Royal Caribbean: Cruising for a Bruising!

Royal Caribbean Cruises (RCL) reported reduced earnings attributable to higher fuel costs. For 2008 they claim to be 52% hedged for Q1 and 45% hedged for the entire year. The company went to great lengths to state that they provide guidance with fuel priced at the current pump prices, except where hedged.

The company needs to be increasingly viewed as an energy play and less as a consumer service stock. The cruises all sound luxurious, but investors are getting hammered by energy costs. Management needs to better explain what they are doing in this cost category. One has to wonder if they have the corporate culture to deal with this complication. Cruise executives are usually experts in hospitality. Transportation executives have expertise in fuel cost management.

Second point: Capex is scheduled to be very high over the next few years. Read this quote from the press release:

Based on current ship orders, projected capital expenditures for 2008, 2009, 2010, and 2011, are estimated to be $1.9 billion, $2.0 billion, $2.2 billion, and $1.0 billion, respectively. Projected capacity increases for the same four years are estimated at 5.1%, 9.3%, 11.4%, and 6.4%, respectively.

Immediately preceding management said this:

As of December 31, 2007, liquidity was $1.4 billion, comprising $0.2 billion in cash and cash equivalents and $1.2 billion in available credit on the company's unsecured revolving credit facility.

I am sure that marketing is very excited about the new product offerings. But finance is probably hiding under their desks. How will the Capex be funded?