Carnival Eliminates Dividend to Preserve Cash

Carnival Corporation (CCL) and Carnival plc (CUK) on 31 Oct 2008 announced suspension of payment of their annual dividend beginning in the next quarter. According to Micky Arison, Carnival Corporation & plc chairman and CEO:

The company's cash flow remains strong. However, in light of the unusually high cost of raising new capital, continuing concerns about financial institution liquidity and current uncertainties in the global economy, we believe that preserving cash is a prudent step which will further strengthen the company's balance sheet and enhance our financial flexibility.

Carnival also filed with the SEC Form 8-K for the issuance of 19,188,005 shares of Carnival Corporation's common stock with the proceeds being used to repurchase shares of Carnival plc in the UK market (Stock Swap). Since Carnival plc shares are currently trading at a discount to Carnival Corporation shares, the company would derive an economic benefit from the stock swap.

At the same time, Carnival gave 2009 earnings per share guidance in the broader range of $2.50 to $3.00 given the uncertain economic outlook. This compares with its 2008 earnings per share guidance of $2.81 to $2.83.

Reading Between the Lines – Credit

It is unusual for a company to suspend dividends when little change of profitability is forecast. But Carnival has “bet the ranch” that the cruise industry would be in for explosive growth. A October 23, 2008 article titled "Can Carnival Adapt to the Changing Economy?" states in part:

Carnival is constrained by 22 new ships being put into service between 2008 and 2012. The only weapon is price cutting due to this additional capacity as there is little doubt now that a worldwide recession is setting in. In the past, ships could be repositioned to stronger markets. This will not happen this time as the markets are saturated.

The timing for Carnival’s explosive growth could not have been worse. The company has added capacity at exactly the wrong time, and will be competing with itself to fill its ships. It also illustrates the credit lines to support this expansion must have dried up, and that new credit sources will be required. Any new source of financing will no doubt be more costly than planned. As Carnival is trying to conserve cash – it might be questioning if (or how much) credit is even available.

2009 Revenue Forecast per available lower berth day

The first consumer expenditure affected in economic downturns is vacations and holidays. Right when Carnival’s expansion cash flow requirements peak, the world enters a recession coupled with destruction of the credit market. Carnival’s 31 October 2008 press release gave some guidance relative to revenue in 2009:

Factoring in the slowdown in bookings, the company is forecasting full year constant dollar net revenue yields (revenue per available lower berth day) to be lower by 1% to 5% compared to the prior year.

This appears to be very optimistic. It is obvious that major discounting is occurring. Carnival must fill its ships. You would expect the revenue per available lower berth day to fall at least 10% caused by discounting due to reduced demand. A percentage of all passengers pay full price as they book up to 18 months in advance before discounting begins. Discounting begins when triggered by passenger booking models which predict at any point in time whether the ship is on track to being sold out. Even New Year cruises which are historically sold out by now can be booked at a discount. Steep discounts of cruises six months in the future are not uncommon today. The longer the economic downturn continues, the more discounting that will be necessary, and the larger the impact is to Carnival’s bottom line.

Length and Depth of Economic Downturn

The economic model Carnival used must show the economic recession to be short and shallow with a robust expansion in the third and fourth quarters of 2009. Whatever economic assumptions are being made, it is a guess.

But the cruise line industry is very susceptible to the impacts of recessions. The average cruise ship passenger is passenger is 46 years old and makes $93,000 per year. This translates to 83% of all passengers still working for a living. Working people in a recession tend to forgo vacations and have to be induced with steep discounts. This is why the length of a recession has major impacts on Carnival’s bottom line.

Off subject but still important, average working people worldwide have seen a reduction in their retirement accounts, as well as the homes they live in. Even if this recession is shallow and short, Carnival will be faced with demand destruction as this segment forgoes vacations to rebuild their retirement accounts.

Overall Outlook

Carnival has taken an optimistic view of future economic conditions in giving guidance for 2009. There are concerns about financing, as well as the passenger revenue which could have significant impact on Carnival’s earning per share.

There are many factors which will affect disposable income of Carnival’s passenger base which cannot be quantified at this time. How this will play out is just a guess, but no doubt will not benefit Carnival’s bottom line.

Disclosures: None.

Comments

[Melissa Jur...:]

Carnival cancelled all their European 2009 bookings, except for 4 late in the year on a new ship, the Carnival Dream.

That makes 4 European cancelations on Carnival for 2009 for me. Out non-refundable airfare too that they are too allegedly pay to everyone who is out money.

Just sailing in the Caribbean and not in Europe - a very popular cruise destination, and turning away loyal customers like myself will further hurt Carnival. I am not going to sail with them any time soon and have gone to a competitor to go to Europe in 2009.

They WILL be competing with themselves and other cruise lines for run of the mill Caribbean bookings. As a shareholder this whole situation concerns me.

2008 Nov 02 08:48 AM

[Anne Campbell:]

Cruisers affected by the repositioning of Carnival's ships will be offered space on Princess or Holland America, two other Carnival Brands. Personally I think it was a wise decision to pull the ships from Europe in 2009 because there is over-capacity in Europe. Every cruise line will have a tough time in Euope next year.

I certainly believe we're about to enter a very rocky economic period. But as we saw post-9/11 the cruise industry is the most resilient segment of the travel industry. And the biggest boon to cruising is "Homeland Cruising", which is positioning ships in domestic ports. The three ports of New York (Manhattan, Brooklyn and Bayonne, NJ) last year saw 1.3 million cruisers. By doing this, cruise lines are attracting people who will drive seven or eight hours to take a cruise although they wouldn't board a plane to fly to Florida.

2008 Nov 02 11:49 AM

[Agape:]

This writer does not know this company or this industry.

"The first consumer expenditure affected in economic downturns is vacations and holidays."

Yes, but this segment is huge, encompassing Las Vegas, Disneyworld, recreational vehicles, camping, hotels, land-based resorts, etc, etc. They all suffer in downturns, but not to the same degree. Cruises have done much better historically than any segment in leisure. Why doesn't he mention that? Cruises are a better vacation value than resorts or hotels, so people foregoing the former may choose the latter. Why doesn't he mention that?

"Right when Carnival’s expansion cash flow requirements peak, the world enters a recession coupled with destruction of the credit market."

Wrong. The capacity coming on now is peanuts compared to what it was after 9/11. Just after the Millenium, that was the peak. Capacity increases in the high single digits now versus the high teens after 9/11 when demand fell off a cliff. That was truly a scary amount of capacity coming on at the worst possible time. However, what happened? The company continued to fill its ships. It had over 100% load factors for both 2001 and 2002. And lower prices soon had people falling over themselves to book.

"In the past, ships could be repositioned to stronger markets. This will not happen this time as the markets are saturated."

Wrong. Europe is a long, long way from saturated. And Asia is just getting started.

"Whatever economic assumptions are being made, it is a guess."

Yes, but management has a history of guessing intelligently, based on facts and a knowledge of the industry. More than we can say for this writer.

2008 Nov 03 04:31 PM

[Steven Hansen:]

Agape. a word associated with Carnival, and has a modern meaning of Christian love of one's fellow man.

I am fully exposed who I am but who are you? You say I do not know Carnival or what I am writing about. I will let my statements stand and I do not have to try to weaken your statements by claiming you do not know what you are talking about. In this type of forum Agape you simply need to give facts, and we can let my fellow investors ponder the validity of the statements.

Agape, the comment that concerns me the most is the economic comparison to 2001. Today's situation compares to 1973 when the cruise industry was in its infancy. investors already know we are entering the mother of all crisis. Carnival's core customer market has been financially damaged - and to top it off, the economy is entering a major recession. In 2001 / 2002 Carnival customers still had their money - they were just afraid to travel. In 2008 / 2009, Carnival's customers only have the same amount of money they had in 2001 / 2002 - the rest has been lost.

Let me be clear, I admire the Carnival model. When Carnival swallowed their competitors, they left the soul in the entities they consumed. One engineering officer at Cunard once told me that Cunard became a more focused and structured company - and he believed it would be much more profitable then before Carnival's purchase. This has come to pass. He would much rather work for Carnival than Cunard. That says it all.

I have over 30 cruises on Princess, Costa, and Cunard. I will take another in a few months to celebrate the low prices. I believe cruising is the way to take a vacation (holiday).

But this article is about interpretation of a legal SEC filing and associated statement from CCL / CUK. Carnival has eliminated dividends when the market was looking for value. It was unfortunate that this came at the worst possible time.

if you are a representative of Carnival, you can contact me directly. Julie Benson, Vice President Public Relations of Princess Cruises has my email address and telephone number. I have tried without success to have Carnival to respond to other issues and questions. for this article however, all information was in the public domain.

steven hansen

2008 Nov 04 02:57 AM

[Agape:]

Actually, when I chose that name I had in mind my reaction to your article. It left me agape. I am agape that you would reference your own earlier article as a source for this article, without even mentioning that you are the author.

I am agape that you refer to Carnival's recent capacity growth as "explosive" when it is actually quite modest relative to the 2000-2004 period. And no new ships have been ordered in recent years because, in management's opinion, the anticipated return is not sufficiently high. It should be noted that Royal Caribbean has not demonstrated the same discipline. Richard Fain is going to build ships whether they end up being profitable or not.

Major discounting is occurring in certain brands and regions. I do not believe it is across the board. Yet. The Carnival short cruises out of Florida have tanked, but HAL has held up well. The voyager class ships of RCL have held up as has Disney. More importantly, look back to the round of discounting that followed 9/11. Travel agents started screaming, "Hurry and book a the lowest cruise prices in 20 years!" The public came running, and those that didn't run missed out on the deals. When the Caribbean was weak a year ago after a series of hurricanes, a little judicious discounting was done and the prices came back.

In most industries, discounting leads to more discounting and an ugly downward cycle. In cruising, discounting leads to travelers running back to book the ship or itinerary they've always dreamed of sailing on. It's not an attitude I condone, but there are many Americans who will give having a great cruise priority over securing their retirement.

Could this be what CCL management is thinking about when they estimate a rebound next year?

Since you have cruised a lot, you realize that there is a large subset of serial cruisers who do not consider the economy when they book. These are things you must be aware of but left out in your haste to construct a bearish case against CCL.

I am not a company insider. Just an investor and cruiser.

2008 Nov 04 01:21 PM