Carnival Cruise Feels Rising Seas Of Fuel Costs

By Greg Sushinsky | March 25, 2011 AAA

Carnival Corporation & PLC (NYSE:CCL), which runs popular cruise lines, reported lower first quarter income due to higher than expected fuel costs. The company slashed its outlook for the remainder of the year due to fuel costs and the events in the Middle East and North Africa.

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Fuel Costs Dampen Profits
Fuel costs increased by 9% in the quarter from the same quarter in 2010, from $497 per metric ton to $543 per metric ton. The increase was more than expected, as the company's guidance in December was for fuel costs of $526 per metric ton in the first quarter. While net revenues were up to $3.4 billion for the quarter compared to $3.2 billion in last year's same quarter, net income fell to $152 million or 19 cents a share from $175 million or 22 cents. Lower unit costs helped offset the higher fuel prices. With oil prices still rising, the fuel story is expected to an ongoing one throughout the year.

Fuel Price Impact
Rising fuel prices are a concern for almost every industry, and Carnival and the other major cruise line Royal Caribbean Cruise Lines (NYSE:RCL) are beginning to feel the impact. The stock market's reaction was to send both stocks down on Carnival's report. The travel and leisure industry has yet to feel a huge impact, but that could change.

Destination spa owner Steiner Leisure Limited's (Nasdaq:STNR) recent robust fourth quarter and full year earnings showed no real impact thus far. Other leisure industries, such as amusement parks, which have been recovering well, will bear watching this summer during the vacation season when gasoline prices are usually hiked further. Six Flags Entertainment (NYSE:SIX) and Cedar Fair (NYSE:FUN), both of which have rebounded from hard times, will be scrutinized, along with others in the industry.

Carnival Outlook Trimmed
The company's original guidance in December for the full year 2011 was of net revenue on a constant dollar basis to increase by 3-4%. This has since been trimmed to a 2.5-3.5% increase. The political unrest in North Africa and the Middle East has been factored in, and changes the yield by $44 million, ultimately five cents per share. Fuel costs, based on the current spot prices, are expected to increase $355 million compared to the December guidance, which will cost an additional 45 cents per share. Full year EPS outlook was cut to $2.55 to $2.65, from previous guidance of $2.90 to $3.10.

Many Positives, Still
Despite the worrisome fuel increases, Carnival still has plenty of positives in its performance and outlook. Even with the lowered guidance, full year EPS should still increase over last year's $2.45. Also, the company's bookings are running higher than the same time last year. Prices are offsetting slightly lower occupancy, as overall ticket sales remain strong. European brands have also shown strength. Demand and long-term fundamentals of the business for Carnival remain strong, though investors will be watching fuel prices closely. (Learn about the futures curve and what its shape means for hedgers and speculators. See Contango Vs. Normal Backwardation.)

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