Carnival Heads Into Rough Waters

According to Lazard Freres and Co., the impact on Carnival's (CCL) business in the first week following terrorist attacks on September 11th is estimated at around $20 million, including loss of revenue from canceled cruises, port reposition costs, and additional transportation expenses. They have since dropped to about 50 to 60 percent of typical levels for this period, but cancellations, which had increased sharply in the days immediately following September 11th, have started to decline steadily with new bookings now outpacing cancellations.

Luxury product continued to suffer in the quarter- the company has sold two vessels from the Seabourn fleet and reduced staff at Cunard/Seabourn by 25 percent. In F2002, CCL's luxury cruise operations will be scaled back significantly and are expected to break even, at a minimum. CCL will transfer Seabourn Sun to the Holland America fleet and reposition Cunard's Coronia for the British market, leaving only QE2 from Cunard and three ships from the Seabourn fleet in its luxury operation next year.

In the current operating environment, Carnival is in a favorable position among major cruise lines, with most of its new capacity not arriving until late 2002. After Carnival Pride enters service in January 2002, Carnival Legend is scheduled to be delivered in August 2002, followed by Hal?s Zuiderdam in September 2002 and Carnival Conquest in October 2002. Overall capacity is projected to grow 5.6 percent in 2002.

Carnival remains the most financially sound cruise line, with approximately $2.8 billion in liquidity, total debt of $2.8 billion and a net debt-to-total capital ratio of 18.6 percent. The company clearly has financial resources to continue its share repurchase program, with about 300 million remaining under the current authorization. According to Lazard Freres & Co., CCL shares are trading at valuation levels not seen since the Gulf War in 1991. Reluctance in recommending that investors assume significant exposure to anything in the travel sector until there is some clarity on the extent and possible duration of the U.S. military involvement in the Mideast. However, Carnival is expected to survive and thrive again, once the extent of the U.S. conflict becomes more clear and booking trends improve.