Carnival Corporation recently released results for its fiscal year and fourth quarter ended Nov. 30, 1996, and demonstrated once again the importance of economies of scale, and also why the company is investing in Europe and the Far East The North American market is not producing enough passengers to maintain Carnival's earnings record.

Carnival reported net income of $114.8 million, or $0.30 per share, on gross revenues of $475 million for its fourth quarter ended Nov. 30, 1996, compared to net income of $84.2 million, or $0.30 per share, on gross revenues of $452.9 million for its fourth quarter of 1995.

However, the fourth quarter net was boosted by $33.0 million income from affiliated operations, that is, Airtours, Seabourn, and Carnival Hotels and Casinos, without which the fourth quarter net for 1996, would have been less than the previous year's fourth quarter.

The result also suggested that this past year's fourth quarter was worse than the previous year's when many lines nearly panicked. This year, it was quiet.

Carnival also reported that it carried 413,000 passengers corresponding to 2,495,000 passenger days and a load factor of 101.1 percent in the fourth quarter, compared to 404,000 passengers, 2,376,000 passenger days and a load factor of 104.6 percent last year.

Year-end results

Carnival reported net income of $566.3 million, or $1.95 per share, on gross revenues of $2.2 billion for its fiscal year, ended Nov. 30, 1996, compared to net income of $451.1 million, or $1.59 per share, on gross revenues of $1.9 billion the previous year.

Net income was up 25.5 percent over the previous year boosted by income from affiliated operations, and 15.4 percent without such income.

The company-wide fleet carried 1,764,000 passengers, corresponding to 10,583,000 passenger cruise days, and a load factor of 107.6 percent for 1996, compared to 1,543,000 passengers, 9,201,000 passenger cruise days, and a load factor of 105.0 percent for 1995.

Carnival's investments outside of the North American market signal not only the company's global intentions but may also indicate a recognition of a possible saturation of the North American market as borne out by the lack of market expansion in 1994 and 1995. Although the market is expected to have grown in 1996, pending numbers to be released by the Cruise Line International Association (CLIA), that growth has also come at the expense of heavy discounting and aggressive marketing.

In December of 1995, Carnival Corp. increased its interest from 25 percent to 50 percent in Seabourn, and in 1996, invested some $130 million in Airtours acquiring nearly a 29.5 percent interest in the British­ based travel company.

In addition, Carnival announced a joint venture with Hyundai to establish a Far Eastern cruise company.

More recently, Carnival and Airtours announced that they had signed a letter of intent to acquire Costa Crociere for $300 million. Pending due diligence, the transaction is expected to be completed by May.

Costa is the market leader in the Mediterranean and has a strong presence in all markets in continental Europe, particularly Italy and France. But its newbuilding program bas left the company with a heavy debt burden along with high operating costs, all of which could be solved by cash-rich and efficient Carnival.

If successful, through Airtours and Costa, Carnival will almost instantly become the major player in the European markets, and is perhaps on its way to similar success in the Far East.

The upside is that Carnival can be expected to continue to post increased revenues and earnings in the years to come.

The downside is the suggestion that by investing abroad, is Carnival saying that the North American market may not have the potential previously thought?

Reduced Rates & Commissions

Effective immediately, Carnival Cruise Lines will only be advertising cruise-only rates, thus lowering its brochure rates. (Other cruise lines have done this for years depending on the sailing region.)

This will help prevent "sticker shock" that can deter potential first-time cruisers, according to Carnival President Bob Dickinson.

This suggests that Carnival sees a need to mar ket more aggressively in 1997.

Also, as a result of the unbundling, Carnival will not be paying 15 percent commission on air/sea packages any more.

Only the cruise portion will be commissionable at the existing rates. A flat 10 percent will be paid on air fare supplements.

This means that Carnival will, in effect, be paying lower commissions, keeping more the money for its own bottom line, which will be another way of boosting earnings in 1997.

That is important since Carnival Corp. cannot use new capacity to drive earnings in 1997 since it is only introducing one new ship, the Rotterdam VI, by Holland America Line, which will be replacing the Rotterdam V.

Carnival will offer the option of purchasing air transportation through the line, however, the cost will be handled in the form of an "air fare supplement" which will vary according to city.

Dickinson said that in "this current era of discount air carriers and frequent flyer miles, the line's volume of air/sea business has decreased substantially as many travel agents are now arranging lower cost (or no cost) air transportation for their clients."

While the tried and true pricing advantage of purchasing an air/sea package through a cruise line may have diminished, according to Dickinson, the ease of such a package would still seem relevant to most consumers.

Carnival's move will also put a burden on those agents who now have to find air on their own, and puts a big question mark on the future of the cruise-only agencies. These agencies are used to having the cruise lines provide the air/sea package and in many cases cannot do air ticketing.

The move is also said to be another step in the direction of taking direct bookings.

In 1996, it is estimated that Carnival paid out more than $300 million in commissions.

Implications...

Carnival's global interests also give the company the opportunity to deploy older ships to less demanding markets and/or move ships any time to where the demand is.

When all the strings are tied up, Carnival Corp. becomes a virtual powerhouse team, led by Bob Dickinson, Kirk Lanterman, Larry Punentel, Nicola Costa, and David Crossland, with Ray Lutz and Rod McLeod soon to be added.

And the cash continues to roll in as evidenced by the fact that HAL has already completed payments on the Veendam. which the line took delivery of only last May. Hence, more acquisitions are in the cards...