Royal Caribbean Cruises (stock symbol: RCL) beat the street consensus of $1.58 by posting earnings per share of $1.63 for the third quarter ended Sept. 30, 2006, but was one penny less than last year's third quarter.

According to RCL, a pod bearing incident on the Infinity. fuel costs and the acquisition of Pullmantur Cruises pulled this year's earnings down by some $0.15 per share, while the redemption of RCL's interest in First Choice added $0.19 per share to last year's earnings. RCL reported net income of $345.5 million on revenues of $1.6 billion for Q3 this year, compared to net income of $374.7 million on revenues of $1.5 billion last year. Net yields were up 2.7 percent, driven by strong cruise pricing, according to RCL.

Q4 and Full Year

While Q4 has traditionally been a money-losing quarter for RCL, this year should be positive, posting net earnings in the range of $0.20 to $0.25 per share, according to Richard Fain, CEO and chairman.

He attributed the Q4 guidance to strong yield growth and lower costs due to a different expenditure pattern this year with marketing and drydocking costs concentrated in the first half of the year, but added that lengthening the shoulder seasons in Europe and Alaska has also been very successful for the company and helps Q4 as well. In addition, fuel costs peaked in Q4 last year, but are so far down this year.

" I f it had not been for the higher fuel costs, we would have been profitable in Q4 last year too," Fain said, but added that he was not prepared to say that Q4 will become permanently profitable.

RCL's full year guidance is for earnings in the range of $2.90 to $2.95 per share. Fain pointed out that RCL's guidance in February was from $2.90 to $3.15, and that the adjusted guidance was only $0.12 less, based on the mid-points of $3.04 and $2.93.

Meanwhile, two pod incidents aboard Celebrity Cruises ships, fuel costs and interest on the financing of the Pullmantur acquisition, have reduced earnings per share by about $0.40. Excluding these costs, earnings would have been $0.10 higher than the guidance given at the beginning of the year.

2007

Fain said he expected yield to be up in 2007 over 2006, which, he pointed out, would be the fifth straight year producing yield increases for RCL.

Next year looks healthy for all three brands, Royal Caribbean International, Celebrity and Pullmantur, according to Fain, who said that advance bookings are in line with what the company achieved at the same time last year.

Adam Goldstein, president of Royal Caribbean International, said he expects a strong winter for the brand in the Caribbean.

"Our Caribbean profile is pretty stable," he said, noting that for Q4 earnings will be driven by a combination of onboard revenue and ticket revenue. Goldstein admitted, however, that he is seeing some softness in the short Caribbean market and in the trans-Atlantic sailings, with ships returning from their European seasons.

"2007 is consistent with last year," Goldstein added. "We see some softness in Ql and then strong Q2, 3 and 4." He said that was not unreasonable given that the Caribbean represents more than 50 percent of Royal Caribbean's business.

"The absence of hurricanes (this year) and with all ports in good shape, bodes well for a good Caribbean season," he said.

Dan Hanrahan, president of Celebrity, stated that the brand has just concluded very successful European and Alaska seasons and that Q4 was shaping up nicely. His focus, meanwhile, continues to be on managing costs.

With the acquisition of Pullmantur scheduled to close this month, after receiving approval from the regulatory agencies in Spain and Portugal, the Spanish cruise line is expected to be accretive to RCL's earnings in 2007. The acquisition is a real boost to the company’s European capacity, according to Fain, who said it makes RCL (Pullmantur) the main player in Spain and Portugal.

"There are different ways to approach different markets," Fain explained. "In Europe, we can go approach the market with an international brand, such as Royal Caribbean; with a nationally targeted brand, such as Pullmantur or Island Cruises (U.K.); or a niche brand, such as Celebrity. "They are different, but they complement each other," he added.

Ship Swaps

RCL also announced that Celebrity's 1992-buUt 47,255-ton, 1,354-passenger Zenith will go to Pullmantur, while the 2000-buUt, 30,200-ton, 718- passenger Blue Dream (ex-R6) will move to Celebrity and be renamed Celebrity Journey.

The swap will benefit both brands. Fain said, allowing Celebrity to expand its Expedition product. After a month in drydock, the Journey will join Celebrity in April 2007, replacing the Zenith on the line's Bermuda program.

The drydocking will allow for maintenance and refurbishment work to be done as well as what Fain called providing nationally oriented amenities onboard.

Although having acquired Pullmantur, Fain pointed out that the Spanish brand will not have much of an impact on RCL's bottom line. It is too small, he said.

Hanrahan noted, however, that Celebrity's new addition will allow it to generate higher revenues on the Bermuda program and elsewhere than had been possible with the Zenith, thus making up for the lower passenger capacity of the Journey.

The Zenith will start sailing for Pullmantur in June, after a drydock, adding balconies, enlarging public spaces and customizing for Spanish guests.

For 2007, RCL said its capacity will be up 3.8 percent in Q l , 7.1 percent in Q2, 6.5 percent in Q3, and 2.5 percent in Q4, for a total of 5 percent for the year.

The second ship in the Freedom-class, the Liberty of the Seas will be joining the fleet in April 2007, adding 3,600 berths, and with the Zenith being swapped for the Blue Dream, the combined net addition will be 2,930 berths with an estimated annual net capacity of nearly 150,000 passengers.

Cost Management

According to CFO Louis Leon, non-fuel related costs were basically flat in Q3 year-over-year. And he expects costs to decrease by 4 percent in Q4, compared toQ3.

On the fuel side, Leon said that RCL was 40 percent hedged for 2007, and that the company is using more alternative fuels while also reducing its reliance on the more expensive marine gas oil MGO - for the gas turbines). In 2006, 30 percent of the fuel costs are due to MGO. This is expected to drop to 18 percent in 2007 and will continue to decline as a share of overall fuel costs, Leon added.

Brian Rice Named CFO

In related news, Leon is retiring, after only three years with RCL, and will be replaced by Brian Rice, executive vice president of revenue performance.

Stock Watch

After the Q3 earnings call, RCL dropped slightly to $40.50 from $40.55, compared to a 52-week highlow of $47.35-$32.47. The consensus 12-month price target is $45.09.