the future. "It is very important to our company to invest and build a strong brand in China," he said.

Issues
Fuel prices are not the only issue the industry and Carnival face. They have also been working on an extension of the passport requirements for Caribbean cruises. "There is a lot of support (for an extension) on the hill," Arison said. "I do not know of anyone who is opposed. The problem is that nothing is getting passed there."

The objective is to postpone the passport requirement to June 2008.

Arison also mentioned the referendum in Alaska and said that it was very hard to get a handle on it and that it will have a very negative impact if passed (imposing higher taxes on cruise ships).

In Europe, meanwhile, Costa has been charging a fuel surcharge since May 29 of 10 euros per passenger on a seven-day cruise and 15 euros for longer cruises. So far, the charge is being added on cruises through November.

Overall, Carnival Corporation ships will consume 2.8 million metric tons of fuel in 2006, according to Cahill.

Work is also underway in Cozumel to clean up debris from Carnival's pier, which was totally destroyed, according to Arison. He said plans call for building a new pier similar to the one in the Turks and Caicos, which can withstand a Category 5 hurricane. According to the timetable, the new pier, designed for two ships, will be completed by mid 2008. In addition, the design will allow the pier to be extended if warranted.

As Carnival is said to bring more than 1.5 million cruise passengers to Cozumel, Arison noted that the company is working on projects to spread the risk in the future. One of the projects is underway in Roatan, Honduras, added Frank.

"Last year was unique (in terms of hurricanes); we lost a major embarkation port (New Orleans) and a major port of call (Cozumel). That has never happened before," Arison said.

With 10 percent of Carnival's passengers said to sail from Gulf Coast ports, Arison said that he expects Carnival to be back with two ships in New Orleans and noted that the Holiday is doing well from Mobile.

As for the new pier in Brooklyn, Carnival has had no negative reports, and Frank pointed out the good logistics offered by the location.

Comments
Commenting on Q2, Cahill cited the higher occupancy at primarily Costa as the driver of higher yield, but that Holland America and the smaller luxury brands were driving higher net yield in North America as well.

On the cost side, Cahill noted that fuel costs were up 43 percent from last year, or 4.6 percent per available cruise day, increasing unit operating costs by 5.25 percent.

Various initiatives on the operating side reduced fuel consumption in the quarter by 2 percent from last year, Cahill said.

Without further increases in fuel cost, Cahill said the cost estimate for the rest of the year would be from flat to down 2 to 3 percent.

Cahill noted that over the past 17 to 18 years, Carnival has basically had no growth in unit operating costs because of economies of scale, which, going forward, is going to continue keep costs down - even eliminating half of the impact of inflation.

Cost efficiencies have been gained in back office procedures in North America and from efficiencies in Europe.

Corporate cost containment efforts include benchmarking, whereby certain activities are compared between the different brands, such as embarkation costs or fuel consumption.

Said Frank: "We are looking for every nickel we can find. We have a group that goes around just benchmarking."

Another area is procurement where gains have been made, especially by consolidating technical purchasing.

Added Arison: "Despite reducing costs, the brands have also significantly improved their products over the past three years." He cited Holland America's Signature of Excellence program and new bedding aboard the Carnival ships.

Direct bookings
Direct bookings is not a big contributor to profits, according to Arison, who said that direct bookings are not necessarily a cheaper way of doing business than taking bookings from agents, since they require additional infrastructure.

But there is no question in his mind that Internet bookings are more efficient. He said that the company is seeing strong growth in internet bookings in Europe and particularly in Germany.

Meanwhile, Arison intends to continue to strengthen and support the travel agency distribution system.

Return to Shareholders
Carnival has just nearly completed its $1 billion share buy-back program, having spent $967 million so far, and its board has approved a second $1 billion share buy-back.

"Our objective is to return excess cash to shareholders through dividends or share buy-backs," said Cahill.

Carnival's shares rose $2.20 immediately following the second quarter conference call on June 16 to $40.19. The average 52-week price target is $56.88. 

Noted
According to Carnival's report, each passenger spent $1,182.67 on his or her ticket fare and $351.28 in onboard spending in Q2 06, compared to $1,128.08 on the ticket and $335.51 onboard in 2005, for a 4.8 percent increase in fare and a 4.7 percent increase in onboard spending year-over-year.

In 2006, tickets were 76 percent of total revenues, onboard spending 22.5 percent and "other" 1.5 percent. In 2005, the corresponding figures were 75.5 percent, 22.5 percent and 2 percent.