Royal Caribbean Cruises (RCC) is maintaining its earnings guidance for the year in the range from $3.05 to $3.20 per share, but posted what may be its lowest net income for Q1 ever at $8.8 million, or $0.04 per share, on revenues of $1.2 billion, compared to net income of$119.5 million, or $0.55 per share, on revenues of $1.1 billion for the first quarter of 2006.

Changes

According to RCC, the acquisition of Pullmantur. and other changes caused significant changes in the seasonality of the company's earnings. RCC stated that "these changes make comparisons between quarters less meaningful but have little impact on the profitability of the year as a whole."

Pullmantur's business is highly seasonal with very strong summer months and weak winter months, according to RCC. In addition, Pullmantur is reported with a two month lag and is thus expected to also have a negative impact in Q2, but is then expected to contribute positively in Q3 and Q4.

RCC's guidance for Q2 is in the range of $0.59 to $0.63, compared to actual earnings per share of $0.57 last year and $0.7 2 in 2005.

But Pullmantur is small compared to the company's other two brands, Royal Caribbean  International and Celebrity Cruises, which were impacted by the demand environment in the Caribbean, which the company said had been weaker than expected.

According to Brian Rice, CFO, who spoke on the company's Q1 conference call, half of the drop in net income from last year's Q1 was due to a legal settlement and Pullmantur.

Disappointing Caribbean

As the Caribbean proved to be disappointing, the company responded with discounting, said Rice, who added that the market got increasingly worse in the lower price categories, and that onboard spending was similarly affected. He said there is continued weakness among price conscious consumers.

In the summer, however, the company's targets shift to less price-conscious consumers with its cruises in Alaska and Europe.

And for Q4 and next QI (2008), advance bookings are very promising, according to Rice.

Rice said that bookings and pricing were both ahead of the same time last year.

The outlook is promising, but still challenging, commented Adam Goldstein, President of the Royal Caribbean brand.

He said that Europe is strong and that passenger sourcing is up considerably year-over-year. Alaska is solid, according to Goldstein, but not as strong as Europe.

Added Dan Hanrahan, president of Celebrity: "The pricing environment was challenging in QI, but Europe is very encouraging, and we -expect strong results. Our cost control initiatives are also paying off without reducing our marketing or impacting guest. satisfaction levels."

Hanrahan said that the installation of a diesel engine on each of the gas turbine powered ships would produce annual fuel savings of $4 million to $6 million per ship. The diesel engine will support the hotel department.

Other initiatives such as new hull paints and operating procedures have led to further savings.

RCC would not provide a specific guidance for Q3, but expects "a very strong quarter," Rice said.

Longer Term

"Our growth has been steady but not linear," said Richard Fain, CEO and Chairman of RCC. "We will continue to grow and be solid and global," he added.

"We can work with international brands and national brands; both strategies work." He used the U.K. as an example, where Island Cruises is a joint venture between RCC and First Choice Holidays, targeting a lower-price point market, but where Royal Caribbean is also dedicating ships to the local markets.

According to Fain, RCC has experienced an average annual growth rate of 29 percent per year in U.K. passenger sourcing since 2000.

Looking forward, Fain pointed out that from 2005 to 2008, the share of the company's capacity in the Caribbean stays relatively flat, while it is growing its capacity in Europe and so-called new markets.

In 2008, RCC will have 48 percent of its total cruise capacity in the Caribbean, down IO percent from 2005, according to Fain. Europe will have 24 percent of the total capacity, up 13 percent since 2005 (but includes Pullmantur). So-called other markets will have 22 percent, down 8 percent, and new markets will have 5 percent, up 5 percent from 2005.

Goldstein added that there may be new opportunities to develop markets, such as the Royal Caribbean ship slated to sail from the Dominican Republic this winter, dedicated to sourcing passengers from the U .K.

RCC also pointed out by "swapping hardware" the company is gaining the best match for each of its brands, referring to the ship transfers between Royal Caribbean, Celebrity and Pullmantur.

And the new, big ships have more flexibility than was previously thought, according to Fain, who suggested that the new Genesis class may not be deployed exclusively in the Caribbean.

Revenue Points

F OJ: Q 1 this year, the average ticket revenue per passenger per day was $144.35, down from $151.10 last year.

Onboard and so-called other revenue was $58.49 per passenger per day for Q l this year, up from $54.58 for the same period last year.

The long-term trend in onboard spending has been upwards, according to Goldstein, who said the trend has been consistent, and he sees no reason why it should not continue. "If there is any sensitivity to onboard revenue, it comes from the same stateroom inventory that spends less on tickets," Goldstein noted.

Capacity Growth

With the addition of Pullmantur, RCC will have a 12.2 percent capacity increase in 2007.

The company's cruise capacity will continue to grow with 8.4 percent in 2008, 7.5 percent in 2009, 11.7 percent in 2010, and 5.8 percent in 2011.

According to RCC, the available passenger cruise days will be 25.1 million in 2007, compared to 23.8 million in 2006, and are further estimated at 27 .2 million in 2008, 29.2 million 2009, 32.6 million in 2010 and 34.5 million in 2011.

Bottom Line

RCC may be on a steady growth course and be building for the future. But in the short term QI was simple: costs increased much more than revenue, despite all the cost savings initiatives. Hence, earnings suffered. And the while guidance for 2007 is above 2006, it less than the $3.26 earned in 2005.

Based on RCC's forward guidance for Q2, from $0.59 to $0.63, up from $0.57 last year, and for the year as a whole from $3.05 to $3.20, the company would need Q3 earnings of more than $2.00 per share, compared to $1.63 last year, and a doubling of its Q4 earnings, from $0.22 last year, to $0.44 or better.

The key will be strong Europe and Alaska markets as well as a stabilization or recovery in the Caribbean.