On June 21, Royal Caribbean Cruises Ltd. laid off 400 employees. On June 22, it told investors it was doing "astonishingly well."
Such was the roller coaster of financial indicators that RCCL sent out last week. The cruise company reported an $84.7 million profit in Q2, a 34% decline over Q2 2007.
Yet, in the face of record fuel prices and a shaky economy, CEO Richard Fain said RCCL's "business continues to do astonishingly well."
"Our continued strong operating performance demonstrates clearly how well we are able to deal with this situation," Fain said in a conference call with analysts. "We don't believe that we're immune from the effects of the economy. There's no doubt that the economy has impacted us. The important difference is that the impact has been so much less than one might have expected in this environment."
That assertion came one day after RCCL announced a cost savings initiative that included the elimination of 400 shoreside positions and some noncore operations. The company said that the layoffs and other initiatives would reduce spending by about $125 million a year.
"These actions were necessary, given the significant escalation in fuel prices and the need to adapt our business model to operate more efficiently," CFO Brian Rice said during the call. "We have to focus on things like travel and entertainment. We've looked at consulting. It's rather broad."
As expected, the market applauded RCCL's layoffs; its stock price soared 5% on July 23, to $27, the highest since May.
Agents expressed mixed feelings about the moves, with many attributing it to fuel prices and several saying that RCCL was putting the interests of shareholders above those of its employees.
"It's interesting to me that Royal Caribbean would eliminate positions while still posting healthy earnings," said Greg Nacco, of Cruise Specialists in Seattle. "Do you think that's going to help the economy?"
Taking share price seriously
RCCL has been bedeviled by a junk debt rating and about $7 billion worth of ships on order during an economic downturn and while the dollar is sagging against the euro, the currency in which ships are priced. Its stock price sunk as low as $22.47 only two weeks ago. The cost-saving initiatives were seen by many as a signal to the market that it takes its share price seriously.
"A historic criticism of [RCCL] is that it has not been as focused on the expense side of the equation," Robin Farley, a UBS investment analyst, said in a note before the July 22 earnings call. "Even excluding fuel costs, RCCL has not achieved a reduction in expense per day in the last five years."
Farley said that investors would be happy to hear that RCCL was focusing on cost, but that the company would "need to deliver."
RCCL said its cruise costs had increased 6.7%, slightly below its guidance of 7% to 8%, mostly because of fuel prices, which jumped by 55% during the quarter. The growth in expenses would have been just 2% if not for fuel, RCCL said. The numbers were driven primarily by lower general and administrative expenses.
RCCL told its remaining employees to expect reductions in their retirement plans beginning in 2009. In an internal memo, RCCL executives said they were contemplating "changing the current retirement plan somewhat for existing employees and more aggressively for new employees."
During the call with analysts, using language that sounded more like crosstown rivals at Carnival Corp., Fain told analysts that RCCL would be cautious about future shipbuilding "both because of the operating environment and because of the cost of the ships."
"We don't think we've changed our view that our industry, and particularly our brands hold up better than you would expect, but still [we] are influenced by the general economy."
Carnival's CEO, Micky Arison, has been saying for months that Carnival would not order any new ships for its North American cruise brands in the near future, a stark contrast to RCCL, which has six ships on order for Royal Caribbean and Celebrity.
A bleak spot in RCCL's Q2 earnings was that net yields for the quarter increased by 1%, not meeting RCCL's guidance of about 2%. Fain attributed that weakness to its Spanish brand, Pullmantur Cruises.
Spain's economy is very weak right now, Rice said, with almost 10% unemployment and a housing market that fell more than 30% in Q1.
Not that RCCL is blaming its foreign source market for any economic downside. On the contrary, the company noted that it had grown its international market from about 13% two years ago to about one-third this year, had increased its presence in Europe by 70% in the last two years and had benefitted from an increase in European-sourced passengers.
With its stock price up slightly, solid earnings in its pocket and oil prices down a bit, RCCL told its remaining employees that despite the difficult decision to lay off so many people, "it is now time to look forward to our future."