Carnival faces choppy waters

It's a surprising fact, given that the world is still struggling to emerge from recession, but an astonishingly large number of new cruise liners are about to be launched. Royal Caribbean, for instance, expects its Oasis of the Seas liner to enter service next month - a mega ship that's bigger than any other liner presently afloat, and five times larger than the Titanic. Carnival will add a further 12 news ships to its existing 93-strong fleet between now and May 2012.

But that merely reflects the fact that the construction of most new ships began about five years ago, when the cruise industry was in a rather healthier state. In truth, all this new capacity couldn't have come at a worse time, and that doesn't bode well for any cruise operator, including Carnival.

After all, the US economy is a key driver of Carnival's revenue, and the return to growth there looks shaky - it was largely driven by the temporary effect of the US government's cash-for-clunkers car scrappage scheme, while high levels of US household debt could yet hold back recovery. The UK, meanwhile, remains firmly in recession, with third-quarter economic output having slipped 0.4 per cent. Such an uncertain backdrop is hardly ideal for encouraging hard-pressed American and British consumers onto cruise ships.

Third-quarter figures earlier this month from Carnival's rival, Royal Caribbean, demonstrate just how tough a task it's going to be soaking up that extra capacity in such difficult times. For instance, Royal Caribbean's third-quarter net yield (the net revenues per available passenger cruise days) slumped 16.5 per cent compared with the same period a year ago. And, in reference to newsflow regarding an apparently improving economic backdrop, Royal Caribbean's management was reported to have said that "we have not seen any evidence of that in our bookings to date."

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Those concerns are just as relevant for Carnival. Certainly, with the group's third-quarter figures in September, Carnival reported that booking volumes for the remainder of 2009 and the first half of 2010 were running 19 per cent ahead of the same period last year. But that has come at a price - Carnival is managing this by offering hefty discounts on ticket prices, while lower on-board spending and a strong US dollar have also taken their toll. The swine 'flu outbreak hasn't exactly encouraged the travelling public, either. Royal Caribbean reckons that swine 'flu has had a negative impact on yields of approximately two percentage points during the third quarter, and there is no reason to assume that Carnival would have fared any better.

Fuel costs are on the rise, too - which spells more bad news for earnings. True, Carnival's fuel cost at the third-quarter stage had tumbled 39 per cent year-on-year to $405 (£244) per metric ton, but fuel prices are increasing again as oil prices rise. Indeed, Carnival's fuel cost has already jumped dramatically since the half-year stage - when the figure stood at $304 per metric ton - and management forecasts a fuel cost of $465 per metric ton for the fourth quarter.

Inevitably, then, Carnival's immediate growth prospects look fairly bleak. Management said with the third-quarter figures that fourth-quarter earnings per share is likely to be between 16¢ and 20¢, compared to 47¢ a year earlier. And analysts don't expect much from the group for a while to come. Broker Numis Securities, for instance, expects turnover to slide 9 per cent in the year to end-November, with earnings per share forecast to slump by a quarter in that period. Moreover, the broker doesn't expect earnings to return to pre-recession levels anytime soon, predicting a recovery in EPS to 269¢ in the year to end-November 2010 - that's almost 10 per cent below 2008's earnings outcome.

True, as the world's largest cruise operator - Carnival boasts a 45 per cent slice of the total cruise ship market - the business does look well placed to navigate such stormy seas. But investors can expect earnings remain under pressure for a while yet, and there's not even a dividend to look forwards to, either - the payout was axed in order to preserve capital spending.