Carnival eyes price stability for Q4

By Tom Stieghorst
Carnival Cruise Lines is trying to hold the line on fourth-quarter sailings, through the entire booking window, and is willing to give up some occupancy to do it, company officials said in a recent teleconference.

If the strategy succeeds, Carnival would lay the groundwork for stronger pricing during the 2014 Wave season.

Carnival Corp. Chairman Micky Arison painted it as a "win-win" because any space that would otherwise be empty at sailing will be given away or sold at deep discount to travel agents.

"Carnival's talking about going a quarter or two, or whatever, and leaving some cabins if necessary," Arison said in the company's third-quarter earnings call for Wall Street analysts.

"They've been able to use these cabins for travel agents, which is fantastic because the agents get to see the upgraded Fun Ship 2.0 product, and that hopefully encourages them to sell more in the future," he said.

Carnival in mid-September gave away 1,000 cabins to agents and said more would be made available later. It has also been offering cabins on close-in sailings to agents at deeply discounted prices.

The attempt to stiffen prices comes after a six-month slump following the Carnival Triumph incident in February.

In the conference call, Vice Chairman Howard Frank said yields for the fourth quarter are projected to be down double digits, year over year. Yield is a measurement of revenue per cabin.

Carnival Cruise Lines is raising its profile with an unusual $25 million fall advertising campaign on national TV, as well as various outreach programs and incentives to travel agents.

Carnival Corp. CEO Arnold Donald said firmer prices are in part targeted at those who are already Carnival partisans.

"We are doing some testing in Carnival now to see if holding the price on certain itineraries can break a cycle of some of our repeat guests waiting until the last minute to book, thinking they're going to get a better price," Arnold said.

Lynn Catalina, a CruiseOne agent in Universal City, Texas, near San Antonio, said past passengers are also quick to rebook at lower fares when prices decline.

"They're very savvy, and they know how it works," she said.

However, Carnival remains very competitive on cruises from Texas ports, Catalina said. She observed that when prices on Royal Caribbean International's cruises out of Galveston dropped below Carnival's for a while, Carnival's prices came down.

Vicky Garcia, COO of Cruise Planners in Coral Springs, Fla., said it is important for cruise lines not to undercut the market. "We have started to see Carnival Cruise Lines holding prices on some itineraries, despite not being sold out," she said.

It isn't clear how extensive Carnival Cruise Lines' strategy is. In general, Frank said that price comparisons for the line aren't expected to turn positive until the second half of 2014.

That forecast drove Carnival Corp. shares down 4.7% in the two days after the call, as analysts downgraded their outlook and cut their estimates for 2014 earnings.

Carnival Cruise Lines hopes to get some mileage out of new product enhancements it expects to unveil later this fall, and possibly from a simplified pricing structure it has promised to deliver in October.

Frank said the cruise line had seen a "significant improvement" in travel agent bookings since it started the Carnival Conversations outreach initiative in July.

Irene Azel, an agent at Travelmasters, on New York's Staten Island, said of Carnival Cruise Lines, "They've really been trying."

A strategy to prioritize price over occupancy is a bit of an anomaly at the cruise line, which nearly always sails full. Through the first nine months of the year, the fleetwide occupancy for all of Carnival Corp.'s 10 brands was 106.1%, reflecting some cabins with third and fourth berths filled.

Carnival Cruise Lines ships that have not been sold out a few weeks before sailing have been an opportunity for travel agents.

In August, the cruise line began topping off ships by offering deep discounts to travel agents. It followed that in September with the cabin giveaway, which sold out in less than an hour.

Beyond the goodwill earned within the agent community, Carnival Cruise Lines also gains exposure for its ships, making agents more informed advocates for its brand.

If it loses some occupancy in the fourth quarter, agents primed to sell the brand during Wave season might be worth the trade-off.

Although it doesn't break out earnings by brand, Carnival Cruise Lines was clearly a big contributor to the 28% decline in Q3 earnings that Carnival Corp. announced last week.

The corporation reported net income of $934 million in the quarter ended Aug. 31, down from $1.2 billion a year earlier. Revenue rose marginally from a year ago, to $4.72 billion.

Contributing to the lower profit were one-time write-downs for the trademark associated with the Spanish Ibero brand, which has weakened with the European economy, and for two older ships at Carnival Corp.'s Costa Cruises subsidiary.

Carnival Corp. did not identify which ships they were, but Arison said the market for used ships is so poor that one of the two would be laid up this fall. "And the other one, a final decision hasn't been taken, but she's clearly on the market for sale.

"So we're trying to move more aggressively to move out this older tonnage," Arison said.

Costa's smallest ships are the 1,680-passenger Costa Classica, built in 1992, and the 840-passenger Costa Voyager, built in 2000 as the Olympic Voyager for Royal Olympic Cruise Lines.

Frank said Carnival Corp. would not have built the ships in question because of their sizes, but they were acquired either in the purchase of Costa, or from another line.

He said that at current prices, they're not generating positive cash flows.

Follow Tom Stieghorst on Twitter @tstravelweekly.
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