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CARNIVAL PLC (NYSE:CCL)
Q3 2019 Earnings Call
Sep 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Arnold W. Donald -- Chief Executive Officer and President

Good morning to everyone, and welcome to our third quarter 2019 earnings conference Call. I'm Arnold Donald, President and CEO of Carnival Corporation & plc. Today I'm joined by our Chairman, Micky Arison as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations. Thank you all for joining us this morning.

Before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today's press release. As you know our Company has been closely tied to the Bahamas for many decades and I'd like to extend our deepest concern for those affected by Hurricane Dorian. Some of whom were our employees and business partners. As a native of New Orleans, my family and I live through a number of hurricanes, I can only imagine the hardships in the wake of this type of storm.

Now, we've already made meaningful contributions to the rebuilding efforts in the Bahamas, which were matched by the generosity of the Micky and Madeleine Arison Family Foundation. Our ships provided critically important supplies directly to the region very quickly, as did our partnership with Tropical Shipping to collect and deliver needed supplies to the National Emergency Management Agency in the Bahamas. In fact, our entire industry has risen up at this time of need for our friends and partners in the Bahamas.

Two of our private destinations in the region Half Moon Cays and Princess Cays, both very popular destinations for our guests, thankfully sustained minimal damage and we're up and running very quickly. Our joint venture Grand Bahama Shipyard although in the direct path is also up and running with Bahamian residents back at work and providing much needed economic contribution to the recovery of the island. As part of the recovery and rebuilding process, we remain fully committed to our two major new developments. Our exciting Grand Bahama Island development and a second development on Half Moon Cay. Now we will continue our support in the coming months and we have no doubt that the spirit of the Bahamian people will overcome and rebuild to be stronger and more resilient than ever.

Now turning to our financial results. We delivered third quarter adjusted earnings per share of $2.63. That's higher than the midpoint of June guidance by $0.11 per share and $0.27 per share higher than last year's record results. For the full year, we are adjusting the midpoint of our adjusted earnings guidance by $0.05 and narrowing the guidance range from $4.25 to $4.35 to $4.23 to $4.27, primarily due to an $0.08 drag from fuel and currency. Lower unit cost driven largely by our ongoing efforts to leverage our scale, more than offset voice disruptions which in part contributed to lower revenue yields than anticipated in our prior fourth quarter guidance. David will take you through our guidance in greater detail.

Now I'd like to thank our 150,000 employees who go above and beyond everyday, as well as thousands of travel professionals who support our world-leading cruise brands. It was their efforts that enabled us to overcome an unusually high level of headwinds from economic malaise in some key countries in Europe, including heightened uncertainty around Brexit as well as the aforementioned voyage disruptions resulting from shipyard delivery delays, hurricanes and rise in geopolitical tensions, which necessitated close and deployment changes in our high-yielding destinations like Cuba and the Arabian Gulf.

As we discussed last quarter our EA segment, sourcing primarily UK and European guests, and representing roughly 38% of our capacity has continue to face heightened geopolitical and macroeconomic headwinds, which impacted our operating performance this year. Our Continental European team performed very well, especially given the environment and our growth in these markets has continued to outpace general travel. However growing into a contracting travel markets does impact ticket prices.

In light of the further deterioration in an already challenging economic environment in Continental Europe, heightened political uncertainty across the Eurozone and reduced consumer confidence, we have been evaluating further opportunities to optimize future operating performance at Costa. We are deep into [Phonetic] our evaluation and have already implemented an action plan to accelerate demand and rightsize capacity, source from Southern Europe by removing two ships from the Costa Europe fleet in fiscal 2020, followed the Costa Mediterranean, as previously disclosed, leaving the fleet in May of 2021. The capacity of these three smaller ships will be offset by the delivery of the extremely efficient 5,200 berths Costa Smeralda. Smeralda is the first new ship delivered for Costa in Europe in five years, since Costa Diadema, which is still among the highest return in vessels in our entire fleet.

In addition, the new Costa Firenze will head straight to China in September 2020. Combination of other moves will result in two Costa ships leaving the Far East base fleet by the end of 2020 including the previously disclosed Costa Atlantica. Also the planned an intentional rotation in the Costa fleet with the removal of these five smaller ships along with the addition of larger more efficient ships like Costa Smeralda should provide the foundation to continue to improve the return profile of the Costa brand. This is an acceleration of our long-term strategy to Costa and will deliver a reduction in capacity growth in Southern Europe for 2021.

In addition, we have taken actions on itinerary planning to optimize the current demand environment in Southern Europe by reducing exotic itineraries along with their accompanying low yielding repositioning cruises, replacing them with more convenient and affordable cruises closer to home and eliminating the costly air coupon [Phonetic]. At the same time this itinerary optimization provides further efficiencies by streamlining operating costs. Concerning Germany, as we indicated in June, land-based tour operator travel demand has trended down significantly this past year. While AIDA has grown double digits, but was unable to hold price in that environment. As we now know we were not alone in that experience, recently disclosed economic trends and Germany experienced a meaningful deceleration over that same time period.

Despite the current headwinds, our AIDA brand has outperformed the German travel and cruise market and is among the highest returning brands in our portfolio with continued double-digit growth in operating income. AIDA is entering a period of slower cruise industry supply growth in Germany, beginning in the second quarter, which should naturally foster improved supply demand balance in 2020.

Turning to the UK. It was unfortunate to see the recent news on Thomas Cook. We extend our deepest concerns for those impacted employees and travelers. And of course we will protect all our guests who are booked on P&O or Cunard. Despite ongoing uncertainty around Brexit over the past fiscal year, our UK brands have grown revenue yields and process in 2019. As you would expect, we have seen greater volatility in bookings due to tensions between the UK and Iran, necessitating their withdrawal of high yielding Arabian Gulf voyages very close in as well as the no-deal Brexit headlines and the resulting negative impact on consumer confidence.

Having said that, UK consumers have consistently proven to value their holidays through sites and we are well positioned to capture our share of holiday spends given the greater certainty provided by our pound/sterling denominated vacation. We believe our UK business is well positioned going into 2020, with bookings well ahead of the prior year. And that's for both our existing fleet and for Iona, the first new ship for our UK brand in five years, and the largest ever purpose-built ship for the UK, which will be delivered just before the peak summer season.

Now as we expected, Iona is booking at significant premiums are other UK shifts on a comparable basis. We remain confident we will continue to outperform the overall travel market, despite the ongoing challenges in the UK and in Continental Europe. We build 30-year assets and take decisions many years in advance, fully aware that we cannot time the economic cycle that we deliver them into.

Accordingly, we assume every ship, we'll see more than one recession in it's 30-year life. As we are demonstrating in Southern Europe, if we find these headwinds to be more than temporary in nature, we can and will make the changes necessary to grow profitably. As we've shown in the past, we believe our cruise brands will continue to be recession-resilient given the low penetration levels of cruise, attractive value proposition and high satisfaction levels relative to land-based vacation alternatives.

In North America, demand for our brands in the core Caribbean product remains particularly strong. And that's despite the disruption caused by the suddenness of the US government's policy change for travel to Cuba. Also, we are beginning to see a lift in ticket price for our Medallion class as we ramp-up our marketing efforts in that trade and as we continue to expand the Medallion throughout the Princess fleet.

While demand for travel to Alaska is certainly healthy, we believe there is a temporary over concentration of supply in 2019, considering the 15% industrywide capacity increase. Nonetheless, Alaska remains a high yielding market for us. With the 2019 season coming to a close, we are already working to create demand for our brands to meet the more than 8% capacity increase expected in 2020.

Our brands offer the best way to see Alaska, particularly when paired with our land-based products. We have five brands serving the contemporary, premium and luxury segments through 18 ships, ranging in size from 450 berths to 3,600 berths. We have the largest share of the cruise capacity in Alaska and an even larger share of the premium land-based cruise to our product, primarily through Princess and HAL. We have long been leaders in Alaska.

We're unique in our position Alaska as we own and operate a combined land and cruise experience. We own 10 largest, our three largest, we're a purpose-built to combined with our cruise product and offer our guests the best and brought us experience at Denali National Park. We have an exclusive rail service with a fleet of 20 dome cars cynically and seamlessly transfer our guests between the ships and our large network. We have more -- we can cruise departures and fully more round trip options from Seattle, Vancouver, Los Angeles to San Francisco. We offer more days in port and more opportunity to see glaciers, as well as other unique highly sought after cruise tour programs to more remote locations, including Canadian Yukon tours and Tundra [Phonetic] tours.

Princess is number 1 in taking more guests to Alaska than any other cruise line and Holland America Line just won the cruise critics -- Cruises Choice Award for best in Alaska, as awarded by consumers. Holland America Line will step up the guest experience even further in Alaska, beginning in summer 2020 with Koningsdam, one of it's newest ships.

In fact our cruise portfolio coupled with our land-based footprint provides an unrivaled strategic advantage in Alaska and we are ramping up our marketing efforts to leverage that and to step of our communications with the trade and consumers to drive greater awareness around Holland America and Princess, as the best ways to experience Alaska.

On the cost side, we remain focused on driving savings through our ongoing efforts to leverage our industry-leading scale. We are ahead of plan and now expect to deliver $115 million, better than the $75 million originally projected and bringing the cumulative total to $470 million. As always, if we see an opportunity to drive demand and generate a return, we will invest.

On the leadership front, we are excited to announce that Peter Anderson has joined us as Head of Ethics and Compliance. That's a new role that is bringing together functions and people that were previously distributed across the corporation, and complementing that with new talents, roles and processes to help take us to best-in-class and broad-based compliance.

Peter, whose background as a former federal prosecutor along with a wide breadth of experience, including of the court-appointed monitor will report directly to me. Also on the sustainability front, AIDAperla will be fitted with the first lithium-ion battery storage systems ever deployed on a cruise ship, to power of the cruise ship's propulsion and operation for limited periods of time. This will complement other industry-leading technology we've already deployed to reduce emissions including cold ironing and the use of LNG.

In fact AIDAnova, the first ship in the cruise industry to be solely powered by LNG was recently named the first ever cruise ship to be awarded the Blue Angel certification by Germany's Federal Ministry for the environment for it's environmentally friendly ship design. These efforts are all part of our ongoing industry leadership to proactively develop innovative solutions for environmentally friendly operation. We pioneered the use of advanced air quality systems to reduce emissions and we have an additional 10 next generation LNG cruise ships on order.

Now, as you are fully aware we are truly a global company, with nearly 50% of our guests sourced outside of the US. We have a leading presence in every established market for cruise travel with over 6 million cruise guests annually sourced outside the US. The global aspect of our business has produced our industry-leading positions with over $5 billion of annual cash from operations, attractive returns on capital and the strongest balance sheet in our industry. Being global has proven to be a positive, however, we are a subject to uneven economies around the world in the short run. We've taken a number of steps to drive results going forward and our deepen analysis considering additional actions to mitigate any ongoing headwinds.

Now we're positioning ourselves for 2020 and beyond, and we'll provide further guidance for next year in December. Over time, we continue to expect to achieve the double-digit return about the capital that we believe our business is inherently capable of delivering. Should some of these headwinds prove to be more than short-term in nature as we have always said, we can and will bring capacity more in line with demand, if it makes economic sense to do so. And we've already begun to do so in Southern Europe as I shared in these comments. With that I'll turn the call over to David.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Thank you Arnold. Before I begin please note all of my references to revenue, ticket prices and cost metrics will be in constant currency unless otherwise stated. I'll start today with a summary of our 2019 third quarter results. Then I'll provide an update on our full year 2019 guidance and finish up with some insights on 2020 booking trends and a few other things to consider for 2020. As Arnold indicated, our adjusted EPS for the third quarter was $2.63. This was $0.11 above the midpoint of our June guidance. The improvement was driven by favorability in net cruise costs without fuel. The majority of which was due to the timing of expenses between the quarters, while the remainder was due to cost improvements, which were realized during the quarter.

Now, let's look at our third quarter operating results versus the prior year. Our capacity increased 5.8%. Our North America and Australian segment, more commonly known as our NAA brands was up 1.7%; while our Europe and Asia segment, more commonly known as our EA brands was up 13%. Our total net revenue yields were down 0.5%.

Now let's break apart the two components of net revenue yields. Net ticket yields were down 1.3%. Our NAA brands were up almost 1% driven by yield improvements in the Caribbean, while our EA brands were down 3.5%. Net onboard and other yields increased to over 2% with increases on both sides of the Atlantic. In summary, our third quarter adjusted EPS was $0.27 higher than last year, driven by the benefit from 5.8% capacity growth; 3.2% lower net cruise cost per ALBD excluding fuel; and finally $0.06 from the accretive impact of the stock buyback program.

So now let me provide you an update on our full year 2019 September guidance. Our adjusted EPS for 2019 is $4.23 to $4.27 versus $4.26 for 2018. The midpoint of our September guidance is $0.05 lower than the midpoint of our June guidance. There are a number of puts and takes, driving the changes in our guidance. First Hurricane Dorian, tensions in the Arabian Gulf and the previously announced delayed delivery of Costa Smeralda cost $0.04 to $0.06. Second, lower fourth quarter net revenue yields are forecast to cost $0.06 driven by a combination of lower net ticket yields and lower net onboard and other revenue yields. We continue to expect our NAA brand yields to be up for the year, but slightly less than our previous guidance. While our EA brands are still expected to be down for the year, but slightly more than our previous guidance.

Third, the combined impact of fuel price and currency cost $0.08, fuel prices $0.07 and currency is $0.01. All of this was offset by $0.07 from our cost improvement efforts, which were finalized during the third quarter, as well as an additional $0.07 of favorability related to depreciation expense, the gross accretive impact of our stock buyback program and a variety of other items.

Turning to 2020 booking trend. At this point in time, our cumulative advance bookings for the first half of 2020 are ahead of the prior year on occupancy at prices that are aligned with last year. Now let's drill down into the cumulative booked position for the first half of 2020. Cumulative advance bookings for our NAA brands are higher than the prior year on occupancy and in line on price. While cumulative advance bookings for our EA brands are in line with the prior year on both occupancy and price.

Now turning to the full year. While it is early, at this point in time, cumulative advance bookings for the full year 2020 are also ahead of the prior year on occupancy at prices that are also in line with the prior year. During the fourth quarter 2019, you will see a step-up versus prior year in our promotional activity focused on 2020 bookings, which is one of the reasons for the increase in the fourth quarter 2019 net cruise cost per ALBD excluding fuel in our September guidance.

And finally, a few other things to consider for 2020. We are forecasting a capacity increase of 7%. Given the 2020 capacity increase by brand, we will have a negative mix impact of approximately 0.5% for both the first half and full year 2020, which will impact our reported net revenue yield. For those of you who are modeling 2020 using fourth quarter September guidance fuel prices and FX rates, the impact of the lower fuel prices and the stronger dollar will unfavorably impact 2020 by about $0.07. Lower fuel prices are favorable $0.01, while currency is an unfavorable $0.08.

In addition, on the fuel side, we previously indicated for 2020, we would increase our usage of MGO as a percent of our total fuel consumption as a result of the new IMO sulfur emission regulations, which go into effect on January 1st, 2020. Again using fourth quarter September guidance fuel prices, the fuel mix impact of the higher price MGO will unfavorably impact 2020 by $0.24. We currently anticipate MGO to represent approximately 40% of our fuel consumption in 2020 versus approximately 20% in 2019.

For clarity the fuel price impact and the fuel mix impact are additive when modeling 2020. The fuel price impact is done by grades [Phonetic], so we do one calculation for HFO price changes and one calculation for MGO price changes. While the fuel mix impact, we calculate the change in fuel expense due to the change in type of fuel grade we use. In this case the change from approximately 20% MGO to approximately 40% MGO. Please note that given the new IMO regulations, it is even more uncertain at this point in time than most years with next year's pricing will be for either HFO or MGO. Keep this in mind when using the year-over-year impact we calculated using the fourth quarter September guidance fuel prices.

Let me give you the current rules of thumb for fuel price changes by fuel grades based again on fourth quarter September guidance fuel price. For HFO, a 10% change in the current spot price represents an $0.11 impact for 2020 with the impact evenly spread across the four quarters of the year. For MGO, a 10% change in the current spot price represents a $0.12 impact for 2020, again, the impact is evenly spread across the four quarters of the year. Fuel expense for 2020 using fourth quarter September guidance fuel prices would be $1.79 billion for the full year versus $1.58 billion for 2019.

We currently expect depreciation to be around $2.41 billion for 2020 versus $2.16 billion for 2019. For net interest expense, our current expectation for 2020 is around $220 million versus $190 million for 2019. We will provide the remainder of the guidance metrics for 2020 during our December earnings call as we normally do each year.

And now I'll turn the call over to Arnold.

Arnold W. Donald -- Chief Executive Officer and President

Thank you, David. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question is from the line of Greg Badishkanian with Citi. Please go ahead. Greg Badishkanian your line is open. You may proceed with your question. Okay. We'll move on to the next question. Our next question is from the line of Jared Shojaian with Wolfe Research. Please go ahead.

Jared Shojaian -- Wolfe Research -- Analyst

Hi, good morning everyone, thanks for taking my question.

Arnold W. Donald -- Chief Executive Officer and President

Good morning.

Jared Shojaian -- Wolfe Research -- Analyst

So, good morning. The guidance for this year suggests EPS could potentially contract for using the low end and just based on what you've told us so far with your booking commentary, your fourth quarter yields exiting this year, the fuel headwind. Do you think it's reasonable that earnings could contract in 2020 as well? And then how are you thinking about the dividend in that context? Is there a max leverage that you're willing to entertain to continue to fund the current rate? Thank you.

Arnold W. Donald -- Chief Executive Officer and President

Thank you. This is way too early to give guidance for 2020. There is a lot of noise out there we'll be well prepared to give guidance on the next call. So that, there will be answer considering the guidance and we're going to work hard obviously to deliver in the fourth quarter with all the things that happen at all the noise out there. We're within striking distance of previous guidance for the full year.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

And as far as the dividends concerned, we've said this many times that our dividend payout ratio we target 40% to 50%. So in the past we have seen situations where when earnings went down the payout ratio went up, but we believe that 42% target is sustainable in the long run. And that's why we chose that and with the strong balance sheet, we believe that the dividend is sustainable at that level. Of course, we wouldn't raise the dividend until we saw earnings go back up.

Jared Shojaian -- Wolfe Research -- Analyst

Got it, OK. And then as we look at capex for this year, this is a record year, next year is similar to this year in terms of elevated capex, but right now, obviously you don't have any earnings growth. Next year, I think, could potentially look kind of similar. I know you're not -- you're wanting to give guidance on 2020 right now. But then your ROIC is also now declining. I know these are two important metrics for you. So, at what point do you start to meaningfully reduce capacity? I know you mentioned some tweaks here and there with Costa, but those don't necessarily appear to be needle movers to your overall capacity. I mean, correct me if I'm wrong on that, but at what point do you start to get a little bit more aggressive on reducing some of the capacity here?

Arnold W. Donald -- Chief Executive Officer and President

We'll look at it brand-by-brand, trade-by-trade, which is what we always do. I think again, we haven't given guidance for next year. We've had a lot of strength where we have a capacity increase for example in Germany, what our AIDA brand, where we had substantial capacity increase there, and obviously with all the things going on at some pressure on yields in different places, but we'll monitor for all the time. We introduced. We plan to hit on capacity for the ships we have, we planned some years ago. We can't always time them perfectly with economic cycles within a given country or even trade, but the assets are mobile and we build 30-year assets. We know that those 30-year assets are going to individually face various recessions over that 30-year period of time. But overall we're building capacity and managing capacity to produce results over time.

Beth Roberts -- Senior Vice President, Investor Relations

And in terms of the capacity growth, as we look at 2022 -- sorry 2021, it looks to be 5.3%, which is well below the over 6% increase we had expected just three months ago.

Arnold W. Donald -- Chief Executive Officer and President

And the capacity moves we make are material for within the trade and brands that we make.

Jared Shojaian -- Wolfe Research -- Analyst

Okay, thank you.

Arnold W. Donald -- Chief Executive Officer and President

Thank you.

Operator

Our next question is from the line of Steve Wieczynski with Stifel. Please go ahead.

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

Yeah, hey guys, good morning. So...

Arnold W. Donald -- Chief Executive Officer and President

Good morning Steve.

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

You gave -- good morning, Arnold. How you doing? So you gave a lot of commentary around 2020 at this point. I know it's -- I know it's still early. I know you're not going to give guidance, but the commentary you had in the release about booking volumes and pricing since June coming down I guess is really causing some concern and I guess, can you help us break down maybe, which markets or geographies have weakened in terms of bookings since we heard from you back in June?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

So the hard part about looking at the booking volumes and pricing since June is all the noise that is out there in the bookings. Remember we had the Cuba situation. We had the Carnival list, Hurricane Dorian, tensions in the Arabian Gulf, we had to change the itineraries for Oceana. So with all that noise, it is very difficult to read through and it's one of the reasons why there is a little bit greater degree of uncertainty and why we feel uncomfortable trying to give guidance for 2020 at this point.

Arnold W. Donald -- Chief Executive Officer and President

Just to reemphasize what David was saying. We did have Dorian, the hurricane, we has Arabian Gulf, we had ship delays Smeralda now, that's going to impact us on the top line with liquid data damages, cash flow wise, we're going to be good with that, but there is other ramifications of that in terms of future cruise credits and and short-term impacts. You've got the no-deal Brexit situation, obviously the environment in the UK for tour is not as positive as it was. There is a clear change in Germany, where the travel market is down. We've outperformed in Germany versus the travel market and versus cruise. But nonetheless, as constrained environment, persistent economic malaise in the rest of Continental Europe, just had a fuel price spike.

So, and then our future cruise credits from Cuba and Vista. So all of those things and then on top of that a tougher comparison in the fourth quarter gross versus [Indecipherable] over the Caribbean is very strong. Cuba pricing last year and the fourth quarter is not available to us in this fourth quarter. So all those things paint a picture with a lot of noise in it and with all of that the results had us within striking distance of the guidance we gave in June on our earnings basis and we're preparing to take on the headwinds next year and be positioned well.

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

But I guess if we -- if I add on to your European business. I guess the question would be, the pressures that are you're seeing over in Europe, would that be more related to macro issues or is that more related to overcapacity or is that basically an equal balance of both those issues?

Arnold W. Donald -- Chief Executive Officer and President

I think there is no question that the macro environment constrains. The ability to grow capacity and grow yields at the same time. There is a constraint on that and then you've got the geopolitical things, where again we had -- it's not just a matter of planning, it's a matter of these sudden changes. So when you have Oriana having to suddenly change an itinerary that was well booked and then change to a different itinerary that you now have to book with a much shorter booking window and the similar kind of situation that happened in some instances with Cuba and with the hurricanes, those dynamics create a lot of noise.

We always plan for some things to go wrong and this year we have had kind of a plethora of things that has overwhelmed even our planning and it's just -- that we are dancing with. But longer term, Europe is a strong market is true. In the short term, we over index. I guess we have three times the number of guests say that [Indecipherable] would have ex-US. We have 10 times -- NCL we have ex-US. So anything that's now going well there, we get more impacted. But the reality is on the longer-term has served us well and we have the strongest balance sheet. We're the largest in scale and we have great returns overall.

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

And maybe if I could ask one more quick one for David. David can you expand a little bit more in terms of what you were referring to in the fourth quarter in terms of higher -- I don't know if you said marketing or advertising costs. And I guess what I'm getting at here is, can you maybe help us also think about the promotional environment that's out there today, and that doesn't mean you're going to get promotional on price I assume?

Arnold W. Donald -- Chief Executive Officer and President

No, no. First of all, the only comment is we're investing to create the demand given the fact we have a 7% capacity increase coming in next year and we're going to pre-invest of course and then wave season to make sure we're doing everything we can to create the demand environment we need to be successful in that. That's the [Indecipherable] it is not promotional like discounting and so on, but David go ahead.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Yeah, I guess, in hindsight, they should use the word advertising. It was relating -- my comment was relating to net cruise costs being higher in the fourth quarter and that being driven to some extent by the higher advertising on a year-over-year basis.

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

Okay, thanks. I just want to make sure I just want to clarify that. I appreciate it guys. Thanks.

Arnold W. Donald -- Chief Executive Officer and President

Thank you.

Operator

Our next question is from the line of Harry Curtis with Instinet. Please go ahead.

Harry Curtis -- Instinet -- Analyst

Good morning , everybody.

Arnold W. Donald -- Chief Executive Officer and President

Good morning.

Harry Curtis -- Instinet -- Analyst

I wanted to follow up on the capacity that's shifting out of your markets. And the -- first of all, that's --you -- it's not a huge amount of capacity, but where is it going?

Arnold W. Donald -- Chief Executive Officer and President

The ships that we're talking about in the cost, I'm assuming that you're referring to.

Harry Curtis -- Instinet -- Analyst

Yes.

Arnold W. Donald -- Chief Executive Officer and President

Different place. Some are being sent to China, some are being sent to other markets where we have strength.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

And some leaving the fleet.

Arnold W. Donald -- Chief Executive Officer and President

And some are leaving the fleet, some are being sold.

Harry Curtis -- Instinet -- Analyst

Okay. So as a going back to Jared's question. Does it make sense to not just sell these ships, but to actually retire some of the old capacity, because that would theoretically give you an opportunity to lift pricing on the next tier up and improve brand image for example. Is that being considered?

Arnold W. Donald -- Chief Executive Officer and President

First of all, our brands do not have tarnished image as the brands are strong and they're doing really well. We don't sail people on old tired ships. The ships have to resonate with the guests and so any ship we have you, that are maybe 100 year hotel, but it could still be a pristine hotel with great service and so on, so forth, so that's the first thing.

Second thing is, in terms of disposing of ships. When we sell then we don't sell them into competing markets. So we're not selling ships into markets where we're going to be competing directly with it. So that capacity is not only leaving our fleet, it's generally speaking leaving the market that we're operating in. And when I say market, I mean, the type of cruise that we do and the type of travel experience that we're marketing. So those will be the two comments.

But again, if we get to the point where we feel there is a need to, we're not afraid to scrap a ship or if there is not a market that's outside of our market to sell it to. At this point, again, we feel pretty confident that we are on the right path. We obviously are examining very closely every segment and every trade to see if there is additional moves we need to make. We saw a persistence of economic malaise in Continental Europe, especially Southern Europe and persistence over time. Costa has been improving it's performance over time and kudos to our team there, because they've done a very good job this past year and with all the other dynamics going on right now, we felt it was more to replace some of the capacity we currently have with much more efficient capacity, which is Costa Smeralda.

And so as opposed to adding net capacity, we'll be replacing capacity with much more efficient capacity and that will give us some help both from an operating expense standpoint, but also moderating capacity for the next period of time here. So we can continue to improve the performance of Costa.

Harry Curtis -- Instinet -- Analyst

Very good. And just my last question is related to kind of renovation and maintenance capex expense this year and maybe -- and looking out to 2020 and '21. I believe you're spending between maintenance and renovation capex about $2 billion. How is that likely to trend in 2020 and 2021? And what are you trying to achieve, particularly with your with your renovation capex? What inning are you in with respect to upgrading some of the existing fleet?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

So the number should be pretty consistent in '20 and '21 as we move out. Some of that in addition to capex for the fleet will go toward port development. Yesterday, we put out the press release about our port facilities in the Grand Bahama. And as far as the -- what inning we're in? You got to take a look at every brand, it is a little bit different, has different average age. I mean some of the brands have as Arnold tried to indicate in his comments have continually maintained the ship and continually retrofitted them to keep consistency across the fleet. So there is always more to do as time goes on, but we feel that we're in good shape and good consistency across each one of our brands at this point. But we'll never be done, it's an ongoing process.

Harry Curtis -- Instinet -- Analyst

Okay, thank you very much.

Arnold W. Donald -- Chief Executive Officer and President

Thank you.

Operator

Our next question is from the line of Felicia Hendrix with Barclays . Please go ahead.

Felicia Hendrix -- Barclays Capital -- Analyst

Hi, thanks a lot. David, can you just give us...

Arnold W. Donald -- Chief Executive Officer and President

Hi Felicia.

Felicia Hendrix -- Barclays Capital -- Analyst

Hi there. David, can you just give us some more color on your NAA brands for the remainder of 2019? It just sounds like that segment got incrementally worse since the last time you updated us and I was just wondering what was driving that?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

So, the NAA brands -- there is a lot of things going on there between Cuba and Vista, and Hurricane Dorian, a lot of noise and a lot of challenges in North America. We saw challenges in late season Alaska as well. And so, overall, as we have said in our prepared remarks, we had taken the guidance down $0.06 that was attributed both to North America and the EA brands.

Arnold W. Donald -- Chief Executive Officer and President

I'm sorry. Go ahead.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

No. No.

Arnold W. Donald -- Chief Executive Officer and President

I was just going to say about -- again the Caribbean is very strong. And overall we have increase in yields for the year in NAA brands. I guess in the forecast is down slightly from what it was, but we have an increase in yields in NAA brands overall for the year.

Felicia Hendrix -- Barclays Capital -- Analyst

Okay. The crux of my -- OK, so Cuba and -- so for Cuba and Vista, those are issues that you knew about last quarter. So like -- if I could bucket things out or segment things, it sounds like just maybe some of the noise there is lingering a little bit more than you thought? Is that...

Arnold W. Donald -- Chief Executive Officer and President

It's a combination of things. So, yes, we knew about them, but yes future cruise credits and when those get claim are not claim, etc. And then just because of the suddenness of them, it changes rebooking and booking curves and it creates noise and so there is a lot of noise in it. But again, since you're talking Cuba and you're talking Vista, I do want to point out that the Caribbean is very strong.

Felicia Hendrix -- Barclays Capital -- Analyst

Thank you for that because I think one of the other items that you threw in there was Hurricane Dorian and I just think that there has been a concern out there that post Hurricane Dorian there has been a booking lull and that might not -- that might have an extended impact into 2020. So that might be a segue into 2020 also because some of your language changed there too, so if we could maybe just focus on that one driver, how we are seeing things?

Arnold W. Donald -- Chief Executive Officer and President

We're not not giving guidance, we talked about the booking trends already for the first half of 2020. But I would say it relates more to the comments about the last six months. So, our booking trends, where you have all this noise in there, that and we're starting all that out to see exactly where we are, but the booking trends we share for the first half of next year, we're way ahead and in-line on pricing.

Felicia Hendrix -- Barclays Capital -- Analyst

Okay. But, I know you're not giving guidance [Indecipherable], but for 2020 the language changed a little bit too, because the bookings are now ahead versus, well ahead, and is that just mainly from EA or is it noise that you're -- continued noise you're seeing in the Caribbean?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Just that was more of the North America the NAA brands, but it has to do with the booking activity during the third quarter. But both the booking activity during the third quarter was down in both the North America and the EA brand, but we're still ahead.

Felicia Hendrix -- Barclays Capital -- Analyst

All right. Okay. And just on Alaska just -- look, I know the industry is going to grow supplying Alaska high single-digits next year, but it is significantly less than the industry grew this year. So is there an opportunity for you in Alaska to do better year-over-year, I know it's really early?

Arnold W. Donald -- Chief Executive Officer and President

It's early, but clearly less capacity growth creates additional opportunity, but mainly for us we're investing as I mentioned in my comments to make certain that the true advantage we have in Alaska with our strong brands was effectively communicated and recognized. But I guess our brands are doing really well as it is a high return market for us as a high yielding market. Back, five years ago, there was temporary over concentration of supply in the Caribbean, similar kind of capacity increase and things [Indecipherable] on yield for a bit, but today the Caribbean is very strong, well above the peak pricing, previous peak, well above that base five years ago with substantially more capacity in it and we think over time, Alaska will probably fade out the same way.

Felicia Hendrix -- Barclays Capital -- Analyst

Okay and finally -- just final clarification, I thought you guys had previously said that your IMO MGO mix was 70-30. So now it's 60-40. What changed?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

No, we had said about 35% approximately. Remember, we always round these numbers. It did move up a couple of percentage points. We took it -- we refined the number by taking into account usage import as well as the commissioning time for some of the installations of advanced air quality systems that are yet to come.

Felicia Hendrix -- Barclays Capital -- Analyst

And is there a chance that the pricing -- the IFO pricing improves from what you're seeing now, because, or I guess those would get lower -- anticipated?

Micky Arison -- Chairman

If we knew, we go [Indecipherable] fuel prices will be in pretty good. So yeah, is get approve, it could get worse.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

If you look at that forward curve, the forward curve will tell you that it will be significantly lower in the January-ish time frame. However, I won't say the forward curve is always a good predictor. So I'm not here to forecast, but I can give you that fact. And the other thing that I do want to point out on the fuel mix with MGO, we have said this before that as we continue the installation of the advanced air quality systems, we'll see that 40% decline over time back toward the 20%.

Felicia Hendrix -- Barclays Capital -- Analyst

Okay. But, so you're not using the forward curve to put it in your forecast today?

Micky Arison -- Chairman

No , I was very specific, we use the current spot prices in that we used for fourth quarter guidance.

Felicia Hendrix -- Barclays Capital -- Analyst

Okay, helpful. All right, thank you.

Operator

Our next question is from the line of Robin Farley with UBS. Please go ahead.

Robin Farley -- UBS Investment Bank -- Analyst

Great, thank you. I wanted to ask a little bit about your comments about the early 2020 commentary. And how bookings have been in the last three months? I guess, thinking about maybe with that rate of decline has been? And I wonder if you could give us a little color on North America, which may be disrupted in the last month by a lot of storms and flooding and things that would maybe be more temporary versus maybe some of the things in Continental -- Continental Europe you've talked about that, maybe you would expect to continue? Just to try and get a feel for how that rate of change from here forward, assuming that volumes from North American passengers recover to normal levels kind of after hurricane disruption? And then also the German market, you're thinking about the fact that there is less supply -- much lower rate of supply growth next year in Germany. Do you have kind of early take on -- is that shaping up to be better, even though I know your general commentary in the last three months hasn't been?

Arnold W. Donald -- Chief Executive Officer and President

Okay. So I'll start and then David and Beth may have some comments as well. First of all, let's start with your last one first, which is Germany. Again I want to give our team kudos because they have totally outperform the travel industry in Germany and they've outperform the rest of the cruise industry in Germany. But clearly there has been a change in consumer sentiment and overall the travel market has declined in face of substantial capacity increase that we had this year. Looking forward to next year, there is less capacity growth for us and for the industry. So that bodes well. Germany was able to grow their earnings this year even with the noise and the background and so on. And so I think, our team is as well positioned to try to drive results next year and we have to see how deep and extensive whenever the malaise in Germany will persist, to see how it would affect us, but there is definitely opportunity in Germany.

The rest of Europe is as we said, we've made the modifications that will impact later in '20 for the Costa brand. But the UK, it has -- did have some short-term disruption recently with the Arabian Gulf situation, that geopolitical tension caused us to change itineraries and shorten list, which I've already talked about that has an impact on these reported numbers that were summarizing in bookings over the last three months and so on and so forth. There is also future cruise credits involved and what have you -- but overall that UK market is strong and as I mentioned on the call, UK consumer tends to still have a good healthy appetite for holiday and vacation and cruise, even when things go not as well there from an economy standpoint as you might like. Also we do have the benefit with P&O and that's one of the advantages of having the national brands, that it is pound/sterling based and so, it can avoid a lot of the currency fluctuation, things that can impact choice of travel that other offerings might have.

And if you move into North America, again the Caribbean is very strong. Carnival brand continues to perform really well because they've performed even better without the noise. Absolutely, but the reality is, it's strong. And North America is going into next year. We are going to study very closely to see what's happening overall. You see some general softness from a lot of this noise and geopolitical noise and other things that even happening today, but it's far too early to predict and give guidance on that.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Yeah. And I think we should stop there, because by giving more specificity relating to all these booking trends will provide information to -- far more information than I really want to give to our competitors at this point in time.

Robin Farley -- UBS Investment Bank -- Analyst

Okay, fine. And then just, I don't know if you have any comments on Thomas Cook and whether that -- taking that supply out of the -- the sort of broader vacation market and tour operator market in the UK. Is that ultimately do you think is an opportunity in terms of picking up share of the vacation market, when you think about previous times a tour operators have have come out of the market. I know it's been a couple of years, but I wonder if you have any thoughts around that?

Arnold W. Donald -- Chief Executive Officer and President

We don't have any predictions around the ramifications. It's kind of a sad day because obviously of all the employees that have been impacted and a number of travellers are being impacted as we said in my comments that we're protecting all of those that were booked on. -- and people will still travel in the UK and they'll find a way to do that and does it, in the end bode even better for cruise versus not for us versus others, that at this point, I'll have to come in.

Robin Farley -- UBS Investment Bank -- Analyst

Maybe just a last question on that point is, when you just think about your distribution in the UK. Are you able to replace what you have been distributing through them, through other channels and through direct channels or do you expect any kind of change in your distribution?

Arnold W. Donald -- Chief Executive Officer and President

I think from a ability to book, yes. We're in a healthy situation and we'll be able to put down to the change and be able to continue to perform -- and our UK brands are performing.

Robin Farley -- UBS Investment Bank -- Analyst

Okay. All right, great. Thank you very much.

Operator

Our next question comes from the line of Brandt Montour with JP Morgan. Please go ahead.

Brandt Montour -- JP Morgan -- Analyst

Great, thanks. Good morning guys. So just a quick question on the commentary around fourth quarter net yield growth. I think you mentioned, David, that you're pursuing lower onboard growth? Just kind of remind us, sort of what's the onboard growth range you guys generally put, one quarter out and is there something you're seeing with the onboard passengers kind of in the near term that is causing to be a little more cautious there?

Arnold W. Donald -- Chief Executive Officer and President

Yeah. Real quickly Brandt, I would like to just point out that onboard both NAA and EA both segments, once again is up this year over last year. And I think there's only been one year in 47 years to 48 years, we've exited at -- onboard revenues have an increase and they are up again. So that's [Indecipherable] comment on onboard revenues, but I'll let David answer your specific question also the modifier in the the guidance?

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

So typically in our our guidance we provide something around 2-ish plus or minus depending on the quarter itineraries and other things. So in this particular case, we're just -- there is still up in the fourth quarter. We were just saying that they wouldn't be up quite as much as we had in the June guidance in the fourth quarter and some of that had to do with onboard credits relating to Cuba, which were given to people on board the ship. I think we got the total Cuba impact correct . The split between onboard and ticket may have been off a little bit. It may have been some other noise in the numbers, but we're talking about small movements here and just trying to give people some direction.

Arnold W. Donald -- Chief Executive Officer and President

[Indecipherable] we can't really forecast our revenues. So we'll see what happens and the teams are working to drive onboard revenue.

Beth Roberts -- Senior Vice President, Investor Relations

So, what is impacting our onboard revenue has been on par occupancy given all of the near-term inventory that's been put into the market and the pricing discipline that the brands are trying to maintain. We are a little bit marginally lower on the occupancy in our forecast versus the last one, which has a knock-on impact on onboard revenues.

Brandt Montour -- JP Morgan -- Analyst

That's really helpful. Thank you. And then just quickly to circle back on the advertising commentary -- just -- where sort of regionally or brand specific -- what do you think that -- those dollars will be focused the mosr? Can you give us a sense or maybe the cost benefit announced around stepping up that marketing spend and what that really can do for yields when you've done this in the past?

Arnold W. Donald -- Chief Executive Officer and President

Providing that level of detail ,we'll probably be going past the line, we don't want to go in terms of revealing versus competitive sets stuff. But the bottom line as we use the word term advertising broadly is a combination of efforts to create demand. And there is obviously some obvious markets that we would anticipate they're going into, so I'll let you just anticipate those.

Brandt Montour -- JP Morgan -- Analyst

Great, that's it from me. Thank you.

Arnold W. Donald -- Chief Executive Officer and President

Thank you.

Beth Roberts -- Senior Vice President, Investor Relations

We'll take one or two more questions, because we will go over.

Operator

Certainly. Our next question is from the line of Tim Conder with Wells Fargo Securities, please go ahead.

Timothy Conder -- Wells Fargo Securities -- Analyst

Thank you. Yeah, I just want to circle back on the North America, I mean [Indecipherable] Dorian in with several other items. Is there a way into breakout the Dorian impact on -- from the consumer side to 2019 -- to fiscal 2019 here? And then any comment, you didn't give or anything related to your impact that the Grand Bahama Shipyard for your ownership position? And then how that may disrupt your dry-dock schedules from that?

Arnold W. Donald -- Chief Executive Officer and President

I will talk about the shift real quickly our joint venture there. The shipyard we're finalizing reviews of exactly what we want to do in terms of the dock that was damaged, that decision we made relatively shortly. That decision has been made in mind with all of the partners desire to ensure that we have the most cost effective dry-dock available for those that are coming up to be scheduled. So we're in the middle of finalizing all that with the partners, hasn't yet been finalized, but is being finalized in the context of making certain that, that we are cost effective in repair our new build, whichever way we go in and then ultimately in servicing the needs of the various partners in the yard.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

It's fair to say, the shipyard is up and running as we speak today, servicing ships. There are ships there. I believe they did put out a press release indicating that. So people are back to work, contributing to the economic viability of the island. And as far as Hurricane Dorian is concerned, I mean it had an impact on our business. We had a couple of cancelled cruises and couple of cruises, where where we had a change in itineraries and change the embarkation day. We haven't seen anything that is different about this particular hurricane than any other in terms of booking trends or anything else. We always see some noise in the booking trends as a result of each and every hurricane.

Timothy Conder -- Wells Fargo Securities -- Analyst

Okay. And David on that specifically could -- is there any specific number you can put on the impact for cancelled cruises, cruise credits whatever related to Dorian in '19. I guess that would help give color on some of the prior questions that have been -- that I think everyone's trying to focus on North America? And then one of the thing I'd like to ask if you wouldn't mind, thank you for the color on Europe, you did mention Asia in your press release, can you talk about any weakening that you're seeing there? How much of that is due to higher capacity from the industry, yourselves putting some older Costa ships there? Or are you seeing maybe a reduction in Chinese outbound travel for cruising in Asia, Australia or UK guests, who would go to Asia? Just any additional color on Asia in general there?

Arnold W. Donald -- Chief Executive Officer and President

I think the press release refers to this segment, and it's the way we define the segment, we say Europe and Asia. If you look at the business in Asia, it is -- that's very strong this year. We're up overall and so we've had a very good year in Asia, both in China and in Japan. And so, Asia, for us has been a good business this year and so we have not seen weakness in Asia this year.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

And we did say that the combined Dorian, the delayed delivery of Costa Smeralda and the tensions in the Arabian Gulf cost us $0.04 to $0.06 in the fourth quarter. And what was interesting is -- remember the Arabian Gulf itineraries just changed in late October, so Dorian and Smeralda were a bigger part of that $0.04 to $0.06.

Timothy Conder -- Wells Fargo Securities -- Analyst

Okay. Thank you gentlemen.

Arnold W. Donald -- Chief Executive Officer and President

Thank you. One last question.

Operator

And our final question is from the line of Stephen Grambling with Goldman Sachs. Please go ahead.

Stephen Grambling -- Goldman Sachs -- Analyst

Thanks for sneaking me in. Given all the headwinds, you're talking to in 2020, I guess, what is the leverage you have to more aggressively cut costs and protect profitability such as what you saw a little bit this quarter? Maybe I'll ask it another way, what's the range of net cruise cost, I think about should the environment remain weak or even deteriorate further?

Arnold W. Donald -- Chief Executive Officer and President

Again, we won't give guidance on cost, what I can tell you is historically we've set the target satisfied to $80 million just from sourcing improvements in this year. I think as I reported, we'll be well north of $100 million of $150 million in savings this year. How much of that we put to the bottom line and how much we choose to reinvest and create demand, that's part of our internal planning processes, which will be wrapping up here in a few weeks.

And so as we look ahead, we see continued opportunity for sourcing savings across multiple fronts and we'll be advising, but that will be as we look ahead. But obviously, as you saw that happen this past quarter, we do have flexibility outside of things that are demand-specific to make change that we need to part of what we're doing also though is in the case of Costa for Costa Smeralda is putting just much more efficient hardware in.

So not only do you moderate the capacity by taking out the [Indecipherable] we're actually improving the operating base because this is just a lower effect net cruise costs operating vessel. So those are the things we're doing and will continue across base. So, I'll have David make a comment.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Yes, so let me repeat what I think I've said a couple of times before. In 2020, given the 7% capacity increase that we have coming, we get tremendous economies of scale, both the onboard those new ships, because they are larger as well as shore side. And as a result of that, we believe that the cost guidance for 2020 will be better than the cost guidance for 2019. But we'll stop there, we'll go through our planning process and we'll give you more detail in December.

Stephen Grambling -- Goldman Sachs -- Analyst

That's super helpful. Thanks so much.

Arnold W. Donald -- Chief Executive Officer and President

Okay, thank you everyone. Really appreciate it and look forward to following up with you guys in the coming weeks. Thank you very much.

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Thank you.

Operator

[Operator Closing Remarks].

Duration: 66 minutes

Call participants:

Arnold W. Donald -- Chief Executive Officer and President

David Bernstein -- Chief Financial Officer and Chief Accounting Officer

Beth Roberts -- Senior Vice President, Investor Relations

Micky Arison -- Chairman

Jared Shojaian -- Wolfe Research -- Analyst

Steve WieczynskI -- Stifel Financial Corp. -- Analyst

Harry Curtis -- Instinet -- Analyst

Felicia Hendrix -- Barclays Capital -- Analyst

Robin Farley -- UBS Investment Bank -- Analyst

Brandt Montour -- JP Morgan -- Analyst

Timothy Conder -- Wells Fargo Securities -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

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