Royal Caribbean Cruises (RCC) has reported net income of $52.8 million, or $0.27 per share, on revenues of $800.0 million for the first quarter ended March 31, 2002, compared to net income of $52.5 million, or $0.27 per share, on revenues of $726.9 million for the first quarter of 2001.

RCC is hoping to move the delivery of the Navigator of the Seas up to December of 2002 (its original delivery date before it was pushed back) to take advantage of the holiday sailings, but CEO and Chairman Richard Fain said it was unlikely that the company would move up other delivery dates.

With the last newbuilding scheduled for delivery about two years from now, Fain said that more newbuilds were not a major focus right now. "We look regularly at new ships, but right now our focus is on operational issues, maintaining yield and cost containment," he said. Fain would not comment on options due to expire in July. "The options still have months to go," he said. "I will not comment more on that now. It is not our focus." Added CFO Richard Glasier: "The trend has been that as we slow up the expansion, we expect the strong cash-flow to pay down the debt. We are very focused on the balance sheet." 

RCC recently introduced a new brand, Island Cruises, operating the Island Escape, the former Viking Serenade.

"We were not at all pleased with the first couple of voyages," commented Jack Williams, president and CEO of Royal Caribbean International (RCI) and Celebrity Cruises who added that it had probably been a mistake to sail the first voyages with a full ship. "We had issues with the product; we had issues with the food," he explained. But bookings had not been a problem.

Fain was vague on the progress of the joint venture with P&O Princess Cruises to launch a cruise brand focused on Southern Europe. He said that the company's ships in Europe in 2003 would be focused on North American passengers while the joint venture would be focused on European passengers. The ship deployment for the joint venture has not been finalized yet, according to Fain.

Doubling European Capacity in 03

Fain commented that the earnings were consistent with the company's guidance and that the market was picking up. RCC boosted its capacity by 23 percent in Q1 and still managed to fill the ships at better rates than anticipated, according to Fain. He also said that 19 percent of the capacity of RCI and Celebrity had been redeployed in 2002 because of 9/11.

Last year, the company deployed nine percent of its capacity in Europe, compared to five percent this year. But next year, the two brands will return with six ships, more than doubling their capacity there.

Williams expressed confidence that they will do well. "I feel confident that the Middle East will stabilize somewhat and not get worse," he said, adding that he believes there will be a pent-up demand for 2003.

Meanwhile, this year, 42 percent of RCC's total capacity is in the seven-day Caribbean market, an increase of 20 percent over 2001.

Seventeen percent of the capacity is in the short cruise market, up seven percent from last year.

Alaska will have eight percent of the capacity, up eight percent over last year, but while bookings are running ahead of last year, pricing is down, according to Williams.

For the year, the two brands will grow their capacity by 15 percent, and by 10 percent in 2003, according to RCC.

"We are still feeling the impact of bookings immediately after 9/11 and from the closer-in booking trend," Fain added. He said there were clear signs that the market was stabilizing, but that the improvement will have more of an impact in 2003 than 2002 "because so much of the capacity is already booked."

Williams said that the Wave Period had been very successful with bookings in January and February up 11 percent year-over-year. "Bookings are still strong after the Wave Period," Williams said, "and pricing continues to improve."

But forward visibility is more difficult with what he called the new consumer behavior of booking closer in and new ship deployments. But as the company moves into a 90-day window, visibility increases dramatically, Williams said. Currently 54 percent of the passengers book within 90 days of their cruise, compared to 46 percent before 9/11. "You need to get inside the window to see what is going on," Williams underscored.

Q1 02

The increase in revenues for the first quarter of 2002 was due primarily to an increase in capacity, offset by a decline in yields. RCC said that yields were down seven percent in the quarter due to pricing actions taken immediately following 9/11. Bookings during those months were taken at significantly discounted prices.

Operating and SG&A expenses were down due to cost containment measures taken by the company, as well as the timing of marketing expenses.

Certain operating expenses were also lower due to the impact of 9/11. In particular, travel agent commissions were lower due to lower cruise pricing, and air travel expenses were lower due to reduced air/sea levels.

The percentage of passengers who chose to book air travel through RCC dropped to 20 percent in the first quarter of 2002 from 31 percent in the first quarter of last year.

RCC said that pricing has returned to pre-9/11 levels for new bookings. Yields are expected to be down five to seven percent for the second and third quarters of 2002, compared to 2001.

First-quarter net income was also negatively impacted by $5 million in guest and travel agent related expenses due to the unanticipated drydocking of two ships. Both the Infinity and the Summit of Celebrity required unscheduled repairs to their Mermaid pods.

Celebrity will introduce its fourth and last Millennium-class ship in May, the Constellation. There are no further orders for the Celebrity brand. RCI will introduce the second ship in its Radiance series in July, the Brilliance of the Seas.

RCI has two Voyager-class and two more Radiance-class ships under construction for deliveries through 2004, and two options for 2005 and 2006.

Analysts have set 12-month price targets for RCC from $26 to the low $30s. At press time, RCC traded at $23.00.

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