Carnival Corporation has announced record net income of $345 million, or $0.42 per share, on revenues of $2.40 billion for its first quarter ended Feb. 28, 2004, compared to net income $1.98 billion for its first quarter last year.

Carnival attributed the increase in earnings to stronger than expected pricing combined with a 15 percent increase in capacity which more than offset higher fuel costs.

The U.S. cruise brands are generating better returns due to a stronger economy, while the European brands are also doing well, they are seasonally weaker and yields were also impacted by the cancelled world cruise on the Aurora, according to Gerald Cahill, executive vice president and CFO. He said that occupancy was up 1.8 percent from last year and that yields - from both pricing and onboard spending - were up 5 percent over Q1 04.

"The new ships have enhanced opportunities to spend and a stronger economy is also driving onboard spending," Cahill noted. Food, repair and maintenance, however, are higher due to inflation, while fuel costs were up 23 percent compared to the average price in 2004. But costs were offset by reduced expenses at Cunard Line and economies of scale from increased capacity. Overall, costs are expected to be flat for the balance of the year, according to Cahill.

Capacity will be up 8.6 percent for the Carnival group in 2005 with the principal drivers being Carnival Cruise Lines with a 7.4 percent capacity increase; Princess Cruises, 17.  percent; and Princess Cruises, also 17.1 percent, according to Howard Frank, vice chairman and COO. "The demand picture is strong," he added. "We now have 12 percent less inventory to sell than we did this time last year, and yield is up in the 5 percent to 6 percent range."

For Q2, Frank commented that bookings are running six points ahead of last year and that pricing is nicely ahead too. Capacity will be up 6 percent year-over-year, he said.

"All the brands in North America are quite strong from a pricing point of view," Frank added. He expects a 6 percent to 7 percent yield increase in Q2.

For Q3, capacity will be up 5.7 percent and bookings are running 10.6 percent ahead and pricing is also nicely ahead, according to Frank, who said the North American brands are seeing extremely strong returns ands that Europe is positive too.

"Carnival is very strong in the Caribbean; Holland America Line is very strong in Alaska and Europe; and Princess is very strong in Alaska and Europe," Frank said.

"Q3 is our most important quarter of the year, and we are very encouraged," he added. For Q4, there will be an 8.5 percent capacity increase while occupancy is so far running 10.6 percent ahead year-over-year, Frank said,· with pricing also ahead of last year.

Frank said that pricing was up for all the brands for 05 except P&O Australia, which has added capacity, but still has good profitability, and Cunard, but he said that Cunard was more profitable than last year - even at lower rates because last year was impacted by promotional costs and higher operating expenses.

"All costs are under control except fuel," Frank added, who repeated Carnival's guidance of $2.70 net earnings per share in 2005.

While Asia is part of Carnival's expansion plans, Frank said: "When we make our move, we will be testing markets on a smaller scale rather than going in big time right away. Added Chairman and CEO Micky Arison: "We have already announced seasonal deployment of a P&O ship in the Singapore market."

As for future free cash flow, Cahill said Carnival expected to pay for new ships in 2005 through 2007 and still have free cash which could be used to pay down debt or return to shareholders. He said the company was leaning towards returning money to shareholders.

Road to Recovery?

On the subject of recovery, it is worth noting that while Carnival had net earnings of $28.69 per passenger per day in Q1 05, it posted net earnings of $47.67 per passenger, per day, in QI 00. The drop-off came in Q1 01 when earnings fell to $28.64 per passenger per day.

The Q 1 00 levels would translate into net earnings of more than $573 million, compared to the actual earnings of $345 million for Q1 05. In addition, net earnings should be further boosted by the increased onboard spending - in the range of double actual earnings.

That is the potential when and if industry earnings can get back on course.