P&O Princess Cruises (POC) has reported net income of $208.8 million, or $0.30 per share, on revenues of $2.5 billion for the year ended Dec. 31, 2002, compared to net income of $286.3 million, or $0.55 per share, on revenues of $2.5 billion for the year ended Dec. 31, 2001.

Included in the 2002 results are extraordinary costs of $117 million related to the merger transactions with Carnival Corporation and Royal Caribbean Cruises (RCC) and the break-up fee to RCC.

Without the extraordinary cost, POC's net income would have been $325.8 million for 2002 compared to $286.3 million in 2001, a 14 percent increase in net income year over year, against a three percent increase in revenues.

Despite a 22.5 percent increase in berths, POC was able to lower its operating expenses 0.5 percent year-over-year.

POC reported 10,760,000 passenger cruise days for 2002, compared to 9,465,000 for 2001. The load factor was 100 percent for both years.


Looking forward, POC CEO Peter Ratcliffe said that "five weeks into the Wave Period, bookings have accelerated but not as much as we had expected." He attributed this to what he called the current geopolitical and economic uncertainties.

Speaking to financial analysts in a conference call, Ratcliffe said that Q1 2003 was mostly booked and that the slowdown seemed to affect Q2 bookings the most, especially the early part of Princess Cruises' European season.

Seven-day cruises in the Caribbean and Mexico will also require the company to generate more close-in bookings than would normally be the case for Princess, according to a prepared statement.

Overall, compared with 2002, Princess is in a good position with the proportion of capacity booked ahead of last year and with average yields significantly ahead, according to POC.

POC pointed out that the key Alaska summer trade was performing well.

In 2003, POC will have approximately 55 percent of its capacity in North America, 26 percent in the U.K., 15 percent in Germany and four percent in Australia, compared to 63 percent of its capacity in North America in 2002, 22 percent in the U.K., 10 percent in Germany, and five percent in Australia.

Ratcliffe noted that POC generates 70 percent of its profits in North America, that is, through its Princess brand, which in turn will have 25 percent of its capacity in the Caribbean, 20 percent on so-called exotic programs, 18.5 percent in Alaska, 17.5 percent in Europe, 12 percent in the Panama Canal, and seven percent in Mexico.

While the build-up in the British and German markets were intended to make the company less vulnerable to ups and down in the North American market, it is the rapid expansion in these new markets that is now pulling earnings down.

Ratcliffe said on Feb. 6 that Q2 was 65 percent booked and that Q3 was 45 percent booked.

Across the group, POC will have a 19 percent increase in capacity in 2003 and 21.5 percent in 2004.


According to POC, 2003 bookings for its two established brands in England, P&O Cruises and Swan Hellenic, have been below expectations, which the company said was probably due to the uncertain political and economic environment.

While cumulative bookings for the two brands are ahead compared to a year ago, the increase is not as much as the increase in capacity. Pricing is said to be in line with last year with some dilution expected in anticipation of the need to discount remaining capacity.

Bookings for the Ocean Village brand were said to be slow last year but have accelerated strongly in January, according to POC.

The German situation is similar, where the company will have grown its AIDA brand from one ship last year this time to three ships by April and also introduced the A'ROSA brand in 2002, with one ship so far. This expansion, combined with a weak German travel market, has put pressure on both pricing and occupancy this winter.

POC said that at this stage the proportion of capacity booked for the AIDA brand for the summer is below the position a year ago - particularly for those itineraries that include ports in the Eastern Mediterranean.

For the A'Rosa Blu, which was introduced last June, current bookings indicate that the ship is on track to show year-over-year improvement. The new brand struggled last year, however.

Ratcliffe also noted that long-distance flying had become an issue for Germans - who don't like to fly, he added.


POC said that the introduction of the new premium product Pacific Princess has gone well and that bookings for the new ship, and for the Pacific Sky product, are satisfactory.

Across the brands, POC said it was on course to increase yields by one to two percent for Q1 - based on significant increases in Princess' yields, offset by lower yields in the U.K. and Germany, while Q2 may not show similar yield recovery. POC said Princess is well­ positioned for Q3, which is also seasonally a stronger period in the U.K. and Germany. The year as a whole is dependent on how the current economic and political uncertainties develop.

Meanwhile, POC said further cost reductions are achievable but not at the pace recorded in 2001 and 2002. In addition, fuel prices and insurance premiums have gone up. Racliffe said, however, that the company was targeting a unit cost reduction of one to two percent before the merger with Carnival.


POC reported a net loss of $85.8 million, or $0.12 per share, on revenues of $570.6 million for the fourth quarter ended Dec. 31, 2002, compared to net income of $16.3 million, or $0.02 per share, on revenues of $485.3 million for the fourth quarter ended Dec. 31, 2001.

Q4 2002 also included the charge of $117 million related to the merger transaction costs, without which POC would have posted net income of $31.2 million, compared to $16.3 million for the same quarter in 200 l. POC reported 2, 731,000 passenger cruise days and a load factor of 97.9 percent for the fourth quarter of 2002, compared to 2,369,000 passenger cruise days and a load factor of 98.4 percent for the fourth quarter of 2001.

Ship Deliveries

POC has suffered setbacks in its delivery schedule with the fire aboard the Diamond Princess last year, which pushed her delivery back to 2004; the delayed delivery of the Coral Princess; and the recently announced eight-week delayed delivery of the Island Princess this year.

POC expects to receive $75 million in insurance proceeds and contract damages due to reduced trading days in 2003 because of the delayed deliveries of the Diamond and Island Princesses.

In total, five new ships and two new riverboats will be introduced over the next two years.