RCL 1Q Review

Royal Caribbean Cruises reported 1Q11 net revenues of $1.67B, a 12.5% increase compared to $1.48B last year and our estimate of $1.68B. Earnings per share for the quarter rose 5% to $0.42 versus $0.40 in 1Q10 (which included a non-recurring gain equating to $0.39) and significantly above our estimate of $0.19. Net yield, which represents the amount of cruise revenues earned net of commission, transportation and onboard expenses, rose 4.0% versus our modeled estimate 3.0%.

The geopolitical events that took place during 1Q in Northern Africa and Japan resulted in numerous itinerary modifications and are expected to have a negative 1% effect on annual yields. As a result, bookings in the Mediterranean and Asia were unexpectedly low despite showing strength at the beginning of the quarter. Earnings will not be incrementally affected until 2Q; however, management believes they will be primarily offset by over-performing Caribbean, Bermuda and Alaska routes.

Given the recent surge in oil prices to over $120 per barrel, a debate has arisen among analysts as to how much rising fuel expense will impact earnings throughout 2011. RCL’s swap contracts were able to mitigate over $36MM worth of fuel expense during 1Q, and the company remains 56% hedged through the remainder of 2011. Royal also owns WTI options with strike prices ranging from $90 to $150 with various maturities as an additional hedge. During 1Q11, RCL recognized a $24MM gain as a result of the rising value of these options ($0.11 on a per share basis).

Given the negative effects of the climate in North Africa and Libya, as well as the rising price of oil, management decreased their fiscal year EPS guidance to a range of $3.10 to $3.30 from $3.25 to $3.45. RCL stock was up over 5% in pre-market trading, but slowly declined during the earnings call before remaining flat on the day. Although the outlook for 2011 was not great, fundamentals in the cruise industry remain strong and we believe that RCL will continue to gain pricing traction, optimize itineraries and leverage costs in the near-term.

-Ian