Why I Am Not Surprised

[Ky Colonel]

I am a regular reader of CCL's annual financial statements and I haven't come across any statements where the individual brands' revenue contributions have ever been provided. Would you be so kind as to point me in this direction?

 

cbr663, I did not save my copies of Carnival Corporation's Annual Reports (which I acknowledge are reported on a consolidated basis) so I cannot point you "in this direction", but I can tell you that I derived my guesstimate of HAL's revenue and profit contributions (by extrapolating reported data for the CC North American Cruise Brands) from CC Annual Reports, CEO Letters to Shareholders, Consolidated Financial Statements and Notes, and MD&A, as well as from SEC filings, analysts' reports and the like. Is this method an exact science? No, but close enough for me.

[cbr663]

Okay, thanks. It's always interesting reading the financial reports. While I cannot say for certain that HAL is not losing money on its “give-away” fares, the Carnival Corporation and all its brands combined certainly do appear to lose money on its cruise prices.

 

According to its 2014 Annual Report (p.6) (http://phx.corporate-ir.net/phoenix.zhtml?c=140690&p=irol-irhome), CCL collected $11.9 billion in cruise ticket sales and had operating costs, not including depreciation and amortization of $12.457 billion. Factor in depreciation and amortization and that cost increases to $14 billion.

 

Looking at it another way, CCL would have to increase all its cruise ticket prices, completely across all brands, by about 18% to simply meet the total costs of $14 billion.

 

CCL raises an additional $3.9 billion of revenue (25% of total revenue) from onboard sales, tours and other revenue. With an operating income of $1.792 billion and a Net Income of $1.236 billion, it is easy to see that CCL makes it’s “money” through onboard sales and tours and not selling cruise tickets.

[Ky Colonel]

cbr663, IMO your analysis above is spot on and serves to further illustrate why it make good business sense for HAL to discount fares (if necessary to fill a cruise) in order to get customers on board for liquor sales, spa treatments, internet use, shore excursions, and so on. At some point it may become financially worthwhile for HAL to pay folks to go on cruises ... wishful thinking, eh?

[G&G]

Ky Colonel: Great Analysis but what I was trying to show was that HAL did not send (at least to me) special deals via emails to loyal cruisers with HAL. The only way I discovered the Special Fares was via an email to my grandson who had only sailed with HAL twice. We are currently booked on an Alaska cruise this month. The price of the cruise for inside or outside guarantees have dropped 35%. I agree with your analysis, though we paid a higher price (includes beverage package) it was worth the price at the time of booking.

 

I do not know how any cruise line makes money on just the price of the cruise. Our first cruise was in 1978, Carnival Festivale, 7 day Caribbean, outside cabin. The price was $698/person (I still have the AMEX receipt). Today, you can find many cruises for this price or less, 37 years later !

[Ky Colonel]

Ky Colonel: Great Analysis but what I was trying to show was that HAL did not send (at least to me) special deals via emails to loyal cruisers with HAL. The only way I discovered the Special Fares was via an email to my grandson who had only sailed with HAL twice. We are currently booked on an Alaska cruise this month. The price of the cruise for inside or outside guarantees have dropped 35%. I agree with your analysis, though we paid a higher price (includes beverage package) it was worth the price at the time of booking.

 

I do not know how any cruise line makes money on just the price of the cruise. Our first cruise was in 1978, Carnival Festivale, 7 day Caribbean, outside cabin. The price was $698/person (I still have the AMEX receipt). Today, you can find many cruises for this price or less, 37 years later !

 

C&G, If you'll pardon the pun, I am "in the same boat" as you are - we also have an Alaska cruise this month for which we probably paid more than what HAL is currently charging. I am okay with that, because by booking early I was able to choose the exact stateroom I wanted. And thanks to our TA, we will also receive substantial OBCs.

 

As cbr663 pointed out so well above, a significant amount of HAL's revenue comes from onboard sales and excursions. And since first-time and other lesser experienced cruisers tend to spend more on cruise pictures and souvenirs, shore excursions, liquor, and the like than (loyal) old-timers, they represent a more desirable target market to HAL than us. Nothing to get upset about, just a fact of business life - so I don't take it as a personal affront.

 

Enjoy your Alaska cruise & smooth sailing.

[iancal]

It surprises me that HAL would provide a significant contribution to Carnival Corp's financials-revenue or profit.

 

Carnival Corp operates 9 cruise lines and over 100 cruise ships. HAL has what, 15 ships.

 

Is HAL's revenue and profit contribution to Carnival Corp proportionally larger than their percentage of ships or berths?

 

It would be very interesting to see a contribution breakdown by Carnival subsidiary. Are these perhaps listed in the notes to the financial statements?

[Ky Colonel]

iancal,

 

No, as I indicated above, the contribution breakdown by subsidiary is not listed in the Notes (or elsewhere, as far as I know) but can be "guesstimated" by extrapolating some of the reported Carnival Corporation data. In turn, determining what is a "significant contribution" is a definitional matter - to me it means a contribution of both profit and cash flow that is disproportionate to a subsidiary's size relative to the rest of the corporation. Just my opinion, of course.

[iancal]

I am a numbers guy. I would love to see each of Carnival Corps sub operating stats.

 

Revenue, PBT, Net Profit and YoY growth numbers for each sub. Full disclosure.

 

I would also like to see how each sub does based on the proportion of their total number of berths to the total berths of the Corporation.

 

The berth comparisons /contributions of the subs would be as much interest to me as a number of ships comparison since there are differences between each fleet.

 

I looked up the latest financials, including the notes and could not see anything like this.

[Ky Colonel]

Until the SEC or the NYSE requires more detailed reporting, we are stuck with what is reported by HAL and will have to make our own guesstimates based on HAL's consolidated reports. From a legal perspective, that constitutes "full disclosure".

[Ky Colonel]

... I would love to see each of Carnival Corps sub operating stats ... Revenue, PBT, Net Profit and YoY growth numbers for each sub ... I would also like to see how each sub does based on the proportion of their total number of berths to the total berths of the Corporation ... berth comparisons /contributions of the subs would be as much interest to me ...

 

Just out of curiosity, iancal, how wold having that information help you deal with HAL's pricing strategies?

[iancal]

It may not.

 

But if we had the Carnival subs quarterly financials, it would give us a very good indication of whether we could expect cuts for any or all of their subs.

 

For instance, the motto in the companies where I worked was always...if you are going to come in under your revenue or your contribution margins, you better ensure that you expenses are coming in lower. Absolute worst case was to be below plan on revenue, profit, and on budget or greater on expenses. And I would expect to see some expense cuts.

 

Many of the costs are fixed, so I suspect that variable costs like entertainment, food, labour, would be targeted immediately. Capital costs would be reduced or deferred where at all possible. Ongoing staff cuts and deferred maintenance, and other such expense cuts always sets off alarms in my mind since I have lived through similar circumstances in large multinationals over many years.

 

If revenue was off plan or down Q/Q I would expect management to focus on bring in revenue...cutting prices to increase volume. These execs are very interesting in their jobs and they know that their jobs, their performance bonus, and their stock options depend on meeting/exceeding plan.

 

Since most US centric companies are quarterly focussed I would expect to see expense cuts that impact customer sat...most especially if he misses were two quarters in a row. Head office would step in to 'help'. This is how it worked in my industry. Cannot see it being any different at Carnival Corp or Celebrity for that matter.

Edited June 2, 2015 by iancal

[Ky Colonel]

... if we had the Carnival subs quarterly financials, it would give us a very good indication of whether we could expect cuts for any or all of their subs ... I would expect to see expense cuts that impact customer sat ...

 

... you may be right, although I doubt Carnival Corporation would make cost cuts that quickly or that even a numbers guy like you could predict (accurately) where HAL would make cost cuts (much less how deep such cuts would be) based on one or two quarters' results ... but I am not a numbers guy so I defer to you on this one ...

 

On the flip side, do you think Form 10-Q data could be used as a predictor of fare cuts if a CC subsidiary were to outperform its budget targets in a particular quarter? If so, that detail would certainly be nice to have, eh?

[iancal]

Yes I do but only if the 10-Q identified subsidiary performance. Which I do not think that they do.

 

So, if I were looking at a 10-Q, lets say in week 5 of the following quarter, that indicated that the previous quarter revenue performance of a specific sub (HAL, Princess, whatever) was below plan, I would expect to see some great offers on some routes for the balance of the quarter, ie in the final payment window, and into the next quarter.

 

The economy in North America and Europe is still not great. There are lots of cruise ships out there and a few more are in the delivery schedule. As long as supply exceeds demand on any one line I believe that we will see attractive offers. What I notice is that more lines are trying to keep revenue constant, or refrain from price discounts by providing supposed freebees like drink packages, etc. I would much prefer a lower price and then pick exactly those options that I want or have value to me.

Edited June 2, 2015 by iancal

[POA1]

It may not.

 

But if we had the Carnival subs quarterly financials, it would give us a very good indication of whether we could expect cuts for any or all of their subs.

 

For instance, the motto in the companies where I worked was always...if you are going to come in under your revenue or your contribution margins, you better ensure that you expenses are coming in lower. Absolute worst case was to be below plan on revenue, profit, and on budget or greater on expenses. And I would expect to see some expense cuts.

 

Many of the costs are fixed, so I suspect that variable costs like entertainment, food, labour, would be targeted immediately. Capital costs would be reduced or deferred where at all possible. Ongoing staff cuts and deferred maintenance, and other such expense cuts always sets off alarms in my mind since I have lived through similar circumstances in large multinationals over many years.

 

If revenue was off plan or down Q/Q I would expect management to focus on bring in revenue...cutting prices to increase volume. These execs are very interesting in their jobs and they know that their jobs, their performance bonus, and their stock options depend on meeting/exceeding plan.

 

Since most US centric companies are quarterly focussed I would expect to see expense cuts that impact customer sat...most especially if he misses were two quarters in a row. Head office would step in to 'help'. This is how it worked in my industry. Cannot see it being any different at Carnival Corp or Celebrity for that matter.

 

Mind if we ask: What are these companies? I have never heard of a company whose motto is: "if you are going to come in under your revenue or your contribution margins, you better ensure that you expenses are coming in lower." - and you're saying that there are multiple firms with said motto.

 

I have to imagine that your company coffee mugs were really tall so that the motto would fit. :D

[Ky Colonel]

Yes I do but only if the 10-Q identified subsidiary performance. Which I do not think that they do ...

 

Forms 10-Q do not provide any more detail than the Annual Report - in fact they provide less data than the Annual Report ... natheless I still doubt that additional 10-Q data/detail would give you the tools to accurately whether or not a particular CC subsidiary would cut specific categories of costs or raise/lower fares. As such, IMO the consolidated results results currently available (both quarterly and annually) are as useful for such guesstimating/stargazing as would a more detailed subsidiary-by-subsidiary presentation ... just my opinion ...

[iancal]

What companies?

 

Well you could try NCR, Digital, Compaq, Hp, IBM, PWC for a start.

 

It is simply good business practice. Why do you think so many large companies are reducing expenses-anything from ee benefits to real estate? It is how business managers who have P&L responsibility get to keep their jobs in challenging times.

 

It is not on a mug but they and their employees try hard to shield customers from this fact lest it negatively impact future customer business.

Edited June 2, 2015 by iancal

[POA1]

What companies?

 

Well you could try NCR, Digital, Compaq, Hp, IBM, PWC for a start.

 

 

Not one of them has nor had the motto you mentioned. (Disclaimer: I worked on the team that did the systems integration when AT&T acquired NCR in the early 1990s.)

Edited June 2, 2015 by POA1

[kjw869]

(Disclaimer: I worked on the team that did the systems integration when AT&T acquired NCR in the early 1990s.)

 

I still have a AT&T's Globalyst 630TPC series around here somewhere. I was on the initial design team of Commodore (Computers) International, PET series working with Jack Tramiel in the late 70s in Palo Alto. Have a working model of one of those also.

 

I left Silicon Valley in the early 80s convinced folks would not have computers in their home!;) Many of my old co-workers went on to have great jobs at HP and Intel in the Valley.

Edited June 3, 2015 by kjw869

[POA1]

I still have a AT&T's Globalyst 630TPC series around here somewhere. I was on the initial design team of Commodore (Computers) International, PET series working with Jack Tramiel in the late 70s in Palo Alto. Have a working model of one of those also.

 

I left Silicon Valley in the early 80s convinced folks would not have computers in their home!;) Many of my old co-workers went on to have great jobs at HP and Intel in the Valley.

Thanks for the trip to the Wayback Machine. I fondly remember popping out the trackball and cleaning it with alcohol. (Now that it's committed to type, it does sound a little odd.)

[kjw869]

Thanks for the trip to the Wayback Machine. I fondly remember popping out the trackball and cleaning it with alcohol. (Now that it's committed to type, it does sound a little odd.)

 

;);)

[iancal]

It was not a motto per sae, it was simply a common understanding of how the business functioned. Surprised that you would take something like that out of context.

 

I was fortunate enough to leave NCR (CI/MEG) just prior to that disastrous takeover by ATT.

[Tante Amalie]

... to understand why service businesses (such as airlines, hotels, cruise lines, etc.) discount their prices late in the "season", you only need to understand the concept of incremental revenue: in a nutshell, once a business has taken in sufficient revenue to cover its fixed and variable costs (plus some profit) for a particular service, every additional dollar of revenue drops to the bottom line ... once you understand that, you will appreciate that HAL's "give-away" fare specials do not result in HAL losing money on them - in fact, the exact opposite is true. If you doubt my word, take a look at CCL's annual financial statements for the past few years and you will see that HAL contributes a significant portion of CCL's revenues and bottom line profit.

 

Not exactly.

 

This statement reflects a fundamental misconception about the difference between the short run incentives and a long run profitable business model. The cruise industry is characterized by high fixed costs. Their biggest expense is fuel, which does not vary with the number of passengers. This creates an incentive to reduce prices at the last minute to maximize load factors. If there were a practical way to do it, HAL would probably be willing to give away free cabins at the dock for ships that are sailing with less than 100% occupancy. The incremental expenses are minimal and any revenue from on board spending would create "profit". However, "profits" like this will lead you straight to bankruptcy. HAL has to find a business model that covers ALL costs (both fixed and variable) in the long run.

 

As far as I can tell, HAL hasn't found a way to do this. There is no direct data in the CCL public documents to support the contention that HAL is profitable. Take a look at Bruce Muzzz's comments. He has stated that HAL is losing a lot of money, and I believe it. They serve a segment of repeat passengers on long cruises, who generally spend much less on board than the short cruise first timers.

 

By the way, when you book a cruise way in advance, it IS NOT the same product as what the people who buy the same cruise at the last minute at a deep discount. You are buying a guaranteed product at a set price. Those who wait have no such guarantee about what the price will be, what cabin they will get, or if they even can get a place on the cruise. They should get a big discount in exchange for this acceptance of risk.

 

My opinion is that HAL is stuck in a very tenuous position. I have no confidence that they can even remain in business if they don't come up with a better business model.

[iancal]

tante amilie....very well said.

[cruz chic]

 

By the way, when you book a cruise way in advance, it IS NOT the same product as what the people who buy the same cruise at the last minute at a deep discount. You are buying a guaranteed product at a set price. Those who wait have no such guarantee about what the price will be, what cabin they will get, or if they even can get a place on the cruise. They should get a big discount in exchange for this acceptance of risk.

 

My opinion is that HAL is stuck in a very tenuous position. I have no confidence that they can even remain in business if they don't come up with a better business model.

 

You are forgetting people that book in advance and take a guarantee. I'm one of those people. You do not save any money by doing that.

Edited June 3, 2015 by cruz chic

[iancal]

That is why we very seldom book early...on any cruise line.

 

The variable then becomes what ship/itinerary will I get on. This is why we often watch pricing on several ships or several itineraries. Not all of them have excess supply, and they drop their prices at different times prior to embarkation and at different discount rates. We simply wait for our 'price' to hit and book. If it doesn't, we simply do something else.

Edited June 3, 2015 by iancal