Wall Street Worries About Cruise Fleet Pricing

The big cruise lines have been steadily filling their rapidly expanding fleets with passengers looking to escape an especially harsh North American winter, but as they get ready to release quarterly results, Wall Street is worried that ticket prices may not be high enough. Analysts are expecting profit declines for the winter quarter from the top three cruise lines, starting with industry leader Carnival Corp., which plans to release its fiscal first-quarter results on Wednesday (March 21, 2001). Cruise stocks, including those of Royal Caribbean, the world's No. 2 operator, and Britain's P&O Princess Cruises, which ranks third, have in recent weeks given up much of their bounce back gains after a sustained decline last year. Wall Street was briefly cheered by the demise of some discount rivals in the North American market. Investors had lifted cruise stocks throughout the 1990s, but were spooked last year by worries about the U.S. economy slowing and possible drags on ticket prices from a shipbuilding boom still underway.

Analysts expect those same concerns to persist for some time.

"While the supply picture in 2001 is an improvement over last year due to certain withdrawals and pricing has stabilized," Bearn Stearns analyst Jason Ader said in a report this week, "there is still a significant amount of capacity to be absorbed in our view, leaving Carnival and other cruise companies very little pricing leverage." UBS Warburg cruise analyst Robin Farley said in a report that pricing this year may be below 1999 levels. Analysts generally expect net yield, a closely watched industry measure of revenue per passenger, to be flat or down 1 or 2 percent for all of 2001, with quarterly comparisons improving throughout the year. Cruise executives show no sign of slowing their fleet expansions, expected to cost tens of billions of dollars through 2006, saying cruise holidays remain a great bargain and they believe a golden era for the sector is dawning as North Americans and Europeans age. Industry executives and analysts have said sales volume was strong during the key "wave season" for cruise vacations, which is now winding down. Carnival said last month that the first five weeks of the season produced a 20 percent uptick in bookings over last year on a 10 percent rise in berths.

"Most of them are pretty happy with the way the wave season has worked," said Lazard Freres & Co. analyst James Winchester. Analysts surveyed by research firm First Call/Thomson Financial said Carnival, the Miami-based owner of Cunard, Holland America, Carnival Cruise and three other lines, earned 20 cents a share in its first quarter ended Feb. 28, down from 28 cents a year earlier, when strong demand from millennium-themed cruises helped results. First Call's consensus estimate for Royal Caribbean, which is expected to report on April 24, is 26 cents a share, down from 55 cents during the first three months of 2000. P&O Princess, the operator of Princess Cruises and P&O Cruises, is expected to earn 9 cents a share, down from 26 cents in first quarter 2000, when the company was still a subsidiary of Peninsular and Oriental Steam Navigation Co. Analysts said fuel costs, while up from the late 1990s, did not appear to be a major drag on early 2001 earnings. Farley compared the present sell-off in cruise shares with one in the early 1990s as the United States went into a recession.

"Although the industry experienced a decline in passenger cruise prices in 1991," she said, "the larger cruise operators grew revenues because of capacity additions, and the total number of North American cruise passengers increased by more than nine percent." Farley and Winchester said Carnival is the best positioned among the top companies and recommend the issue to clients. The company's operations were highly efficient and its debt load relatively light, Winchester said. But Ader calculated that Carnival, trading on Friday at about $28, or about 16 times its projected full fiscal-year 2001 profits of $1.77, was not a bargain by historical price-earnings valuations. – (Reuters)