Royal Caribbean Cruises First Quarter Hampered by Voyage Disruptions

Royal Caribbean’s adjusted first-quarter EPS of $0.21 were at the lower end of guidance of $0.20 to $0.30 and below our estimate of $0.27 and consensus of $0.28, primarily reflecting a $0.05 penalty associated with six cruises that were shortened or canceled during the quarter (e.g., Galveston oil spill). Reported EPS of $0.12 included $0.09 of expenses related to restructuring and the divestiture of Pullmantur’s non-core businesses.

Constant-currency net yields declined 0.3%, below our estimate for a 1% gain and guidance for relatively flat and inclusive of a 50-basis-point penalty associated with the aforementioned voyage disruptions. Ticket revenue met expectations across most key itineraries, with a slight decline in Caribbean yields and nicely positive yields in other regions, including strong yield growth in Asia despite a significant increase in capacity. Royal Caribbean seasonally has its highest percentage of Caribbean itineraries in the first quarter at roughly two-thirds of capacity (the Caribbean is expected to remain quite promotional for the rest of 2014 with the most pressure on seven-night or shorter itineraries).

Onboard revenue yields rose 3.4% on constant-currency basis, reflecting the continued benefit of fleet upgrades and onboard revenue initiatives with specific strength in gaming and beverages. Looking forward, two more Voyager-class ships will be revitalized in the upcoming 12 months, with additional capacity, pervasive Wi-Fi, new dining venues, and upgrades to the casino and retail areas.

Constant-currency net cruise costs (excluding fuel) increased 1.3%, better than guidance for a 2% to 3% increase mostly due to timing.

Booking volumes over the past three months are up 16%, with bookings over the past eight weeks up more than 20%. While Caribbean yields are expected to decline slightly for the year, overall load factors and average per diems are ahead of the same time last year, with European (22% of full-year capacity) and Chinese demand (4% of capacity) particularly strong with double-digit yield improvements expected, the latter despite a 30% year-over-year increase in regional capacity. In 2015, Royal will further increase its capacity in China as the new Quantum of the Seas moves to Shanghai after its inaugural winter sailing out of the New York market, joining its sister ships Mariner and Voyager of the Seas. Alaska is also expected to perform well this year, with low- to midsingle-digit yield improvements.