Carnival Corp. in late March reported solid bookings during Wave season, clearing the path for inventory to be filled for the remainder of 2015 without resorting to close-in price discounts.

The multi-brand cruise company reported results for the fiscal first quarter ended Feb. 28 that were more than double the $20 million it earned in the first quarter of the prior year.

The world’s largest cruise company reported Q1 net income of $49 million on revenue of $3.5 billion. In remarks to analysts, Carnival Corp. CEO Arnold Donald used terms like “strong” and “nicely ahead” to describe the start of the year.

Donald indicated that markets closest to North America were particularly promising, at one point referring to the upcoming Alaska season as “super-strong.”

He added that pricing in the Caribbean, which has been a drag on much of the industry, should become a tailwind starting in the second quarter.

And he said the company’s flagship brand, Carnival Cruise Line, had “outperformed” for the second consecutive quarter.

Rachael Rothman, an analyst at Susquehanna Financial Group, raised her price target for Carnival shares from $52 to $55 after the results were released.

“We are encouraged by management’s commentary that the Carnival brand enjoyed mid-single-digit yield improvement despite the competitive Caribbean environment in the quarter,” Rothman said.

Carnival is the first cruise company to report results based on activity during Wave season.

T0406ARNOLDDONALD.JPG
Arnold Donald

It raised its guidance for revenue yields for the rest of the year to between 3% and 4% from the 2% to 3% it forecasted in December.

“Overall, our booking trends build confidence in our increased yield guidance as much of the year is already booked at higher prices,” Donald said. “Moreover, we have less inventory remaining for sale, leaving us well positioned to strengthen pricing on the remaining inventory.”

While the prospect of fewer promotions to fill ships could be encouraging for travel agents, another trend highlighted a continuing frustration for agents selling the industry’s non-luxury brands.

Yields from onboard revenue advanced companywide by 8% during the quarter, while yield from tickets — the portion of consumer spending on which commissions are calculated — remained flat relative to the same period a year earlier.

Donald said that after currency translation losses were factored out, ticket yields were up 1%. He said that improved yields on cruises in Europe and Asia were partly offset by lower yields in the Caribbean.

A long-awaited rebalancing in the Caribbean has begun, and Donald said industrywide capacity would be down by double digits there in the third quarter, the industry’s most lucrative earnings period.

While Caribbean and Alaska itineraries for the rest of the year are “nicely ahead on both price and occupancy,” according to Donald, he said bookings for North American brands on routes elsewhere, primarily Europe, are ahead on occupancy but at lower prices.

Donald attributed the lower prices to currency translation. The euro is at a 13-year low against the dollar, which reduces the price on cruises purchased in euros when they are converted to dollars.

Carnival Corp. said it had reached strategic agreements with two European shipyards to build nine ships in the 2019-22 timeframe, the single largest shipbuilding pact in cruise history.

Donald said that currency did not factor into the decision, but rather it was driven by the need to give the two yards, Fincantieri and Meyer Werft, longer lead times to manage subcontractors.

Some of the ships will also be based on a new design described as the most efficient ever, and Donald said, “That requires additional forward planning as a prototype.”

Carnival has not actually placed orders for the ships, so there is no detail about how big they will be, what they will cost, which lines they will go to or exactly when to expect delivery.

Robin Farley, an analyst at UBS Securities, estimated that the ships would average about 3,500 berths. Carnival has a ship being delivered for its German Aida brand later this year with 3,250 berths and an estimated price of $650 million, which by extrapolation would put a value of about $6 billion on the agreement.

Farley said that despite its record size, the agreement would result in only two to three ships a year, and an addition to the berth capacity in North America of about 2% annually.

CEO Arnold Donald said that pricing in the Caribbean, which has been a drag on much of the industry, should become a tailwind starting in the second quarter.

Carnival Corp.’s order “maintains the below-average supply-growth rate that the industry has reached for the last three years,” Farley said.

Donald confirmed that at least some of the ships would be purpose-built for the Chinese market, so they would not represent additional inventory in more mature cruise markets.

On a conference call with analysts, Donald was asked about the impact of the terror attacks on cruise tourists in Tunis in mid-March.

He said Tunisia, which is visited by Costa, Holland America Line and Princess among others, is about 2% of Carnival’s port calls.

“But … whenever there are incidents like this, it affects the psychology of travel,” Donald said. “We will just have to monitor and see what the long-term effects are, but there has been a history of the market response to these things, and historically it dissipates.”

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