For Carnival Corp., ship orders continue conservative growth

Carnival Corp. enters the year with a larger order book after announcing contracts for two new ships to be delivered in 2018.

Carnival Cruise Line will get its 26th ship, one with a design similar to the 3,954-passenger Carnival Vista, which is scheduled for delivery in April 2016.

Holland America Line (HAL) will get a second in its Pinnacle class of ships, which was started with the 2,650-passenger Koningsdam due in February 2016.

In a conference call with Wall Street analysts, Carnival Corp. CEO Arnold Donald declined to specifically answer a question about the cost of the two ships, which will be built by Italy’s Fincantieri shipyard.

According to cruise industry publications, the Vista’s cost has been estimated at $780 million, the Koningsdam’s at $518 million.

Donald said the two ships continue the policy of measured growth that Carnival Corp. has hewed to since the 2008 recession. It now has 10 ships on order, which Donald said is roughly one for each of its brands over the next four years.

Combined with the exit of older ships such as the Ocean Princess and Costa Celebration, overall capacity is set to grow just 2% next year.

Donald said the ongoing substitution of larger, innovative, more efficient ships for smaller, less efficient ones “will enhance the return potential of our fleet over time.”

During the conference call to discuss fiscal fourth-quarter and year-end results, Donald said Carnival is forecasting company-wide net revenue yields will improve 2% this year, up from 0.9% in 2014.

The meager yield improvement still led to a 14.4% increase in net income for the year, a rebound from 2013 when profits fell 16.8% in the wake of the Carnival Triumph engine room fire.

Net income for the fiscal year ended Nov. 30 was $1.2 billion, or $1.59 a share, up from $1.1 billion, or $1.39 a share, a year earlier. Total revenue advanced 2.6%, to $15.9 billion.

“Looking back at the full year, we turned the corner in 2014 with improved earnings and positive yields,” CFO David Bernstein said during the call.

Despite more capacity than demand in the Caribbean and Japan and the loss of high-yield itineraries due to geopolitical issues, Carnival Corp. still had over $1 billion in free cash flow in 2014.

Carnival Corp. is ready to unleash a January advertising blitz that will culminate in a 60-second ad during the Super Bowl on Feb. 1. The ads will encompass all of Carnival Corp.’s brands, not just Carnival Cruise Line.

Donald said the company’s planned ad spend in 2015 will be 25% higher than it was in 2012.

“Our 2015 marketing program is designed to reach the new-to-cruise market, including directing them to the experience that best resonates with their vacation preferences,” Donald said. “The focus of all these efforts is to create relative scarcity by driving demand for our brands that far outpace the supply, ultimately leading to higher yields.”

Donald hailed new leadership at Carnival and HAL, saying newly named Carnival President Christine Duffy’s “front-of-house skill set” will complement the operational team already in place, and that HAL President Orlando Ashford has “a great history and track record of high-performance culture change.”

Asked about the potential for Cuba to emerge as a cruise destination, Donald said there are 11 Cuban ports that could handle cruise ships but that the one at Havana is limited to smaller ships because it has a relatively shallow draft and can’t be dredged because of tunnels running beneath it.

He said opening Cuba would allow for some very fuel-efficient new itineraries and stimulate demand from past passengers to the Caribbean, adding there is “no question” that if the embargo is lifted, Cuba would be “a tremendous opportunity.”