Carnival Corporation has reported net income of $344.7 million, or $0.58 per share, on revenues of $1.06 billion for its third quarter ended Aug. 31, 1998, compared to net income of $297.9 million, or $0.50 per share (adjusted for stock-split), on revenues of $805.4 million for the third quarter of 1997.

Revenues for the third quarter increased 31.8 percent over the comparable quarter of 1997 due to the substantially higher pricing of Cunard Line. Excluding Cunard, in which Carnival acquired a 68 percent interest at the end of May 1998, revenues were up 12.6 percent. Net income was up 15.7 percent over the third quarter of 1997.

Higher Prices

The increased revenue this year for Carnival Cruise Lines and Holland America Line was driven mainly by higher prices, according to Carnival.

Carnival and HAL generated 12.8 percent of the total revenue increase, of which 3.5 percent was attributed to increased capacity; 0.6 percent to higher occupancy; 0.7 percent to air/sea; and eight percent to higher pricing.

While occupancy including Cunard/Seabourn was 111.5 percent for the third quarter, occupancy excluding Cunard/Seabourn was 114.9 percent for Carnival and HAL compared to 114.3 percent last year.

For Carnival and HAL capacity was up 3.5 percent quarter over quarter with the Ecstasy out of service for six weeks. Still, Carnival was able to boost revenues 12.8 percent.

According to Carnival, the fire on the Ecstasy cost the company $18.4 million instead of $24 million as previously suggested.

The cost was partially reduced by the postponement of the planned drydocking of the Imagination, which took over the sailings of the Ecstasy, and partially because Carnival raised prices on its other cruises immediately following the incident, realizing there would a shortage of berths.

Meanwhile, several one-time events, including the fire aboard the Ecstasy, reduced third-quarter earnings by about $7 million.

The third-quarter results also included the consolidated results of Cunard and Seabourn Cruise Line. Seaboum was previously included under income/loss from affiliated companies.

For the third quarter ended Aug. 30, 1997, Cunard/Seaboum contributed $154.8 million in revenues.

Overall, Carnival reported 3.7 million passenger cruise days and a load factor of 111.5 percent for its third quarter this year, compared to 3.3 million passenger cruise days and a load factor of 114.3 percent last year.

Affiliated Earnings

Airtours and Costa Crociere contributed $13.8 million to the bottom line in the third quarter this year, compared to $10.4 million last year.

Airtours' share was $6.8 million this year, compared to $6.9 million last year, reflecting Carnival's diluted interest from 28 percent to 26 percent; and Costa, which was not part of the group last year, contributed $6.6 million this year.

For the nine-month period, Airtours' contribution was a loss of $4.5 million, compared to a loss of $1.4 million in 1997. The result was attributed to Airtours having a tough year in Scandinavia.

Airtours' strongest quarter is its third which Carnival will pick up in its fourth and, according to Carnival, Airtours "feels good about its summer season" and projects results in the range of analysts' expectations of 130 to 140 million pounds.

The nine-month contribution from Costa was $9 million, and the company is experiencing the same strength in booking patterns in Europe as Airtours with a summer program that has been "quite strong." Costa will have a positive impact on Carnival's fourth quarter as well, according to Carnival.

Nine Months

For the nine-month period, Carnival reported net income of $615.3 million, or $1.03 per share, on revenues of $2.3 billion, compared to net income of $510.7 million, or $0.86 per share, on revenues of $1.9 billion for the same period last year.

Carnival also reported 9.7 million passenger cruise days and a load factor of 107.8 percent for the nine-month period this year, compared to 9.2 million passenger cruise days and a load factor of 109.6 percent last year.

Carnival claimed a 10.4 percent increase in revenues for the Carnival and HAL brands for the nine­ month period, again excluding Cunard, and attributed 2.7 percent to increased capacity; 0.7 percent to air/sea; 7.7 percent to pricing; and a reduction of 0.7 percent to occupancy.

Cunard Line

Carnival carries a total of $425 million of debt related to the consolidation of Cunard and Seaboum and from the acquisition of Cunard. Thus, interest expenses in the third quarter of this year were $16.3 million, compared to $9.6 million last year.

After being aboard for only three months, Cunard is "performing in line with our forecasts for 1998," Carnival executives said. But, they pointed out, there is still much work to be done.

In the near term, Carnival expects to improve Cunard's bottom line by further cost cutting, regarding price increases at Cunard's level as unrealistic at this point.

So far, most savings have been achieved from staff reduction - approximately 80 people (25 percent of Cunard's staff as of May) had been let go at press time, and more such reductions in headcount shoreside and shipside can be expected. According to the new management there is also excess staffing aboard the ships. Staff reductions is where the company recognizes major opportunities to get margins in line with other Carnival companies.

In addition, Cunard Line is consolidating offices and operations in Miami, meaning that Seabourn's San Francisco offices will be closed down by March 31, 1999. According to a spokesperson for Seaboum, all 83 employees in the San Francisco office have been invited to go to Miami and have been offered relocation packages.

The main reason given for the move is the cost efficiencies achieved by merging offices and being closer to the ships (they call more frequently on the East Coast than the West Coast) and the parent company.

Meanwhile, the impact of marketing changes at Cunard are not expected until 2000. The booking pattern for luxury products is much further out and thus, the results of the new management and marketing programs take longer.

Not much is being revealed about the Queen Mary project except that the company is looking at two or three different product types and hopes to negotiate a contract by year's end.

Will the Queen Mary be a one-ship project? Not necessarily. Carnival pointed out that the Fantasy started out as a one-ship contract as did the Destiny. Only time will tell, according to coy Carnival management.

In addition to the 68 percent interest held by Carnival Corp., 32 percent is held by Norwegian investors. The plan is to take Cunard Line public in three years' time. If not, Carnival Corp. is reportedly committed to buying out the Norwegian investors with Carnival stock at a pre-set value of $34.50 per share.

4th Quarter Outlook

According to Carnival executives last month, pricing for the fourth quarter looked strong, but they cautioned against expectations of eight percent or more as achieved in the third quarter.

Capacity will be up an estimated 11.5 percent, primarily driven by the Elation, Rotterdam VI, and Windsurf.

The Paradise is schedule to enter service in late November -- too late to have much impact on the quarter.

1999 and 2000

For 1999, Carnival is forecasting what it calls a two-percent-plus increase in pricing over 1998, noting it will be difficult to achieve the same increases as in 1998 with all the capacity coming on line next year.

Still, Carnival is optimistic, noting how it predicted a three percent increase this year and eventually realized an eight percent increase.

According to Carnival, advance bookings were at better prices than in 1998 and "early indications are quite positive."

In addition, Carnival does not want to track a whole lot ahead. That means they would be leaving money on the table.

Year 2000, however, should start out with a bang. According to Carnival, millennium cruises will get that year off to a good start and the first quarter will "clearly be the most profitable in cruise industry history."

As of June (1998) all millennium cruise deposits were non-refundable.

Carnival has also allowed a peak at its product philosophy. The Destiny has been designed to operate every single itinerary that a Fantasy-class ship can, which in turn was designed to operate every itinerary that a Tropicale-class ship can sail - without infrastructure investment.

Thus, Carnival can order "many more" Destiny­ class ships as long as it has itineraries to support them.

What if...

The time going forward will not be as good as the past 18 months, Carnival executives admit. But if the near future takes a turn for the worse, it will put pressure on the smaller and weaker competitors, which in turn will create opportunities (read: acquisitions) for Carnival.

Apart from the three major cruise companies, the other companies are non-factors in the market, according to Carnival, and have no impact on marketing or pricing.

Also, no ships are for sale in the Carnival family.