All aboard Carnival

The improved trading conditions being experienced by the cruise industry were evident when Carnival reported full-year results last December. Most strikingly, final-quarter fuel costs had plummeted 13 per cent to $584 per metric tonne. This year, continued oil price weakness is expected to lead to a $475m year-on-year fall in fuel costs. In the first quarter alone, fuel expenses fell from $523m in 2014 to $318m as fuel prices dropped 38 per cent to $406 per metric tonne. Management has told investors to expect fuel prices of $402 per metric tonne in the second quarter and $406 for the full year.

While lower fuel costs should boost Carnival's earnings, the group is suffering due to the strengthening US dollar, which reduces the reported value of its sterling, euro and Australian-dollar sales. This is likely to affect EPS growth this year, but management's guidance still stands at 230ȼ-250ȼ for the year (previously 230ȼ-260ȼ), compared with 193ȼ in 2014. In the first quarter, Carnival recorded EPS of 20ȼ a share, compared with a minor loss per share in the previous year, and despite negative currency movements, first-quarter revenues at $3.5bn nearly matched 2014.

More advanced bookings and higher prices are generating improved net revenue yields - a measure of revenue per available cabin berth. In the first quarter, net revenue yields rose 2 per cent at constant currencies. A 3-4 per cent increase is expected in 2015 as a whole, mainly due to strong demand for Caribbean and Alaskan cruises, with a 2-3 per cent improvement expected in the second quarter. The company's commitment to improving passengers' onboard experiences is also paying off, with onboard spending up 8 per cent during the first quarter.

A perennial industry fear is the possibility that excessive capacity growth will undermine cruise operators' pricing power, but the outlook is positive on this front. Carnival has repeatedly said tight cost containment and capacity management will deliver double-digit returns within the next three to four years. Between now and 2018, Carnival expects a compound annual capacity growth rate of roughly 3 per cent, but virtually all will be focused on the emerging cruise market in China. By comparison, growth in "established" markets should be just 1 per cent. China looks like an exciting opportunity, with Carnival chief executive Arnold Donald claiming the country will become the largest cruise market in the world driven by the emerging middle class and growing disposable incomes.

Cost control - excluding fuel expenses - is also high on Carnival's agenda. Mr Donald is aiming to save $300m-$400m over the next few years, targeting $70m-$80m of cost savings in the current financial year alone. And while first-quarter net cruise costs, excluding fuel, increased 2.4 per cent, this was lower than December guidance. Overall, 2015 costs excluding fuel are expected to be up 2 to 3 per cent compared with the prior year, primarily due to higher dry-dock costs and advertising expenses.

The key to success, according to Carnival, is to maintain capacity and cost discipline while driving up demand. There's no doubt that an ageing population means demographics are strongly in the company's favour, but the group realises it has to improve its marketing. The group just targeted a host of younger 'new to cruise' customers with a campaign that aired during the main US broadcast of the Super Bowl tournament.