Carnival Corporation has reported net income of $734.3 million, or $0.90 per share, on revenues of $2.52 billion for its third quarter ended August 31, 2003, compared to net income of $500.8 million, or 0.85 per share, on revenues of $1.44 billion for the same quarter in 2002.

The financial results for the third quarter include P&O Princess Cruises, which was acquired by Carnival in April. Thus, the consolidated revenues for Q3 increased by $1.08 billion compared to last year. The increase was attributed to $909 million from P&O Princess (now known as Carnival PLC) and a 19.6 percent increase in Carnival Corporation stand-alone capacity, partially offset by lower ticket prices, particularly for bookings taken early in the year for Q3. Later bookings came at higher prices.

Carnival also attributed lower revenue yields to the lower overall yield of the Carnival plc brands.

Fuel and insurance expenses were also up in Q3 2003 compared to 2002, although some costs were offset from the scale of the new combined company.


Commented Micky Arison, Carnival chairman and CEO: "We were very encouraged by the strong rebound of our business shortly after the conclusion of the Iraqi war, although ticket prices during this year's third quarter were somewhat lower than last year."

Arison also said that the company was well into the process of optimizing cost savings and has already launched several new initiatives to improve asset utilization in its effort to achieve higher returns. He referred to the Jubilee moving to P&O Cruises, and becoming the Pacific Sun, and the shutting down of A'Rosa Cruises, transferring the A'Rosa Blu to Aida Cruises.

The company also launched four new ships in the third quarter: the Costa Mediterranea, the Island Princess, the Carnival Glory, and the Oosterdam.

For 2004, Carnival will be introducing seven new ships across five brands.  

"We are looking at 2004 with great anticipation and optimism," said Howard Frank, vice chairman and COO, but also cautioned that the surge in bookings was the result of discounting, and that the seasonality of the business (of the new combined company) was greater with more ships coming back to the Caribbean.

Carnival's capacity will be up 17.6 percent in 2004 compared to 2003 - with 17 percent in Q1, 22 percent in Q2, 18.3 percent in Q3 and 13.4 percent in Q4 - and 8.8 percent in 2005.

The new ships are the QM2 for Cunard Line the Carnival Miracle for Carnival Cruise Lines, the Diamond Princess, Caribbean Princess, and Sapphire Princess for Princess Cruises; the Westerdam for Holland America Line (HAL) and the Magica for Costa Crociere.

European Perspective

In Europe, Carnival will grow its capacity 27 percent in 2004 and 14.5 percent in 2005, while the passenger mix coming from Europe will grow from 30 percent in 2003 to an estimated 34 percent in 2004. (Prior to the merger, about 30 percent of Carnival's passengers came from Europe.)

But for this summer, yields in Europe were down with Germany being the toughest market, according to Gary Cahill, senior vice president of finance and CFO.

Added Arison: "Considering the huge capacity increase, we have performed very well under difficult circumstances. Costa also performed well despite weak economies in France and Spain, and a recession in Italy. When the economies improve, Costa should be doing very well for us."

Arison also admitted that Europe is more seasonal with a tougher Q4 and Q1.

Onboard Revenues and Expenses

This is the first time any cruise company has reported onboard revenues. Carnival stated onboard revenues at $466.5 million and so-called other revenues - from tour operations (and P&O travel agencies) at $194.1 million, for a total of $660.6 million, compared to passenger tickets at $1,863.2 million.

Thus, onboard revenues were 18.5 percent of total revenues or 26.0 percent if tour operations (shore excursions) are included, and passenger tickets accounted for 74.0 percent in Q3 2003, compared to 17.5 percent or 24.4 percent, and 75.6 percent respectively, for Q2 2002.

Onboard spending per passenger, including shore excursions, was $405.52 (plus tips) in Q3 2003, compared to $339.05 in 2002.

On a per-passenger-day basis, onboard spending , including shore excursions, was up 8.5 percent for Q3 2003, at $60.67, compared to $55.94 in 02.

Costs were also broken down at $361.3 million in travel agents commissions and airfare, $82 million for onboard expenses (cost of product, cost of alcohol, etc.), and $118.2 million for food, out of total operating costs of $1,279.6 million for Q3 2003.

Compared to 2002, travel agents commissions and airfare were 28.2 percent of total operating costs in 2003, compared to 28.8 percent in Q3 2002. Food was 9.2 percent of total operating costs in 2003, compared to 10.0 percent in 2002.

The new combined company spent an average of $72.54 on food per passenger, per cruise, or $10.85 per passenger day in Q3 2003, compared to $66.30 per passenger and $10.94 per passenger day in Q3 2002.

Merger Update

Princess is performing quite well, according to Frank, who said "we are starting to see the beginning of the synergies - in a variety of different areas of the business."

While Frank would not quantify savings, he did give some examples and said that F&B contracts were being redone on renewal, taking the added volume into account; marine and hotel purchase pricing has come down; and that satellite communications contracts were being renegotiated to bring the price down.

Frank also said that he expects to see onboard revenue increases and cost reductions, and mentioned such areas as casino, photo, and art auctions.

Frank said: "We are very comfortable with $100 million in savings right now. We are running according to plan. And, we are not going to stop at $100 million.

When asked to explain his seemingly cautious outlook, Frank said: ''We have 13 brands some of which are new brands and new markets for us. We had more capacity coming on line in 2003 than some of our competitors.

"We market from the bottom line," he continued. "We are happy with our model. With a strengthening economy and no events outside of our control, we have a good feeling for 2004."

Continued Arison: "We do not manage to maximize yield. We manage to maximize profitability."

Asked about pricing in the Caribbean next year, Frank said it was too early to tell. But as far as Princess is concerned, which is boosting its Caribbean capacity with 75 percent in the 2004/2005 season Arison said: "Princess has always gotten a prercium (price) wherever they have been. We believe they will get a premium pricing in the Caribbean year-round."

As for the QM2, Arison said he was very pleased with the market response, but promised a "huge" marketing campai as well.

Added Frank: "Older ships are performing well too. There is no urgency to move them out," he said, although conceding that if the right kind of deal comes along, sales will be considered.

"It is counter-productive to talk about specific ships," said Arison, noting that the Noordam is featured in HAL's 2004 brochures. "The second you announce something it is detrimental to sales (bookings)," he said.


'We are coming off our strongest quarter and going into our weakest quarter," Arison said. And, with close-in bookings (which Arison described as extraordinary - even a week before sailing), it is hard to predict how the quarter will turn out. But while the Carnival brands are booking at what Arison called a "robust pace" and "ahead of last year."

"We are less behind going into Q4 than in previous Q4s," Arison said. But Q4 will be distorted somewhat by promotion costs for the QM2.

But robust bookings are undermined by low prices and cost factors, and Carnival forecasted a four to six percent yield decline for Q4. Its guidance was for $0.24 to $0.28 per share, which would give total annual earnings of $1.79 per share, if Carnival reaches $0.28 in Q4, compared to $1.73 for last year. Carnival earned $0.33 per share in Q4 2002.

While the strong bookings of this summer have slowed down, Arison said that "if we see anything like we saw in Q3, we will see a strong Wave period in 2004. Last year, events diverted people's attention."

Ultimate Princess

The project is in a preliminary stage, according to Arison, who said he did not expect to announce any capacity at this time. "Now, we have a unique opportunity to shore up the balance sheet and give to our shareholders," he said. "In the long range we will continue to grow," he added.

Added Frank: "We are not interested in making core investments outside our business. We can increase dividends - perhaps, buy back stock, or pay down debt."


"Our plans are in place," said Arison, who did not expect any changes. The only change is the A'Rosa brand which is being shut down with the ship moving to Aida. 'We expect no changes," he underscored.

Issues such as increased port taxes surface all the time, according to Arison, who said if fees go too high in one location the company will factor that into its model, and make itinerary decisions based on costs.

A new issue affecting earnings is taxation according to Code Section 833 that states that non-shipping U.S.-sourced income is now taxable, such as shore excursions to visit places in the U.S. that are sold to cruise passengers. Alaska tour operations have already been taxed. Carnival estimated that the impact in 2004 when the new tax code becomes effective, could be $0.02 to $0.03 per share.

Nine Months

Carnival reported net income of  $988.9 milion, or $1.42 per share , on revenes of $ 4.90 billion for the nine-month period ended August 31, 2003, compared to net income of $824.6 billion, or $1.40 per share , on revenues of $3.34 billion for its first nine months of 2002.

Also for the nine-month period, Carnival carried approximately 3,679,000 passengers and reported a load factor of 104.4 percent, compared to 2,640,000 passengers and a load factor of 10 same nine months last year.

For Q3 2003, Carnival carried approximately 1,629,000 passengers and reported a load factor of 109.8 percent, compared to 1,036,000 passangers and load factor of 104.4 percent for Q3 2002.

Stock Price

Following Carnival's Q3 announcement on Sept. 18, the share prices rose from opening at $34.70 that day to $35.33 at day's close. At press time , however, the share price had retreated to $33.40.

The 52-week range is from $20.34 to $36.04.

Analysts' recommendations were mixed with an average 12-month price target of approximately $38.00, with a range from $31.00 to $43.00.