Carnival Corporation F3Q08 (Qtr End 08/31/08) Earnings Call Transcript

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 |  About: Carnival Corporation (CCL)
by: SA Transcripts

Operator

Welcome to the Carnival Corporation third quarter earnings conference call. It is my pleasure to turn the conference over to Mr. Howard Frank, Vice Chairman and Chief Operating Officer. Please go ahead, sir.

Howard Frank

Good morning, everyone. With me in Miami this morning is David Bernstein, our Senior Vice President of Finance and Chief Financial Officer; and Beth Roberts, our Vice President of Investor Relations. Micky Arison is also on the call and is traveling and over on the other side of the Atlantic, right now. And Micky, of course, is our Chairman and Chief Executive Officer.

I am going to turn the call over to David Bernstein. David will take you through the third quarter and provide some color on exactly how it came down. David?

David Bernstein

Thank you, Howard. I'll begin the call by reading our forward-looking statement.

During this conference call, we will make certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties or other factors, which may cause the actual results, performances or achievements of Carnival to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. For further information, please see Carnival's earnings press release and its filings with the Securities and Exchange Commission.

For the third quarter, our earnings per share was $1.65 compared to $1.67 for the prior year. Our EPS for the third quarter came in above the midpoint of our June guidance by $0.08 per share. This was driven primarily by three things.

First, lower than expected fuel consumption worth $0.02 per share, as our brands continue to find ways to operate their ships more efficiently. Second, lower than expected SG&A worth $0.03 per share of which $0.02 is timing and is expected to reverse itself in the fourth quarter. And lastly, a final insurance settlement related to the damage done to our port facility in Cozumel by Hurricane Wilma in 2005 worth $0.02 per share. By the way, this facility is expected to reopen next month.

Looking more closely at our third quarter operating results versus the prior year, our capacity increased 8.8% for the third quarter with the vast majority of the increase going to our European brands. Our European brands grew 24%, while our North American brands grew 1.5%.

Overall, net revenue yields in current dollars increased 1.4% in the third quarter versus the prior year. Now, let's look at the two components of net revenue yields.

In our net cruise passenger ticket yields, we saw yield improvement of 5.2% in current dollars and 2.2% in local currency. Our North American brands were up 3.4% driven by the Caribbean, Mexico and other exotic itinerary. Our European brands, excluding Ibero Cruises joint venture which we began consolidating in the fourth quarter of last year, experienced 1.8% lower local currency passenger ticket yields versus some very strong comparisons from the prior year.

Given the 24% capacity increase for our European brands this year and the increasing competition from other companies in the European marketplace; we were expecting to see overall flattish yields for the year and that is still the case.

As to Ibero, we did experience some soft pricing during the third quarter, as a result of the difficult economic environment in Spain.

For net onboard and other yields, we reported flat yields in current dollars for the yield decline of 2.1% in local currency. However, mix accounts for 0.7% of the decline as our European brands, which have always had lower onboard spending, are growing faster than the North American brands.

0.6% of the decline results from Ibero Cruises, which was not included in the results last year as they were consolidated beginning in the fourth quarter after we closed the joint venture. Therefore, on an apples-to-apples basis, the decline in yields year-over-year is only 0.8% in local currency with declines in most of our brands.

On the cost side, cruise costs per available lower berth day for the third quarter in local currency are up 12.6%, driven primarily by fuel prices. Fuel prices this year were 77% higher, costing us an additional $230 million or $0.28 per share. Excluding fuel and local currency, the cruise costs per available berth day were essentially flat.

Turning to our 2008 outlook, I will skip the net revenue yield outlook, as Howard will discuss that in a few moments. The cruise cost per available berth day for the full year in current dollars, we're expecting to see a 9.5 to 10% increase. However, excluding fuel and local currency, we will be down slightly.

Based on the current spot prices for fuel, using Monday's closing prices, fuel prices for the full year are projected to be $573 per metric ton for 2008 versus $361 per metric ton in 2007, costing us an additional $678 million or $0.83 per share.

Overall for 2008, we continue to forecast controllable expense unit costs, excluding fuel and currency down slightly, exceeding our long-term target of unit cost growth between flat to one half of the rate of inflation, which continues to be a credit to our brands, given the significant inflationary pressures in crew wages, crew travel, freight and other areas.

Our currency assumption for the euro was $1.42 and the GBP $1.80 for the remainder of the year. Given these FX rates, the year-over-year benefit of currency is expected to be $77 million or $0.09 per share. Currency offset about 11% of the fuel increase of $678 million.

At this point, I will turn the call over to Howard.

Howard Frank

Thank you, David.

Before I provide some early color on the 2009 booking patterns, let me comment briefly on the balance of this year, essentially the fourth quarter. During the quarter, we will take the delivery of the Ruby Princess, which will have its first revenue sailing in November out of Fort Lauderdale to the Western Caribbean. The ship Ruby is booking well, as are most of our Caribbean programs this fall.

At this point, there is very little inventory remaining to be sold in the fourth quarter. We expect local currency revenue yields for the fourth quarter to increase in the 0.5% to 1.5% range, slightly lower in that range from previous estimates with continued Caribbean strength offset by lower onboard revenues and weakened ticket prices in Europe, primarily in Spain, as David touched upon. Fourth quarter operating results will also benefit from forecasted lower fuel costs, partially offset by the weakening of the euro and sterling currencies.

As commodity fuel prices have declined over the last two months, bunker fuel prices have also declined but not to the same degree. It is difficult to know where the bunker pricing will eventually fall into its historical range relative to commodity fuels. But if it does, bunker pricing could fall further from where it is today. However, as David mentioned, for current forecasting purposes, we are pricing bunker at current spot prices.

As a result of the three major hurricanes this fall, we have had several ship disruptions, including the recent disruption for two of our Carnival ships in Galveston. Our Q4 guidance includes a couple of pennies per share for these hurricane related issues, sort of the costs and lost revenues as well.

Taking all of the above factors into consideration, we currently estimate fourth quarter results will be in the range of $0.36 to $0.38 a share compared to the $0.44 a share in the fourth quarter of a year ago. The reduction in year-over-year fourth quarter earnings results from higher forecasted fuel price increases this year versus 2007, which is expected to cost us under $35 million or $0.17 a share.

For the full year 2008, we are forecasting our results to be in the range of 279 to 281, at the higher end of our previous guidance. By the time we report to you fourth quarter results in December, we will be focusing more on the 2009 year. So with fiscal 2008 coming to a close soon, let me try to summarize the year for you.

Throughout 2008, we have been challenged by the US consumer whose finances have been squeezed as a result of the reduced value of their homes and higher gas and commodity prices, and clearly, we felt the impact from the consumer as our onboard revenues were lower than we had estimated, although our estimates for ticket yields, especially in North America, held throughout the year. Also during 2008, as we all know, constantly rising fuel prices cost us $285 million more than we expected last December when we provided earnings guidance for the year.

From the midpoint of our December 2007 guidance for 2008 year of $3.20 a share; that was the guidance we set out at the beginning of the year; we are currently guiding to $2.80 per share or $0.40 below that original guidance. Increased fuel costs of that $285 million that I referred to account for $0.35 of the $0.40 shortfall. We have in the past stated that our business model while not immune to a softer macro economy will have some resiliency, and we think our performance in 2008 supports this case.

Now turning to 2009, our capacity is expected to increase by 5.8%. 3.9% of that capacity will be for our North American companies and 8.8% in Europe. Quarterly capacity increases will be as follows. In the first quarter, it will be 3.1%, in the second quarter, 6.7%, in the third quarter, 5.7%, and in the fourth quarter, 7.4%.

We have five ships scheduled for delivery in 2009, the Aida Luna in March, the Costa Luminosa and Costa Pacifica in April and May, the Seabourn Odyssey in June and the Carnival Dream in September.

On a fleet-wide basis, occupancies at this time, for the first half of 2009, are slightly behind a very strong occupancy that we had last year and higher than the comparisons with the 2007 year. And overall, ticket prices are higher for 2009 booking versus 2008. I will provide further ticket yield details by quarter in my later remarks.

Now as to the current booking environment, and this is just now for North American brands for the first half of 2009, while it's clear that the US economy is softening, recent booking trends; and by that I am referring to, let's say, the last six weeks or so; have been slightly stronger than the very strong levels experienced a year ago but at slightly lower prices.

For the first half of 2009, Caribbean and Mexican Riviera Cruises are up of up to 14 days, which represents a majority of our first half 2009 cruises continue to sell well. Bookings for longer, more exotic cruises broadly speaking are slower on a year-over-year basis at somewhat lower prices.

The North American consumers continue to book their vacations but are looking for value in the cruise product. Of course, our product is well-positioned to meet the needs of the value conscious consumer. At this point, the overall booking picture for North American brands, in our view, in the first half of 2009, is encouraging.

Turning to our European business, bookings for the first half of 2009; and again, this is the last six weeks of bookings or so; are slower than the very strong levels of a year ago, but with pricing running nicely higher. Recent booking trends at Costa, our largest European cruise company, have so far been solid for 2009 and at higher prices, which is very encouraging.

So on a fleet-wide basis, we are pleased to report that even with the continuation of the soft economies in the US and Europe, our current booking volumes for the first half of 2009 are holding up well. While our businesses performed well during the global economic slowdown in 2008, we are mindful of the enormous turbulence in the financial markets and the further possible impact this could have on the consumer in 2009. We will have a better feel for how these events could affect our business at the end of our fourth quarter and we will provide an updated view on the booking picture at that time and more specific guidance on revenue yield.

With respect to operating costs, we will be finalizing our 2009 operating plan during the fourth quarter. We are seeing inflationary cost increases, especially in commodity prices, but it's still too early to provide specific cost guidance. Of course, fuel is our main cost variable and if it continues to go down, it will benefit our 2009 costs.

There also seems to be an inverse correlation between the movement of fuel prices and the movement of the dollar versus the euro and sterling currencies, which are the other main currencies in which we operate. So as fuel prices have declined, the dollar has strengthened, which given our large European operations will reduce our dollar profits. As I indicated, we will provide more specific guidance on the 2009 year during our December call.

Now let me start to give you a brief rundown as to how each of the quarters are shaping out. Think of this as sort of the current picture of what the bookings look like right now. For the fourth quarter, our capacity for the entire fleet is up 8.5%, 5% for North American brands and 17% for our European brands. On a fleet-wide basis right now, our fourth quarter occupancies are slightly lower year-over-year with local currency pricing nicely higher.

For North American brands, the Caribbean represents 42% of capacity, down from 46% a year ago and Mexican Riviera is 12%, which is the same as a year ago. Europe is 12% versus 10% last year, and all other itineraries, including Alaska and [long and] exotic cruises, are each under 10%. With very little inventory left to sell, North American pricing is well ahead of last year with occupancies running slightly behind.

Caribbean and Mexican Riviera pricing is well ahead year-over-year with lower occupancy pricing for Europe and Alaska shoulder seasons are lower with flat year-over-year occupancies. And generally speaking, all other itineraries are enjoying higher pricing with slightly lower volumes.

Europe brands in the fourth quarter are 77% of the Europe itineraries, down from 81% a year ago with the balance in just various other itineraries. Europe local currency pricing at this time is flat with last year with occupancies running slightly behind. Late bookings are holding up well, especially for Costa, as I mentioned before, our largest European brand.

By the time the quarter closes, we forecast overall revenue yields in Europe to be slightly lower, largely because of lower onboard revenues and continued sluggishness in the Spanish market. With an 18% increase in Europe brand capacity, we are quite pleased with our European brand performance.

On a fleet-wide basis; this is also for the fourth quarter; combining North America and Europe, fourth quarter local currency yields are forecasted to be up in the range of 0.5% to 1.5%, which I previously mentioned, but slightly lower than our previous forecast as a result of the lower onboard revenues and the slowdown in the Spanish market.

Now I'm going to turn to the first quarter of 2009. On a fleet-wide basis, first quarter capacity will be higher by 3.1%, 1.5% for our North American companies and 9.5% for our European companies. At this point, on a fleet-wide basis, first quarter pricing is ahead year-over-year with occupancies running slightly behind. And that's versus a very strong booking year in 2008. Indeed, occupancies are nicely up against comparisons for the 2007 year. Ticket pricing against the 2007 year is nicely ahead.

For North American brands, first quarter capacity is 62% Caribbean, 12.5% Mexican Riviera, with the balance of the itineraries in various other trades, including long and exotic cruises and world cruises. Overall, North American pricing is nicely ahead year-over-year with approximately flat year-over-year occupancy.

Breaking it down by trades, Caribbean cruise pricing is running well ahead year-over-year with higher occupancies. Mexican Riviera pricing is also nicely ahead with slightly lower occupancies. These two trades, together with Panama Canal cruises which also has strong pricing, accounts for approximately 80% of our first quarter capacity. As I indicated in my earlier comments, pricing and occupancy for long and exotic cruises is running behind, and this represents approximately 20% of our inventory, of our capacity.

So, on an overall basis at this time, the North American booking picture for the first quarter is quite encouraging, given the strength in the Caribbean and Mexican Riviera.

Now turning to Europe, Europe brand itineraries are 32% Caribbean, down from 37% last year. Europe cruises are 24%, about the same as the prior year. Europe Pacific is 12% versus 8% a year ago. South America, 11%, world cruises, 12%, which are both about the same; and the balance of the fleet and various other itineraries.

Overall, Europe brand occupancies are running behind year-over-year with local currency pricing also behind, but keep in mind, comparisons to last year are a bit tough because bookings were so strong.

Breaking it down by trades for the Europe brands on a year-over-year basis, Caribbean prices and occupancies are ahead, Europe cruise pricing and occupancies are lower, Orient Pacific pricing is level with lower occupancy, South America pricing is lower with higher occupancies, and world cruise prices are higher with lower occupancy. So it's a bit of a mixed bag, but given recent booking trends, including strong demand for late bookings, we feel the European brand, the performance in the first quarter will be quite acceptable.

Now turning to the second quarter of 2009 and giving you the booking picture there, second quarter 2009 fleet-wide capacity is up 6.7%, 4.9% in North America and 9.1% in Europe. Booking information in the second quarter is still in its early stages of development. So I caution not to read too much into the data.

On an overall basis, second quarter pricing is currently running ahead year-over-year with occupancies flat versus the tough comparisons in 2008. Compared to 2007, occupancies are nicely higher.

North American brand capacity breaks down as follows. Caribbean is 52% versus 51% in the prior year, Mexican Riviera is 11%, down from 13% in the prior year and all other itineraries, Alaska and European shoulder season, Panama Canal, long and exotics, are all under 10% each.

Caribbean pricing is running nicely ahead year-over-year with slightly higher occupancies. Mexican Riviera pricing and occupancies are slightly ahead. Pricing and occupancies for the various other itineraries, generally speaking, are running behind last year with the exception of Europe and transatlantic where pricing is ahead, but at lower occupancies versus 2008.

Looking at Europe in the second quarter, European brands are 58% in Europe trades versus the same 58% a year ago, 10% in the Caribbean, which is down from 16% a year ago, 11% are transatlantic, down slightly from a year ago, 12%; and the balance of the different itineraries are all under 10%.

Local currency pricing in Europe on an overall basis is higher than last year with occupancies approximately flat versus 2008, but higher than 2007 occupancies. Europe itinerary pricing is higher than a year ago with lower occupancies, for the Europe cruises trade. Caribbean pricing is lower with higher year-over-year occupancies and transatlantic have lower pricing with higher occupancies.

On an overall fleet-wide basis, occupancies and pricing for the second quarter bookings are encouraging at this time, but the second quarter is still, as I said before, in its early development.

And with that sort of rundown on the booking picture for the fourth quarter this year and the first and second quarter of 2009, I will turn it back to you for Q&A. Alex, we are ready for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Robin Farley with UBS. Please proceed.

Robin Farley - UBS

Thanks. I wonder if you could give a little bit of color about onboard. I mean we see it was down slightly in the quarter, but are you seeing that across all brands? I think previously you talked about it being mostly, I think, of Carnival and Costa brands broader market. I wonder if you could update us on the trends you are seeing there now, and then I have got another question after that.

Howard Frank

Yes. I will turn it over to David.

David Bernstein

Sure. Robin, we are seeing the weakness, as I said, across most of our brands in North America and in Europe. As we mentioned before, we are seeing reductions in bar. We are seeing it in the casino. We are seeing it in art auctions. We are still seeing an uptick in [ShoreX] and spa. So there are some pluses and minuses, but overall it is down across most of the brands.

Howard Frank

When we say it is down, it is down really very modestly, I think in the 1% range or something. I mean, it is really down modestly.

David Bernstein

For the third quarter, I had mentioned that the real year-over-year decline was 0.8%. In the second quarter, apples-to-apples, it was only 0.2%. So we are talking about very modest declines.

Howard Frank

Remember, when we gave guidance at the beginning of the year, we assumed, as normally happens, that we would see increases in onboard, which typically happens every year. We did not see those increases. So, certainly from the standpoint of where we thought we would be, we are not getting there.

Robin Farley - UBS

Okay, great. Then, when you gave your outlook for the first half of '09, and I realize it is still early, but you talked about ticket prices at higher levels, but occupancies slightly below. I seem to recall that last year it was the opposite, where the bookings were ahead in volume, but lower in price, and then as you get closer, you would see that reverse a little bit. Is that a function of what you are doing with pricing or is it a function of something on the consumer side normally where you would be with volume and prices, it sounds like it is a slightly different outlook than last year?

Howard Frank

I think it is probably a combination of both. I think to some degree; and it is hard to know, it is hard to measure that; our brand managers believe they can capture higher yield even at a lower booking pace because demand is still strong enough to still get there by the end of the quarter. So from a yield management standpoint, they are sticking with their higher prices at the expense of somewhat slightly lower demand in the belief that they can still capture higher pricing, higher yields in 2009.

Now, to some degree, some of that may be because of the economies in both North America and Europe there is a little bit of a slowdown. It is hard to know. The slowdown, albeit, is at higher price points that we have out there. So it is also possible that if we continue to see it slow further that we will have to take pricing down. Right now, we are trying to hold onto as much pricing as we can going into 2009.

Robin Farley - UBS

Okay, great. Thank you.

Operator

The next question comes from the line of Tim Conder. Please proceed.

Tim Conder - Wachovia Securities

Thank you. Just a couple of items here. Howard, you were alluding to it a little bit there, but have you seen the booking window, anyway to quantify any changes in the booking window over the last 90 days, and in particular, commentary from bookings that you are seeing out of the UK, and then, separately continental Europe?

Howard Frank

Well, when I gave you the trend in bookings, Tim, it was really a six-week trending, which we do to see what is more recently been going on. Quite honestly, our view is it is remarkably pretty solid on both sides of the Atlantic. In the UK, we are holding price. Remember, the UK, while the economy has softened considerably, the P&O brand, which is our main brand in the UK, their market is largely older British passengers, many retirees, in fact, their long cruise, their world cruise that just opened up for 2010, they got an enormous number of world cruise bookings this week. It is amazing and they were surprised.

So that market is more immune to the slowdown in the British economy because these are people that are in retirement, they are close to retirement or wealthier people who were taking longer cruises and P&O historically has had very good performance in these down markets. So they are doing fine and they are holding price, and even if it is at the expense of taking late bookings because both in the UK as well as in Europe with Costa, we are finding that the sense on in both areas is that while the consumer is delaying their vacation decision that they ultimately are stepping up and taking their vacations and booking their cruises, but at later dates. So, late bookings are holding up well both in the UK, as well as in continental Europe with Costa, if that answers your question.

Tim Conder - Wachovia Securities

Yes, because I think you said that a year ago, in general, and you mentioned this with the P&O cruises that that brand had booked out about 10 months historically versus the overall corporate industry average of six months. So, as I understood your response right that your P&O cruises in the UK are still holding up very well, but potentially seeing a little bit of tightening of that window, as people are booking a little closer and the same thing for Costa, is that correct?

Howard Frank

I think P&O this year is taking a little bit different approach to their yield management with a goal objective of capturing more yield. Last year with the delivery of the Ventura, I think they were more concerned about, with that significant increase in capacity, of filling up the Ventura and filling it up earlier, so they put out pricing that they thought in retrospect. You always do that. It is really a little bit of a guessing game when it comes to a new ship focusing on a little bit different part of the British market that you are going to get your pricing out there early, your lower pricing. So I think they are trying to capture some higher pricing at the expense of booking at a little bit slower pace.

Tim Conder - Wachovia Securities

Okay. Then, secondly, maybe more of a question for Micky here, Micky, two parts to the new build outlook here, any change in the competitive landscape, better or worse as a result of [STX] of Korea fully acquiring [Aucker]? Then, on the dollar-euro exchange rate, at what level threshold does it start to look a little more attractive to consider maybe reallocating some of the new build capacity to a dollar denominating market? So, what threshold level does it start to peak your interest more of the dollar-euro rate?

Micky Arison

It is very hard to pin a rate to that. I think we are in constant discussions. We are constantly looking at that, looking at potential returns. Obviously, even fuel prices have an effect on how we look at that because we use current fuel prices on doing our return data. So there are too many moving pieces just to isolate one piece and say there is a target on one piece. I will say that with the situation now with the yard is pretty volatile right now and a lot going on, but I do not think our position has really changed dramatically from where we were last quarter.

I think it is still pretty challenging to do new building projects. It is not just euro-dollar exchange, it is a lot of things. Commodity prices, steel prices have had a major impact. If predictions of a global economy slowing are correct, the container business, for example, slows, demand for container ships slow that could have a major impact on yards around the world and could bring prices in. So we will see. Right now, I would say that nothing has really changed from 90 days ago despite all the volatility.

Tim Conder - Wachovia Securities

Okay, great. Thank you, gentlemen.

Operator

The next question comes from the line of Steve Wieczynski with Stifel Nicolaus. Please proceed.

Steve Wieczynski - Stifel Nicolaus

Yes. Good morning, guys. Just a couple questions. First, I do not know if it is too early to tell, but have you looked in terms of fuel supplements and either you pushing them back at all?

Micky Arison

I think we have tried to make it clear in the press release that the fuel supplements, assuming fuel stays the same as when we did the press release consistently for the rest of '09, we will have recovered through that supplement only 25% of fuel increases for '08 and 43% for '09. So we are still only recovering a very small amount of the cumulative fuel price increases, and therefore, I would expect them to be around awhile.

Obviously, if fuel prices continue to drop at the kind of rate that they have dropped over the last quarter, I mean the middle of July they were at $147, so without predicting where fuel goes, if fuel stays at the same level, then we are still only at 43% recovery if we recover the full fuel supplement from every passenger.

Steve Wieczynski - Stifel Nicolaus

Okay. Got you. Thanks. Then on the last call you basically said cancellation rates were almost zero or close to zero. Any change there?

Howard Frank

There really has not been any significant change. The comments we made on the last call still hold true in terms of the cancellation rates just being up a tad.

Steve Wieczynski - Stifel Nicolaus

Okay. Got you. Then, you said for the fourth quarter, your revenue guidance includes the impact from what you are seeing in Galveston. I think you said it was a couple cents. Have you seen many people cancel those cruises due to the change in port?

Micky Arison

The couple of cents relate to all events, hurricanes 'A' through 'I'. I think it is very early to say. I do not know if, David or Howard, you have gotten any feedback, but it is very early to say whether there has been any impact.

Howard Frank

I do not know. I suspect there might be a little bit, but not much. I mean, we moved the ship to Houston, which fortunately there was a pier available in Houston, so we can continue to operate. So I think certainly the local markets in Houston and Galveston, clearly, will be affected in that part, but the rest of Texas is okay. A lot of our business coming into Houston and Galveston is fly in business as well. So I think we will be okay.

Micky Arison

Obviously, if somebody has lost a home, there is some likelihood of potential cancellation. So hopefully, we have got that all factored in a couple of cents, but time will tell. At least, we have a pier to operate in Houston. We are going to be back in Grand Turk starting October 8. So despite all the devastation, we should be back to business as usual pretty quickly.

Steve Wieczynski - Stifel Nicolaus

Okay, great. Thanks, guys.

Operator

The next question comes from the line of Assia Georgieva with Infiniti Research. Please proceed.

Assia Georgieva - Infiniti Research

Good morning, guys. Congratulations on excellent Q3 results. A couple of questions. Howard, maybe you can help me by providing a little more detail on the trends in the past six weeks in the North American market. Specifically when we look at the Bahamas and the short Caribbean the first time cruiser markets, it seems there has been some weakness there. Is that part of your yield management program of holding pricing or is it something that you are seeing in terms of the number of bookings and calls to make reservations?

Howard Frank

I think on some of the short Caribbean programs, we have seen a little bit of weakness from the first time cruiser. Some of that could be hurricane-related. Typically, when those passengers who have never been on a cruise are more affected by the sense of hurricanes, the psychology of the hurricanes than people who are more experienced cruisers and many of the people that go on short cruises are first timers, and they see a little bit of an aberration. I think we are seeing a little bit of that, yes.

David Bernstein

That is all factored into the yield guidance we have.

Micky Arison

When you look at the short period here, the last few weeks and going into the next few weeks, when you have Category 3, 4, 5 hurricanes as the lead-in story on all the network cable shows and network news and front page of newspapers, we always see a slowdown, but when they get off the front pages, things tend to get back to normal. The other thing that we generally see, and having been around this a long time, is that after the Presidential Conventions and going into a Presidential Election, we generally see a slowdown as people focus in on the Presidential Election through the first week in November. I can say that in the 30 plus years I have been doing this, almost every four years we do see that as everybody is focusing on in who they are going to vote for.

So the combination of those two things has played a role. Now, if you add in all the market turmoil, it is very hard to know what is causing what.

Assia Georgieva - Infiniti Research

Okay. Micky, in June 2012, we should tell people to short the stock because of the next election?

Micky Arison

No, more like September.

Assia Georgieva - Infiniti Research

Okay. Thank you for that. My second question relates more to SG&A. It was down this quarter. It was down the quarter before on a unit basis even though you took delivery of a couple of ships. Should we expect that trend to continue and is the insurance recovery that is included in SG&A related to the Princess fire?

David Bernstein

No, the insurance recovery that was included in SG&A was related to Hurricane Wilma and the damage to Cozumel back in 2005. That represented, as I indicated before, about net it was $0.02 a share. There was some tax impact. So it was more like $0.03 a share in the SG&A line. So that was the primary reason that SG&A was driven down in the third quarter.

We have been tightening up on SG&A across all our brands. So, as I mentioned in the second quarter call, people were looking at their expenses and reducing them as a result of cost containment programs. At this point, we are not putting any guidance forward for 2009. As I mentioned overall, we did expect cruise costs to be flat for this year.

Assia Georgieva - Infiniti Research

Okay. Thank you, David. Thank you so much.

Operator

The next question comes from the line of David Leibowitz with Horizon. Please proceed.

David Leibowitz - Horizon

Quickly, what quarter next fiscal year, would oil prices be flat or even down if at oil remains at $95 a barrel?

David Bernstein

David, basically, within our guidance for this year, in the fourth quarter we used, I think it was $594 per metric ton. At this point in time, of course, that includes actual essentially for September, which is above that number and it includes a projection for October and November of about $570. So at this point in time, the $570 projection for October and November is actually $3.00 below the 2008 full year cost per metric ton, which was $573.

Howard Frank

This is a moving target and it is also bunker prices and the crack spreads. I did mention that the bunker prices did not fall as quickly as the commodity fuel prices we expect. Just recently, we did see the crack spreads fall a little bit more. That is not factored into the numbers, but also fuel prices went up. So you have got so many variables here, it is hard to know.

I think at some point when we get closer to the; and maybe in the fourth quarter call and we have a better sense of, at least at that point, where fuel prices are; we will give a sense on a quarter-by-quarter basis as to how it measures up versus last year's quarter savings.

David Leibowitz - Horizon

Okay. The second question, at what point does the dollar become strong enough that some of the capacity that you have committed to with the yards might switch over to a North American brand?

Micky Arison

The capacity is committed to specific brands and it would be virtually impossible, but not impossible, to switch it from one brand to another. It is not something that is under consideration. I mean those ships are designed, the interiors are done already for the specific brand. As you know, brands design the interiors very differently. So we really do not have that much flexibility to do that. I know what you are thinking of because in the past we have signed contracts that allowed us to switch brands. All those contracts ran out. We have no brand switching contracts going forward.

David Leibowitz - Horizon

Okay. Then if I could rephrase it, at what dollar to euro rate would you think to add additional capacity to North American brands?

Micky Arison

I think I answered this question already, but it is really a function of when the dollar brand capacity can meet our hurdle rates and that that brand needs the capacity, as well as meeting our hurdle rates. That is not just a dollar-euro question, but it is a question of type of ship, prototype, sister ship, commodity prices, cost of fuel at the time, et cetera, et cetera. So you are asking a question of one element of a very complex web of moving targets. I can just assure you that when we can get the kind of returns, we target returns and our brands need the capacity that we will be moving at that time.

David Leibowitz - Horizon

Okay. Rather than beat a dead horse, we have some older ships in some of your North American brand ships that are 15 to 20 years in service already. Would that dictate the desire for new capacity?

Micky Arison

We have no ships in our North American brands that have lives, in my opinion, less than 10 years. Our older ship in our North American brand, I believe is the Fantasy where we are just now spending $50 million on an evolution of fun upgrades. Do we have any older?

Howard Frank

The Holiday.

David Bernstein

The Holiday.

Micky Arison

The Holiday we have already announced is leaving and going to Iberocruceros. So taking the Holiday out --

David Leibowitz - Horizon

And the Prinsendam?

Micky Arison

Prinsendam is an unbelievably successful ship that we put $20 million in last year and is getting one of the highest yields of any of our ships in our fleet.

Howard Frank

As are the Seabourn ships, which are approaching those ages, but I mean they are performing very well.

Micky Arison

There is no ship in our fleet that I would say in the North American fleet that has less than 10 years of life in it.

David Leibowitz - Horizon

Okay. Again, I am not trying to push a hot button. I was just trying to indicate that at a point in time new capacity comes on not just because you need capacity as much as trade-offs with existing capacity. So I, again, do not mean to hit a hot button issue with you.

Micky Arison

That really is not an issue right now. The issue is whether that we are going to take a disciplined approach and whether brands that need capacity can meet the hurdle rates for a new building program, for a new building project. If they can, we will seriously consider it and negotiate a contract. If they cannot, we will wait.

David Leibowitz - Horizon

Thank you.

Operator

The next question comes from the line of Mark Reed with Landsbanki.

Mark Reed - Landsbanki

Good morning. Two questions. The first one is just a quick one on share buybacks. Have you made any in the quarter and what is your thought on buybacks going forward? The second question is standing back a little bit, the major economies of Europe could well be in a recession in the next 6 to 12 months. You have got 8.8% capacity increase going into 2009 in Europe. At the moment, you seem to be holding price in the yield management system, which seems to imply that you are pretty confident in Europe demand, and that is a big capacity increase on top of one we already had this year going into a fast slowing economy, and when do you start to change the yield management in Europe?

Micky Arison

Yield management is based on booking pattern, not based on the front page of the Financial Times. It is based on bookings. Right now, booking levels are pretty strong and that is how we make yield management decisions. Despite the fact that a country like Italy, for example, had a pretty rough economy this year, that Italians will take their vacations and Costa filled their ships at good yields and met their quotas in Italy. The only country, as Howard said earlier, that seemed to suffer from a slowdown in vacation travel from the standpoint of cruises was Spain. I venture to say that some of that is the fact that Spain really does not have well established brands.

When you look in the UK and you look at P&O and Cunard and how powerful those brands are, they did well regardless and Costa in Italy and Aida in Germany, but we and some of our competitors are trying to create and build brands in Spain and building a brand takes a little time. So, we are very confident in the capacity increases that we have in Europe. We do not have any in Spain next summer, but we do have in Italy and in Germany and Costa and Aida are performing very well for us.

Mark Reed - Landsbanki

Thank you.

Howard Frank

On share buyback, David?

David Bernstein

Yes. Mark, on share buyback, we had announced we had stopped buying back the shares last December and we have not bought back anything since.

Mark Reed - Landsbanki

Your attitude to the future, will you continue to review that situation?

David Bernstein

We always review the situation. Of course, in light of today's financial world and the credit market, we are not currently buying anything back.

Howard Frank

We have also been very consistent that we have said that we intend to defend our A minus rating and we would only buy back on the basis of continuing to defend that A minus rating and we think in these times in particular that has proven to be very important and very valuable.

Mark Reed - Landsbanki

Thank you.

Operator

The next question comes from the line of Scott Barry with Credit Suisse. Please proceed.

Scott Barry - Credit Suisse

I had just one question. Are you seeing any change in your air/sea mix and would you anticipate potential in the future that you would have to maybe partially subsidize there going forward?

Micky Arison

I do not know that we have seen the change, but air/sea mix has been lower. Clearly cost of air has gone up and some of these long, exotic cruises that I talk about where business has been off, I think part of the reason is the higher cost of the air leg and the higher price point as result of it. I think that will ultimately get absorbed. I think that is going to be with us for a while, as long as fuel prices are at these levels.

Howard Frank

Absorbing air costs has historically been to some degree a marketing decision and a yield management decision. That is just one of the various elements that marketing can use to market its product. There was a period of time that every cruise line offered free air. I mean that is just part of the marketing mix and each brand makes decision on how they do that in the context of how they do their marketing and how they do their yield management.

Scott Barry - Credit Suisse

Great. You had mentioned I think on the last call you were seeing some relative strength in the short cruise market here in North America. Is that still the case? Are you still seeing some strength in the three, four, five day market?

Howard Frank

What I said just a short few minutes ago, Scott, is that, just recently, probably the results of the hurricanes and all the other turmoil after the three, four and five day market has shown a little bit of softness, but we think that is typically not unusual in the fall with hurricanes, but that is just a recent development. I think the psychology of first time cruisers is more affected by hurricanes than it is for experienced cruisers and that short market is primarily a first timers market.

Scott Barry - Credit Suisse

Okay, great. Thanks very much.

Beth Roberts

Just to clarify on the air/sea mix, it has been running up slightly higher this year, but that is really a function of itineraries as we move more capacity out to Europe.

Operator

Sir, the next question comes from the line of Joe Hovorka with Raymond James. Please proceed.

Joe Hovorka - Raymond James

Thanks, guys. You commented that fuel is going to benefit you $60 million in the fourth quarter and foreign currency is going to be a negative $33 million, and there is a relationship between those two. Looking into '09, should we expect roughly half of the benefit of fuel being offset by foreign currency or should that relationship change a bit?

Micky Arison

That is very hard to tell. We are not here to predict the movement in foreign currency and/or the movement in fuel prices. There have been, as you could look back historically, when one has benefited, the other has gone against us and there has been an inverse relationship there. The exact relationship and how much one offsets the other is very difficult for us to say or predict at this point.

Joe Hovorka - Raymond James

FX is usually a smaller percentage, is that correct? Is that what the actual numbers have been the last couple of years?

Micky Arison

It depends on the percentage movement in FX versus the percentage movement in fuel. Lately, like for instance in 2008, fuel prices have moved far more dramatically than FX. So the impact was substantially more than the FX impact. In 2007 over 2006, they were much closer to each other because of the percentage movement.

Joe Hovorka - Raymond James

Okay, great. That is all I had. Thanks.

Operator

There are no questions at this time.

Howard Frank

Okay, great. Well, thank you all for calling in and I think if there are any follow-on questions, you know how to get in touch with Beth Roberts. Everybody, have a good day. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.

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