Carnival to Cut European Capacity as Mediterranean Bookings Slip

  • Cruise giant is moving ships to faster-growing Chinese market
  • Quarterly profit beats estimates on higher sales, lower costs

Carnival Corp., the world’s largest cruise operator, said it’s cutting European capacity to account for political risk and falling fares, putting a damper on a second-quarter profit report that beat analysts’ expectations.

The company, based in Miami, plans to reduce capacity in Europe by 5 percent in the fiscal year starting in December, Chief Executive Officer Arnold Donald said on a call Tuesday with investors. Cruise fares in that market are coming in lower in the second half of the current year because of geopolitical risks, Carnival said.

Carnival closed little changed at $43.73 after being up as much as 5.8 percent intraday on Tuesday in New York. The shares are down 20 percent this year. The stock was also little changed in London.

Cruise stocks have been hit hard since Britain voted to leave the European Union, with Carnival down 12 percent in two days. A weaker pound could reduce travel by U.K. residents and crimp Carnival’s receipts in that currency. The company, which includes the famous U.K.-based Cunard line, got a third of its revenue from Europe last year.

Carnival’s decision to cut back in Europe was made before the Brexit vote, Donald said. The company and its rivals had added capacity in the region and Carnival is now redirecting vessels to the fast-growing Chinese market.

“We thought there was excess capacity in the Mediterranean,” he said in an interview. “We made a global deployment decision.”

Market Turmoil

Turmoil in foreign exchange markets will impact earnings. A 10 percent change in currencies vs. the U.S. dollar would cut profit by 18 cents a share for the rest of the year and nine cents in the current third quarter, the company said. The British pound, a key currency for Carnival, tumbled more than 10 percent in the days after the Brexit vote.

Second-quarter profit rose to 49 cents a share, excluding some items, Carnival said in a statement. Analysts were forecasting 39 cents, the average of 16 estimates compiled by Bloomberg. Sales climbed 3 percent to $3.71 billion in the quarter ended May 31, beating projections of $3.68 billion. Fuel prices, including derivatives, and currency changes added 4 cents a share to earnings.

Fuel Prices

Changes in fuel prices, including fuel derivatives, and currency exchange rates are expected to reduce full-year earnings by 17 cents a share compared with Carnival’s March guidance, according to the statement.

  • Full-year earnings excluding some items will be $3.25 to $3.35 a share, surpassing its March outlook of $3.20 to $3.40 a share. Analysts are projecting $3.37.
  • Profit for the third quarter will be $1.83 to $1.87 a share, short of the $1.98 average of estimates.
  • The company plans to buy back as much as $1 billion in shares. Since October, Carnival has repurchased almost $1.9 billion in shares under its stock repurchase program.

Advance bookings for the rest of the year are “well ahead” of last year at slightly higher prices, the company said. Since March, Carnival has booked passengers at higher prices, with volume running lower than last year, because there is less inventory remaining for sale than at this time in 2015, the company said.

Full-year net cruise costs, excluding fuel, will rise 1.5 percent, trailing the company’s March forecast of 2 percent.

Costs excluding fuel for the third quarter will be 6 percent to 7 percent higher than a year earlier, driven by advertising expenses and the remodeling of its Queen Mary 2 vessel.

Changes in fuel prices, including fuel derivatives, and currency exchange rates are expected to increase third quarter earnings by 1 cent a share share compared with the year-ago quarter.

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