P&O Princess Cruises (POC) has reported net income of $163.0 million, or $0.94 per ADS, on revenues of $776.0 million for the third quarter ended Sept. 30, 2001, compared to net income of $150.6 million, or $0.88 per ADS, on revenues of $778.1 million for the third quarter of 2000.

POC was able to boost its net earnings year-over­ year mainly due to a reduction in its tax rate, but also absorbed a $12 million one-time charge arising from the terrorist attacks of Sept. 11. ($5 million for what POC called the "immediate disruption" and $7 million in additional promotion costs.) The financial impact of the attacks was limited by loss of profit insurance.

POC reported 2,526,000 passenger cruise days for the third quarter of this year, compared to 2,288,000 last year.

According to POC CEO Peter Ratcliffe, the 2002 earnings outlook is uncertain and will be heavily influenced by the political and economic environment that prevails from January to March 2002. "This is the most important booking period for quarters two and three, which make a disproportionate contribution to full-year earnings," Ratcliffe said.

"We had already embarked on a major cost efficiency program prior to Sept. 11 which we have now accelerated," Ratcliffe added. "We have new budgets in place for 2002 and we expect to deliver a unit cost reduction of around seven percent in 2002 in addition to the five percent savings made in 2001.

"There is only one rule," Ratcliffe said, "Cost savings shall not affect the product or safety and security. Our savings will help offset some of the inevitable yield pressures in 2002," Ratcliffe said.


According to POC, net revenue yields, including onboard revenue, were five percent lower on a like-for­ like basis compared to the third quarter of 2000. POC attributed this reduction to Princess, which experienced competitive trading conditions particularly in Alaska, the company said in a prepared statement. POC said there bad been a significant increase in capacity in Alaska in 2001.

Ratcliffe also pointed to the cruise industry's inherent flexibility. "We are able to redeploy ships," he said, "to minimize the impact of events that can have a disproportionate impact on any one program."

He said the strengths of POC included its high return on investment capital and low interest costs.

Impact of 9/11

The immediate impact on Princess Cruises was the diversion of ships to Boston from New York. Second was the short-term disruption of air travel within and out of the U.S. The Golden Princess' final European cruise of the season had to be cancelled as a result and occupancy on other cruises was reduced.

For 2002, Princess said it has transferred capacity from Europe to Alaska and from what the company calls exotic trades and the Southern Caribbean to itineraries out of Los Angeles. (Still, the so-called exotic trade will have more capacity in 2002 than 2001.)

Changes have also been made to a number of itineraries to exclude ports in the Eastern Mediterranean and the Middle East. This has affected some P&O Cruises (UK) itineraries in the fourth quarter of 2001 and some of Princess' 2002 itineraries.

While the company may have lost some of the forward booking momentum for Alaska and Europe, which typically starts in September, Ratcliffe said he believed Princess will catch up. He also said that the booking pattern may change with more cruises closer to home.

Ratcliffe said that Princess has not yet considered delaying the introduction of new ships, saying that the contracts are firm. "We prefer to see how things stabilize before we make such decisions," he said.

Capacity Changes

For 2002, Princess will offer 1.6 million passenger cruise days in Alaska compared to 1.3 million in 2001; 870,000 passenger cruise days to the West Coast of Mexico, compared to 220,000 in 2001; and 980,000 passenger cruise days on its so-called "exotic and other cruises" compared to 950,000 in 2001.

Princess' European capacity will decrease to 500,000 passenger cruise days in 2002 from 780,000 in 2001; the Panama Canal will see a decrease to 730,000 from 830,000, and even the Caribbean will see Princess cut capacity, albeit slightly, to 2.1 million from 2.2 million passenger cruise days in 2001.

Nine Months

For the nine-month period ended Sept. 30, 2001, P&O Princess reported net income of $270.0 million, or $1.56 per ADS, on revenues of $1,965.7 million, compared to net income of $277.7 million, or $1.63 per ADS, on revenues of $1,939.1 million for the same period last year. A reduction in the tax rate was offset by increased operating costs and interest expense.

P&O Princess reported 7,096,000 passenger cruise days for the nine-month period this year, compared to 6,498,000 last year.


Prior to Sept. 11, POC said that booking volumes had been in line with the increase in capacity. The company said there were also signs of some yield stabilization after the reductions experienced in the fourth quarter of 2000 and the first three quarters of 2001.

But in the first two weeks after Sept. 11, Princess experienced a net loss of 20,000 bookings. While bookings have since picked up, Ratcliffe said bookings had fallen behind projections by some 40,000. "That is only five percent of the company's annual volume, however," he said. "And we have time to make it up."

In Europe, POC said bookings for the upcoming winter and spring seasons have been running at 65 percent of the expected rate. POC added that the markets are responding to promotions.

The group expects to sail more than 95 percent full in the fourth quarter of 2001, with average prices some five percent below last year's fourth quarter.

POC said it was difficult to assess the first quarter of 2002, noting that the group was less than 60 percent booked for this period at press time. Ratcliffe admitted the company was running behind for the first quarter and expected yields to be down as well.

POC said there has been a disruption of the normal booking cycle and the political climate is still very uncertain. "It is clear that we have to use the price mechanism more than would normally be the case in order to maintain the required pace of bookings," the company said.

For 2002, the most important quarters for earnings are Q2 and Q3 and the outcome for these quarters will depend primarily on the political and economic circumstances that prevail in the January to March 2002 period, POC said.

The biggest challenges Princess may face in 2002 is going back to Alaska with more capacity, considering that market's competitive situation in 2001, and by introducing so much more capacity on the Mexican Riviera.