Our conclusions are largely the same as our thoughts in our 2/26/09 post “CRUISING TOWARDS STABILITY” with the big difference that RCL & CCL have had huge rallies… and aren’t as cheap. CCL confirmed that lower pricing have allowed bookings to find some stability, 1H09 bookings aren’t as bad as some have feared, ship financing is still available, and lower fuel costs are a huge tailwind. CCL also confirmed that there is little visibility and, given the shorter term booking, 2H09 will likely be worse than expected and higher end product is fairing much worse.

Now that everyone is on the same page and stocks have had a healthy run, we remain concerned about 2010 capacity issues and that the street is too high in their expectations. We seem to be back to the fundamentals being awful vs. worrying about the credit and the near-term. Unfortunately, CCL’s release and earnings call didn’t provide any insight to change our intermediate and longer term concerns surrounding capacity increases, demographics, and the sustainability of the decent European trends.

The following is a “youtube” of our 2/26 post reconciled with CCL’s earnings release and conference call.

“Wave season may be better than feared, Europe is holding up (surprise), and overall bookings are stabilizing.”

CCL confirmed that European demand is holding up better than NA demand for a myriad of reasons:
- Less penetration
- Europeans don’t rely on credit to purchase cruises
- More vacation time/it’s a local trip/etc

However, on a dollar basis yields will clearly be quite bad with the FX drag although not as bad as before the recent dollar move and CCL has already factored this into their guidance

“RCL and CCL are down 83% and 54%, respectively, from their 52 week highs.”

CCL has rallied 17.4% since our note and is probably trading into the mid-teens on our trough 2010 estimate

“However, there has been no deterioration since the tough Q4. Pricing is probably down 10‐15% but consumers are responding, which is serving to stabilize the market. On the margin, the wave season and pace of forward bookings are probably a bit better than what the market is expecting. Here are some observations about current trends:”

• “Near term yield, revenue, and earnings guidance still looks reasonable”

CCL beat Q109 expectations by a large margin, partially helped by business that was booked before the fall meltdown and 45% decrease in fuel prices. Clearly RCL won’t have the same fuel benefit because of its hedges. 2Q09 guidance is right in line with consensus

• “Looks like industry has restored booking volume and price equilibrium (granted at lower pricing) post last quarter. That has gotten the ball rolling again for a more normalized pace of business”

CCL confirmed the statement above

• “Wave season, seems to have not tapered off yet and bookings are going at a healthy pace (again, at lower prices with greater incentives being offered).”

CCL confirmed the statement above

• “Europe has been surprisingly robust, especially the UK, despite the large capacity additions.”

CCL confirmed the statement above

• “There will be a big mix shift towards cheaper cruise options (shorter, inner cabin booking vs. balcony, closer ports).”

CCL confirmed the statement above

• “Alaska is faring poorly because of this mix shift and due to the short booking window. People are just not booking for Q3 yet.”

Booking pace is poor with occupancies down and pricing down materially for Alaskan and exotic cruises. CCL blamed this weakness in Alaska partly on the $50 tax surcharge; we suspect this is a small part of the problem compared to the cost of the flight to get to the port of departure and overall cost of the cruise. CCL also spoke about competitors taking capacity out of Alaska and following suit. The issue is that they are simply shifting capacity to another market, and they don’t really have any healthy markets … just “less bad” ones. Not being able to take out capacity is a huge structural issue for this industry, given that even at current depressed levels ships are still FCF positive and everyone is managing the business for cash right now.

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