Royal Caribbean Cruises (RCC) has reported net income of $53.2 million, or $0.27 per share, on revenues of $880.2 million for the first quarter ended March 31, 2003, compared to net income of $52.8 million, or $0.27 per share, on revenues of $800.0 million for the first quarter of 2002.

RCC said the increase in revenue was primarily due to an 11.5 percent increase in capacity, but also increased ticket prices and increased shipboard revenues, partially offset by fewer passengers booking airline tickets with the company.

RCC reported 4,743,164 passenger cruise days and a load factor of 101.7 percent for the first quarter of 2003, compared to 4,344,802 passenger cruise days and a load factor of 103.9 percent last year.

Looking Forward

According to RCC, the war with Iraq and economic uncertainty continue to have a negative impact on bookings, especially for the second quarter.

RCC stated that while it had seen strong bookings through late 2002, it started to see a slowdown in December, which became more pronounced as the war approached. This trend continued through the war. As a result, RCC anticipated that net yields for Q2 would be down in the range of six percent to nine percent.

Explained RCC Chairman Richard Fain: "The war was short, but had a long lead-in, which disturbed people, while coinciding with our main booking period."

Fain compared the war with Iraq to the events of 9/11, and said that while 9/11 had been more significant and more dramatic, they occurred at the beginning of what has traditionally been a slow booking period.

He said that RCC had seen a dramatic decline in bookings at the beginning of the war, but that bookings had started to pick up as the war came to an end.

"The Wave Period was slower," added Jack Williams, president of Royal Caribbean International (RCI) and Celebrity Cruises. "For the last 16 weeks we have seen a drop in demand and pricing, compared to previous years." 

"The next few weeks will be critical," Williams continued, noting that the company is seeing some rebound of its summer sailings in Europe. If American­ sourced passengers do not materialize, Williams said that passengers would instead be sourced in Europe where the company bas a strong sales organization. especially in the U.K.

2003 Deployment

Williams outlined RCC's major sailing areas in 2003 as follows:

The two brands have 42 percent of their capacity in the seven-day Caribbean market, up 17 percent from 2002. But bookings and pricing are running behind last year's, according to Williams.

Thirteen percent of the capacity is in the short­ Caribbean market, down nine percent year-over-year, while bookings and pricing are also down.

Eight percent of the capacity is in the long­ Caribbean market, with no change in capacity, and with pricing flat year-over-year, but bookings down, according to Williams.

Seven percent is in Alaska, with the capacity there up five percent year-over-year, and load factors are "well behind what we saw last year, but we sold too fast last year," Williams said. "This year, pricing is up," be pointed out.

RCC has not boosted its capacity to Bermuda, which represents four percent of its overall deployment, and "load factors are significantly behind last year and pricing is down too," according to Williams.

Pricing is ahead but bookings are behind in Panama Canal cruises, which represent four percent of capacity. With year-over-year capacity in Europe up 88 percent, load factors there are behind last year. European cruises account for eight percent of RCC's capacity in 2003.

"With the outbreak of the war with Iraq, bookings stopped," Williams said.

"It is difficult to say how much of the impact is due to the war and/or the weakening of the economy," be added. "But we saw strong bookings before the talk about the war started."

There have been no deployment changes since the war started, and RCC does not plan to make any changes, according to Fain.

"We can turn on sales and marketing in Europe pretty quickly," Williams explained, adding that the decision to turn it on or not will be based on the demand and pricing the company is getting elsewhere (presumably the United States).

The original plan for the European cruises called for sourcing 30 percent of the passengers in Europe and 70 percent from North America.

The balance of RCC's capacity, six percent, is deployed in Mexican Riviera cruises and on repositioning cruises, according to Williams, who did not comment on bookings or pricing on these sailings.

Continued Fleet Expansion

After RCI introduces the Serenade of the Seas and the Mariner of the Seas this year, and the Jewel of the Seas next year, the company has no more ships on order for the first time in recent memory, although there are two options with Meyer Werft available through September 2003. These have already been postponed twice and if they were to be exercised, new ships could not be delivered before 2006, according to RCC.

Meanwhile, RCC will grow its capacity as measured in passenger cruise days by 16 percent in Q2, 10 percent in Q3 and 12 percent in Q4 for a total of 12 percent in 2003, and 11 percent in 2004.

Whatever may be in the pipeline, Fain would only say that the company is considering alternatives (in terms of new ships) but that they "do not like to talk about newbuildings before orders are actually placed."

Issues

"We may deny boarding to people who come from suspected areas of SARS," Fain said. So far this bas only applied to a handful of people.

"We are doing some screening with passengers from Toronto right now," added Williams. Booking trends continue to be relatively close in with 40 percent within 90 days, showing tendencies to move to 60 days, according to Williams.

The big question, said Williams, is how much (decline in bookings and pricing) is due to the war and how much is due to the economy.

"How well we did before the war demonstrates that we have a large upside," Williams added.

Stock Watch

With earnings per share of $0.27 for Q1, RCC beat the consensus of $0.21. However, its net earnings on a per-passenger-cruise-day basis were the lowest reported for Q1 since RCC went public in 1993.

Based on RCC guiding the balance of the year lower, analysts' earnings estimates for the year range from $1.37 to $1.65 per share, with 2004 estimates from $1.84 to $2.05.

For 2004, analysts are assuming economic recovery, improved pricing, load factors as high as 104 percent, and a lack of all the negative issues that have affected the industry in 2002 and 2003.

Twelve-month price targets· for RCC's shares range from $20 to $24. At press time RCC traded for $16.88, compared to a 52-week high/low of $24.38/$12.42.