Expect Smoother Sailing into 2010
• Our proprietary pricing survey shows that cruise prices have stabilized in recent weeks. We are in the worst of net yield
declines now and are seeing signs of light at the end of the tunnel. Prices for 3Q09 and 4Q09 departures have increased over
the last eight weeks, even for longer European and Alaskan itineraries. Cruise prices in the Caribbean have increased and
booking trends have stabilized.
• We are above consensus and expect positive net yield growth in 2010. Specifically, we forecast net yield growth of 4.9%
at Carnival (CCL) and 3.0% at Royal Caribbean (RCL) in 2010 owing to – significant easing of year-over-year net yield growth
comparisons in 2Q and 3Q of next year and our view that Europe, which is a less mature market and has experienced above
average passenger growth in recent years, will continue to be a source of growth for Carnival and Royal.
• Average 2010 capacity growth of 9.3% for Carnival and Royal in an already weak demand environment is a risk.
However, if we put expected capacity growth into context, 9.3% average growth next year is below the 15.2% CAGR coming
out of the last economic downturn. This bodes well for a resumption of net yield growth as cruise demand stabilizes.
• Fuel is the wildcard. Oil prices remain extremely volatile, as evidenced by the +60% increase in the price of WTI (West Texas
Intermediate) since February. Our estimates for CCL and RCL assume oil price increases similar to the implied futures prices
for WTI, which is about 30% higher than current levels. However, if global economic growth resumes at a higher than expected
pace, we would expect oil prices to rise accordingly, offsetting some of the positive impact of improving yields. We estimate
that a 10% move in the price of oil is roughly equal to $0.14 (6.4%) of annual EPS for CCL and $0.10 (11.3%) of annual EPS
for RCL.
• Valuations are attractive. We see upside of 13.8% and 18.2% for CCL and RCL from current levels based on our above
consensus earnings estimates for 2010. We are very encouraged by the improving cruise pricing environment, risks the to
attainment of our price targets are the potential for accelerating supply growth to cannibalize existing sales, pressuring net
yields, margins and earnings, rising fuel prices, and further weakening of the consumer.