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Euro's slide may hit cruise companies' earnings

Source: Reuters - Mon 24th May 2010

The euro's slide against the U.S. dollar may bruise 2010 earnings for major cruise ship operators, just as these companies are adding cruises in key European markets.

Analysts said booking for cruise vacations in Europe have held up in recent weeks, despite worries over high debt and proposed budget cuts in euro zone countries.

But if the euro holds at current levels or falls further against the dollar, annual results from Carnival Corp and Royal Caribbean Cruises Ltd - typically reported in U.S. dollars - could come in weaker than projected.

"The demand side of the equation is probably okay" said Bernstein Research analyst Janet Brashear in an interview. "It's really the translation side of the equation that's going to affect profitability."

The euro has fallen about 15 percent against the dollar so far this year. Its decline means it now buys less goods and services that are denominated in dollars.

One-third of Carnival's capacity is in Europe, while a record 22 ships of Royal Caribbean's 38-strong fleet sailed in Europe at some point during 2009, according to annual filings.

Should the euro remain at current levels, this would hurt into Carnival and Royal Caribbean's projected net revenue yield for the year, Brashear said.

For No. 1 cruise operator Carnival, a one percentage point swing in yield - a measure of revenue drawn from available capacity - can lift or cut annual earnings by 14 cents per share, Brashear said.

For No. 2 player Royal Caribbean, the effect is a gain or loss of 22 cents per share.

"Foreign exchange is volatile," said Brashear, who has an "outperform" rating on both companies. "It probably does affect the prospects for this year's earnings, but I don't think we should magnify and project it into a long-term trend."


Analysts said the effect of the falling euro would largely be seen in the fourth quarter and early 2011, because cruise vacations tend to be booked well in advance.

Should the euro hold steady at current levels, Carnival may only see a 1.7 percent jump in net revenue yields this year, Brashear said. She had earlier estimated a 3.4 percent jump in yield- a measure of revenue derived from available capacity.

She had earlier projected that Royal Caribbean would see a 4.5 percent jump in yields this year, but the euro's woes may bring that figure down to 3.1 percent.

The euro's drop comes as both Carnival and Royal Caribbean add cruises in Europe. Both companies have described Europe as a burgeoning market for cruise demand.

By 2012, Carnival hopes its European brands will comprise 37 percent of its overall capacity, up from 33 percent as of November 2009.

The Royal Caribbean International brand could carry more guests on European cruises than any other cruise line during the 2011 summer season, Royal Caribbean said last month.

"The cruise business has been modeled around the idea that its more of a mature business in the US and the growth is in the Europe" said S&P credit analyst Benjamin Bubeck.

In 2009, 46 percent of Royal Caribbean's ticket revenue came from international passengers. In fiscal 2009, Carnival drew 53 percent of its revenue from outside the United States.

Carnival's greater international exposure coupled with the fact that it has four brands devoted exclusively to serving Europe makes it more sensitive to the euro's moves than Royal Caribbean, William Blair & Co analyst Sharon Zackfia said.

But analysts added that some of downside of the falling euro is offset by the fact that some costs - such as food and some building costs - are also reported in euros.

Further a stronger dollar tends to pressure dollar-priced commodities, such as crude oil, because it makes them more expensive for holders of other currencies.

"There can be other potential offsets here" Zackfia said. "This is not by any means a debacle."

But one wild card that remains is the European consumer's appetite for cruises.

"It appears that demand has been relatively stable with the euro crisis" Zackfia said. "But where you would really see them (cruise companies) start to become alarmed were if the European consumer were to pull back."

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