Carnival Cruise Ignores Recession, Continues Ship Building

Although fuel prices per metric ton have receded more than 47 percent from record high levels, cruise operator Carnival admits that 2009 will be a challenging year, with weaker consumer spending resulting in falling demand and softer cruise pricing, and a stronger U.S. dollar (versus the Euro) hurting European markets. In addition, customers are opting to book trips closer to the actual date departure, looking for bargain pricing on these close-in bookings. Despite limited visibility in forward operating profitability, Carnvial remains committed to expanding berth capacity, according to the company's 2008 regulatory 10-K filing:

As of January 28, 2009, we had signed agreements with three shipyards providing for the construction of 17 additional cruise ships scheduled to enter service between March 2009 and June 2012. These additions are expected to result in an increase in our passenger capacity of 38,056 lower berths. The net impact of these additions is a 22.5% increase in passenger capacity as compared to our January 28, 2009 passenger capacity [total of 169.040 lower berths on 88 ships].

Expansion will not come cheap, however, as Carnival has $17.4 billion in cash obligations coming due through 2013, including: shipbuilding costs of $8.3 billion; long-term liabilities and interest payments totaling $8.1 billion and $2.5 billion; and, operating leases, port facilities, and other purchase obligations totaling $1.7 billion. In December 2008, Standard & Poor's Rating Services assigned a negative outlook to Carnival's A- credit rating, citing concern that the weakened state of the economy and continued pull back in consumer spending would pressure cash flow. Albeit the current state of the economy will likely lead to lower revenues in 2009, an analysis of the company's balance sheet suggests a sequential decline in operating results would not materially impact Carnival's ability to meet its debt obligations. For example, of the $17.4 billion, only $5.2 billion comes due in 2009, and long-term debt has a weighted-average maturity of five years.

In fiscal 2008, Carnival's net cash from operations declined year-over-year 16.7% to $3.4 billion, reflecting the timing in receipt of customer deposits (as more guests opted for close-in bookings). Free cash flow was a negative $38 million, principally resulting from $2.7 billion spent on the ongoing shipbuilding program.

In light of the current uncertainties in the global economy and a desire to preserve cash and liquidity, the board of directors voted to suspend the quarterly division beginning in March 2009. This move will save about $1.2 billion in cash outflows this year.

At November 30, 2008, although Carnival had a working capital deficit of $4.1 billion, if one excluded customer deposits and debt obligations not maturing in 2009, the adjusted working capital deficit decreased to $950 million. Total debt was a manageable 32.9% of capital and a fixed-charge ratio of 5.8 times indicates the company has more than enough financial muscle to satisfy its existing financing expenses.

Despite the deteriorating global economy in 2008, net cruise revenues increased 12.9% year-on-year to $11.5 billion, driven by both a 6.7 percent increase in available passenger capacity and a 3.7% increase in passenger ticket prices, partially offset by a 1.6% decrease in onboard sales. Cruise occupancy held stable at 105.7 percent.

Carnival cannot cancel existing newbuld contracts without substantial financial penalties. I caution readers, therefore, that contrary to management's optimism, If the recession persists into 2010, forcing consumers to opt out of cruises altogether, the company will likely need to access the debt markets for shipbuilding financing.