Carnival Corporation has reported record net income of $409 million, or $0.49 per share, on revenues of $2.52 billion for its second quarter ended May 31, 2005, compared to net income of $332 million, or $0.40 per share, on revenues of $2.26 billion for the same period last year.

The earnings increase was driven both by a 5.3 percent increase in capacity and 8.4 percent higher cruise net revenue yields (revenue per available berth days), which Carnival said more than offset higher fuel costs. The increase in net revenue yields was primarily attributed to higher ticket prices.

Looking Forward

Carnival reiterated its earnings guidance of $2.70 per share for the year, up 21 percent from last year, despite an estimated negative impact of $0.25 per share from the cancellations of cruises and repairs for the Aurora and the Pacific Sky and higher fuel costs at $249 per ton in 05 compared to $184 per ton in 04. Still, Gary Cahill, executive vice president and CFO, said that although fuel prices now represent 6.5 percent of revenues, they do not affect Carnival's business model.

In Q2, ticket yield was up 9.5 percent over last year and onboard spending grew 5.2 percent, according to Cahill, who also said that (ticket) pricing in North America has been much stronger than expected and that the U.K. and Germany have also been generating very good yields, although Southern Europe has been seeing some yield pressure.

Cahill noted that Carnival expects to pay for new ships and still have a free cash flow, but pointed out that despite having raised dividends twice in the last few months, the company also plans to be opportunistic and is not necessarily committed to returning more cash to shareholders.

Carnival Chairman and CEO Micky Arison said Carnival is working on a number of (newbuilding) projects for all the brands in order to meet his return hurdles, expressing some concerns that the Pinnacle Project (very large ships) may be too expensive.

While newbuildings will be considered on a brand by brand basis, Arison added that "potentially all the major brands will need new capacity after 2008."

Q3 and Q4

Carnival also expects yield increases for Q3 and Q4. With a 5.5 percent capacity increase year-over-year for Q3, Vice Chairman and COO Howard Frank said that occupancy is more than 100 percent booked and that it was mostly about "filling in spots here and there." He expects yields to be up 4.5 percent to 5.5 percent year-over-year.

Frank also noted that Princess Cruises and Holland America Line have achieved very strong pricing and bookings in Europe and Alaska with very little inventory left to sell. Carnival Cruises Lines, meanwhile, has some inventory left in the short cruise market, which Frank said typically book closer in. He added that Carnival is very strong in the sevenday market and that the Liberty's European program is virtually sold out.

The U.K. market is quite buoyant, according to Frank, who said pricing and bookings for P&O Cruises, SW AN Hellenic Cruises and Ocean Village are running well head of last year. In Germany, Aida Cruises is also performing well, with pricing and occupancy up year-over-year, according to Frank.

Costa Crociere, however, is having a somewhat mixed Q3, Frank said, with yields slightly down year-over-year, although against a 20 percent capacity increase and sluggish economies in Italy, France and Spain. Costa's winter programs in the Mediterranean also produce lower yield, added Cahill. Still, Costa is performing very well and is extremely profitable, Frank pointed out.

According to Cahill, Carnival derives 30 percent of its revenues from its European brands. For Q4, Carnival will have an 8.9 percent capacity increase and so far occupancy is up 5.5 percent over last year, with pricing considerably ahead, according to Frank.

Ql 06

Providing what he called directional indicators for 06, Frank said that occupancy is tracking well ahead of last year - 15 percent ahead in Europe and 7 percent ahead in North America. He said that pricing was up modestly in North America, but down a little bit in Europe, although he expects pricing to come up in
Europe too.

Booking Curve

According to Frank, with strong bookings and an extended booking curve, it has become necessary for the brands to release their 2006 brochures earlier to keep the booking momentum going.


While Carnival had promised to make a statement about its Asia plans by QI 05, that was pushed to Q2, and Frank said that he thought the company would have been in a position to make a statement, but that it has been more challenging doing business in that part of the world than he had expected. "We are continuing to work in different markets," he said. "As we go forward, we hope to be more specific in the second half of the year."

Q2 Notes

For Q2, while onboard spending was $570 million compared to $526 million last year, spending declined as a percentage of revenues to 22.6 percent, compared to 23.3 percent last year. Food costs were $151 million this year, compared to $137 million last year, or an estimated $8.82 per passenger and crew per day fleetwide in 2005, compared to an estimated $8.34 last year.

Six Months

Net income for the six months ended May 31, 2005, was $753 million, or $0.91 per share, on revenues of $4.92 billion, compared to net income of $535 million, or $0.66 per share on revenues of $4.24 billion for the same period in 2004.