Carnival Runs Aground

The past two months have been a PR nightmare for cruise ship operator Carnival (NYSE: CCL  ) -- and its CEO, Micky Arison, hasn't helped the situation one bit.

Following a deep recession that necessitated large discounts to entice consumers to buy cruise packages, Carnival went into 2012 with high hopes of raising prices and returning profits to pre-recession levels. The tragic crash of the Costa Concordia in mid-January completely changed that. Perhaps more damaging than the actual crash itself will be the potential lawsuits and the lack of involvement by Mr. Arison that I described two weeks ago. To make matters worse, another Costa ship, the Allegra, experienced an engine fire just weeks later, leaving the ship and its passengers without the basic necessities of water and power for three days.

Needless to say, the recipe was set for a terrible quarter, but no one knew exactly how bad. Well, now we know...

On Friday, Carnival posted a first-quarter loss of $0.18, with revenue actually rising 5% to $3.58 billion. Sales actually squeaked by Wall Street's expectations, but the loss was $0.11 wider than the consensus. Reality seriously kicked in when the company issued its full-year forecast, which called for EPS ranging from $1.40 to $1.70, which is a clean 40% lower than its previous guidance of $2.55 to $2.85.

From what I can tell, this represents a worst-case scenario, barring any more acts of God. The good news here, if any can be found, is that Carnival is going to stick to its guns when it comes to pricing. This means that even if revenue declines -- which is quite probable, given the backlash against the company -- customer yield, or gross margin per passenger, should rise. Focusing on quality over quantity will be better for investors over the long term and spare them another three-to-five-year period of playing the discount game.

The thing to remember with Carnival's report is that this affected the entire industry, not just Carnival. Royal Caribbean (NYSE: RCL  ) has admitted that bookings have slowed since the accident, but they've begun to show the first signs of a rebound, despite the bad press. Disney's (NYSE: DIS  ) CEO, Bob Iger, noted in February that its cruise ship booking volume was down, owing directly to the Costa Concordia incident, but much of its 2012 booking had been filled prior to the accident.

Another aspect to consider is the effect bookings could have on publicly traded online travel agencies priceline.com and Expedia. Neither has reported figures yet, nor do I expect a huge impact since cruises are commonly booked by actual travel agents, but there is a possibility there could be a negative impact with both Carnival and Royal Caribbean seeing double-digit drops in bookings immediately following the accident. Expedia is doing its part to drive business by boosting its cruise offers by 60% in the wake of the accident.

Personally, I see Carnival's biggest challenge being not its safety record (which is pretty good) or its challenging earnings outlook, but rather getting investors and consumers to trust CEO Micky Arison. His handling of the disaster was a disaster itself. I'm perfectly happy being a bystander at the moment. This way I can see how the lawsuit implications play out and whether or not Mr. Arison can redeem himself.

What's your take on Carnival? Is this ship ready to set sail, or is it dropping its anchor for a while? Sound off in the comments section below and consider adding Carnival to your free and personalized watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He and the water have never gotten along. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of Disney and priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's your personal anchor.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 13, 2012, at 9:28 PM, specialdez63 wrote:

    I've been cruising for over 20 years, often on Carnival. Ive been thinking Carnival wishes it could disassociate (sell) Costa! Carnival's ships and product deliver exactly what one would expect for the market they serve. (Not the high end of the cruise travel market). A year ago I took a VERY nervous first timer on a 3 day Carnival cruise. He needed Xanax when he saw the ship. He truly feared it would capsize in a pool of sharks. Now, even after the Concordia disaster, he can't wait to cruise again. I think Carnival and others are going to be fine. If their stocks are down, buy now. You can't beat a cruise as a travel bargain. They WILL come back.

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