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Updated - Fain blames fuel costs for cost-saving job cuts
Rajesh Joshi - Tuesday 22 July 2008
Royal Caribbean chairman and chief executive, Richard Fain blamed rocketing fuel costs, that have soared 55% since last year.
“Too much of our profitability is being eroded by the increase in fuel prices,” Mr Fain said yesterday. “This is unacceptable and we are evaluating everything we do to find ways to do it more efficiently and effectively.
“This is a difficult period for virtually all businesses, but we are determined to improve operating results through tight cost controls, while preserving our outstanding guest experience.”
As part of the $125m restructuring, Mr Fain said that the shoreside jobs had been eliminated “as of yesterday”. The Scholar Ship, an educational partnership for college students studying on board cruiseships, has also been axed, along with other non-core operations.
The company is taking a charge of $15m in its third quarter accounts to absorb the restructuring.
Mr Fain admitted that Royal Caribbean’s brands “continued to attract premium pricing even in this difficult environment”.
But analysts point to the company’s overall higher cost profile.
A leading cruise analyst in New York told Lloyd’s List that while most self-respecting cruise firms were reviving some versions of their post-9/11 austerity plans to weather higher costs, he was “not surprised” that Royal Caribbean appears to have taken the biggest hit.
“Royal Caribbean has never been the lowest cost operator,” the analyst said. “Compared with Carnival, the company has always been more a corporate type, more formal in structure and less entrepreneurial.
This means the company’s overhead is much higher.”
The analyst said the luxury cruise sector had so far remained immune from cost pressures because of less pressure on revenues. Other mainstream firms are all “keeping a watchful eye on increasing costs and taking whatever steps they can,” he said.
Addressing a company conference call yesterday, Mr Fain said that while the company’s revenues were healthy and in fact portended a “terrific year”, Royal Caribbean was not immune from consumer sentiment, in that cost pressures have begun to affect the cruise ticket buyer as well.
The results statement noted that while net yields improved 1% on the quarter, net cruise costs increased 6.7%. The company expects net yields to increase around 2% for the third quarter, 4% to 5% for the fourth quarter, and 3% to 4% for the full year 2008.
“Although pressure on the consumer persists and there is much uncertainty in the market, demand for our cruises and onboard spending continues to be resilient and yields should improve in all four quarters,” said Brian Rice, Royal Caribbean executive vice president and chief financial officer.
Despite the gloomy restructuring news, Mr Fain and Mr Rice highlighted Royal Caribbean’s longer-term vision of growing its international business.
Mr Rice said: “We have made significant investments to seed our growth in many strategic markets. These costs are now being absorbed by capacity and revenue growth in the emerging markets around the world. In addition, our scale and exceptional brand positioning in North America are enabling us to drive further efficiencies.”
Net income for the firm for the second quarter fell to $84.4m on the quarter from $128.7m a year ago. Corresponding revenues increased to $1.58bn from $1.48bn.
