Bloomberg News

Cruise Ship Sinking in Peak Booking Season May Worsen Losses

January 25, 2012

(Updates with Carnival Plc bonds in eighth paragraph.)

Jan. 16 (Bloomberg) -- Carnival Corp.’s losses following the grounding of the Costa Concordia cruise ship off Italy may be exacerbated by the disaster coinciding with the start of the peak booking season.

About one-third of all cruise vacations are arranged during the so-called wave season from January to March, said Sharon Zackfia, an analyst with William Blair & Co. in Chicago.

“They’re the most profitable bookings,” Zackfia said in an interview. “Presumably most people now are booking for the key summer season, which is when the cruise lines make the bulk of their money.”

Europe generated about 38 percent of Miami-based Carnival’s revenue in fiscal 2010, the last full year for which geographic results are available. Its Genoa-based Costa Crociere unit is the continent’s largest cruise line based on passengers and ship capacity, according to Carnival, the world’s biggest cruise operator with brands including Cunard and Princess Cruises.

“The timing of this event could weaken 2012 booking trends given the fact that it occurred early in the wave season,” Emile Courtney, a New York-based Standard & Poor’s credit analyst said in a note. The grounding “could weigh on booking trends across other cruise brands.”

Credit Rating

Carnival will probably retain its BBB+ grade, the third- lowest investment ranking, S&P said after assessing the cruise operator’s ability to cope with a 3 percent drop in industrywide net revenue yields caused by price cuts. The ratings company had anticipated “low-single digit growth” for major operators, according to the note.

Royal Caribbean Cruises Ltd.’s BB rating and NCL Corp.’s B+ grade are also unlikely to be unaffected by the incident, S&P said. Still, for all three lines, lease and port commitment adjusted debt to earnings would increase to “near our maximum thresholds” for current ratings under a 3 percent drop in yields, the ratings company said.

Carnival has $325 million of bonds outstanding, according to data compiled by Bloomberg. Dually listed Carnival Plc has the equivalent $1.45 billion of bonds, the data show.

Carnival will lose business from customers who were booked on future Concordia voyages, Zackfia said. There will be additional costs that are hard to estimate, she said. The company doesn’t have insurance that covers lost revenue or earnings from its ships or other operations, according to its most recent 10-K, filed in January 2011.

“They will obviously have customers who were booked on upcoming Concordia journeys that aren’t going to happen,” Zackfia said.

Carnival Plc plunged 16 percent to close at 1,878 pounds in London trading. U.S. markets were closed for the Martin Luther King Jr. holiday.

Death Toll

Five people were confirmed dead and about 15 remain missing from the Costa Concordia, which ran aground the night of Jan. 13 near the island of Giglio in the Tyrrhenian Sea. Three people were found alive in the capsized cruise liner. The ship’s captain has been arrested and accused of manslaughter, abandoning the vessel and causing the shipwreck.

Rescue workers evacuated more than 4,000 of the 4,229 passengers and crew aboard, Italy’s Civil Protection agency said on its website. Costa customers come primarily from Italy, France and Germany, according to Carnival. Passengers onboard the Costa Crociere also came from countries including South Korea, the U.S. and Japan.

“I can’t believe such an accident could happen,” said Kengo Kuno, general manager at Tokyo-based Overseas Travel Agency Co., which sells Costa cruises in Japan. “I am sure it will have a negative impact on the next cruising season.”

Search & Rescue

Search and rescue operations were due to continue through the night, according to the regional government in the province of Grosseto. Costa Crociere has been ordered to remove the ship, according to the statement.

“I want to express our deep sorrow for this terrible tragedy,” Gianni Onorato, president of Costa Crociere, said in a statement. “I am only now able to speak on behalf of Costa because, as you will understand, I have been at Isola del Giglio to be close to the rescue operations.”

The ship had embarked from Rome on a trip that was to include stops at ports in France and Spain. The liner hit rocks and Captain Francesco Schettino, after assessing the damage, decided to secure the ship and gave the evacuation order, Onorato said.

Ship Handover

The 1,500-cabin Costa Concordia was delivered to Costa Crociere in 2006 by Fincantieri Cantieri Navali Italiani SpA, according to the Trieste-based shipbuilder’s website. The cruise unit, which has 15 ships operating worldwide, in 2007 agreed to pay 510 million euros ($647 million) each for two more similar- sized vessels. The Costa Favulosa, added to the fleet last year, and the Costa Fascinosa, scheduled to enter service in May, were to increase Costa’s capacity by 20.4 percent, according to company filings.

Carnival carries insurance that covers a number of risks within certain limitations, according to the January 2011 filing. The coverage includes hull and machine insurance, as well as protection and indemnity policies that include crew and passenger injuries, shipwrecks, damage to third parties and pollution.

Ship Insurance

The company also had practiced some self-insurance in the past, according to Zackfia and to filings. Carnival had no immediate response to requests for specifics of its coverage.

The Costa Concordia was insured by companies including Assicurazioni Generali SpA, RSA Insurance Group Plc and XL Group Plc, said three people with knowledge of the policies. The three are among several insurers facing total costs of about 405 million euros, said one of the people, who declined to be identified because policy terms are confidential.

“This is a company that has a very strong, solid cash flow and balance sheet,” Zackfia said.

Bookings had been “strong” heading into the wave season, Chairman and Chief Executive Officer Micky Arison said in a Dec. 20 statement, with “slightly higher prices with slightly lower occupancies.”

For the year ended in November, revenue rose 9.2 percent to $15.8 billion, Carnival said on Dec. 20. The company projected then that net income would rise to $2.55 to $2.85 a share this year, adjusted for one-time items, from $2.42 in fiscal 2011.

The company’s last major incident happened in November 2010, when an engine fire aboard Carnival Splendor stranded the cruise ship off the California and Mexican coasts for days, with more than 4,400 passengers aboard. Splendor, which has since been repaired, was used for Mexican Riviera voyages from Long Beach, California.

“Historically, they’ve had a very good safety track record,” Zackfia said. “This is definitely a tragic event. I’m sure the company is taking this seriously.”

--With assistance from Marco Bertacche in Milan, Kevin Crowley in London and Kiyotaka Matsuda in Tokyo. Editors: Anthony Palazzo, Neil Denslow

To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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