Tue 22 Jul 2008 08:05

Bunker costs hit Royal Caribbean


Cruise operator cuts 400 jobs as part of a cost-saving initiative.



Royal Caribbean Cruises Ltd., the world's second-largest cruise operator, has announced that it will cut 400 jobs as a result of higher bunker prices and decreased earnings.

Despite a rise in demand for cruises and onboard spending in the last quarter, a 55 percent increase in bunker prices during the same period lead to an overall drop in earnings.

Net income for the second quarter fell to $84.7 million, or 40 cents a share, in line with Wall Street expectations. In the same period last year, the company earned $128.7 million, or 60 cents a share.

Meanwhile, revenue for the quarter ended June 30th rose to $1.58 billion from $1.48 billion a year ago.

As a consequence of the rise in fuel prices and lower net income, the company has announced a significant cost savings initiative that is expected to reduce spending by approximately $125 million annually.

"Too much of our profitability is being eroded by the increase in fuel prices. This is unacceptable and we are evaluating everything we do to find ways to do it more efficiently and effectively," said Richard D. Fain, Chairman and Chief Executive Officer.

"While our brands continue to attract premium prices even in this difficult environment, it is imperative that we find ways to reduce our costs," continued Fain.

As part of the restructuring, the company has revealed that it is eliminating approximately 400 shore-side positions. In addition, the company has discontinued some non-core operations, including The Scholar Ship, an educational partnership aimed at college students studying aboard cruise ships. The company expects to incur charges related to this restructuring of approximately $15 million, or $0.07 per share, in the third quarter 2008.

"This is a difficult period for virtually all businesses, but we are determined to improve our operating results through tight cost controls, while preserving our outstanding guest experience and continuing to strongly support our travel agent partners. We will also continue to make measured strategic investments, especially in growing the international operations of our business," Fain said.

Royal Caribbean said it expects third quarter earnings per share, including the restructuring charges, to be $1.65 to $1.70, nearly unchanged from forecasts at the start of the year except for the direct increase in fuel costs. Full-year profit for the year has been forecast at $2.55 to $2.65 a share. Analysts were expecting a third-quarter profit of $1.81 a share and a full-year profit of $2.79 a share.

Based on current bunker prices, the company has included $772 million in fuel expenses in its full year 2008 guidance. This figure is $86 million, or $0.40 per share, higher than at the time of its previous earnings guidance.

Assuming the company's fuel costs correlate with movement in the price of WTI, the company says a $10 change in WTI per barrel, would equate to an $11 million change in the company's fuel expense for the third quarter and a $20 million change for the full year.

Royal Caribbean also estimated that at current oil prices, its bunker expenses for 2009 would be approximately $890 million net of existing hedges and that a $10 change in the WTI price would change the expense by $59 million or $0.28 per share.



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