Royal Caribbean Cruises (RCL) reported net income of $84.7 million, or $0.40 per share, on revenues of $1.6 billion for the second quarter ended June 30, 2008, compared to net income of$128.7 million, or $0.60 per share, on revenues $1.5 billion for the same quarter last year.

Commented CEO and Chairman Richard Fain: "The current situation is rare - unlike anything we have seen before - still the industry is performing well. The two biggest issues are fuel and the economy." Fain said that higher fuel costs account for l 00 percent of the change in industry performance in 2008, and that if it had not been for the fuel costs, RCL would have beaten the forecasts. 

He added that despite the weak economy, the industry's strong performance demonstrates its resiliency and that bookings and pricing for the balance of 2008 and 2009 are holding up better than a year ago. The only weak spot is the Spanish market.

Changes

Nevertheless, earnings are down and Fain outlined the company's response as follows: Reducing energy consumption as much as possible; changing deployment and sourcing; cost reductions; and new ships that "will generate returns earlier classes of ships could only dream about."

On cost reductions, Fain said that the company has identified $125 million in possible savings, including the elimination of 400 shore-side positions. Earlier this year, RCL raised the sales bar for the maximum commission level travel agents can earn and began charging a fuel surcharge last fall.

As for deployment and sourcing, he said that nearly one third of the passengers are being sourced outside of North America in 2008, compared to only 13 percent only two years ago. Moreover, the passengers sourced from other markets tend to take longer cruises so they represent a higher percentage of revenues, Fain added.

Going forward, RCL's North American brands, Royal Caribbean International, Celebrity Cruises and Azamara Cruises , will see flat capacity growth in North America over the next several years, Fain said, adding that the growth will be outside the U.S.

Guidance

RCL' s earnings' guidance is from $1.65 to $1.70 per share for the third quarter (including charges of $0.07 per share from its restructuring efforts) and from $2.55 to $2.65 for the full year. (Last year, RCL posted earnings of $1.84 per share for the third quarter and $2.82 for the year.)

According to Executive Vice President and CFO Brian Rice, passenger capacity will be up 3.9 percent in the third quarter and 5.0 percent for the year.

Rice said that overall, demand was healthy; that the company has seen a strengthening of demand for the Caribbean; and that the European products were performing consistently, with the exception of Spain.

The booked load factor for the third quarter was nearly I 00 percent according to Rice, who said that the booking level for the fourth quarter was consistent with last year, with pricing ahead. For 2009, load factors and per diems were ahead for the full year, he said. 

While onboard spending is expected to be flat for 2008, compared to 2007, spending is still at historical levels, Fain added. In addition, there are different revenue streams, with shore excursions expected to generate more revenue during the third quarter.

When asked if any action has been taken with regard to the onboard art auctions following some critical press coverage, Adam Goldstein, president and CEO of the Royal Caribbean brand, said that the revenue stream (from the auctions) had weakened and the cruise line will be focusing on the concessionaire "operating properly and producing properly."

By Brand

On a brand basis, Goldstein said that the profitability of Royal Caribbean's newest ship, the Independence of the Seas, was "outstanding," and that the new Oasis compares favorably with a much higher ratio of balcony cabins and being 30 percent more energy efficient.

The cruise line is also evaluating all of its itineraries for fuel efficiencies, according to Goldstein, who said that such evaluations will be much more aggressive in the future.

Royal Caribbean will also deploy the Legend of the Seas in Asia, replacing the Rhapsody of the Seas, for the winter season, and year-round starting in the fall of 2009. The focus will be on local market sourcing, Goldstein said, especially in China.

Dan Hanrahan, president and CEO of Celebrity and Azamara, said that Alaska and the Caribbean were the drivers for the second quarter results. He also said that he expects to benefit from increased passenger sourcing in Europe and noted that Azamara had moved one of its ships from Bermuda to Europe, having both ships overseas.

The Panama Canal is also exceeding expectations, he added.

Meanwhile, the new Solstice is producing a ticket premium toward the end of the year and into next year, Hanrahan said. The new class of ships will also have 18 percent more retail space than the previous Celebrity ships. Hanrahan said he was seeing very positive signs for 2009.

In Spain, Pullmantur represents about 7 percent to 8 percent of RCL's cruise capacity, but also has a tour division which impacts earnings. The combination of cruise and tours are doing worse than expected, Rice said. RCL has $7 billion worth of ships on order over the next five years and some $200 million in annual maintenance expenses, according to Rice, who said that most of this will be funded from cash flow, but that the company also has back-up financing in place, including government guarantees. "In today's world we would be a lot more cautious looking at new orders," said Fain. "While we are holding up better. than expected, we are impacted by the economy."

Following RCL's announcement of cost cutting, its shares rose more than $4.00 to $26.74, but had declined somewhat at press time to $25.47. (During July, RCL's stock had dropped below $20.00.) Of the 400 jobs being eliminated, it has been reported that the actual layoffs are 300, with the other I 00 positions being vacant. Most of those being laid off are said to work in Miami and Broward. The company has an estimated 3,600 employees ashore.

Noted:

While RCL posted respectable net earnings for the second quarter, they dropped 8.7 percent from the same quarter last year and 36 percent on a per passenger cruise day basis. Revenues were up 6 .9 percent overall, and 3 .4 percent on a per passenger cruise day basis. However, that increase also includes revenue from the fuel surcharges that are included in ticket revenues.