Saturday, November 1, 2008

Carnival Corp.'s Response to Anticipated Cash Flow Reductions: Shareholders, Not Passengers, To Feel the Pinch

Carnival Corp. (owner of Carnival, Princess, Costa, Holland America, Cunard and Seabourn) announced yesterday that it was suspending the distribution of dividends for 2009; not because of a lack of profitability - Carnival's products are, and are projected to remain, profitable - but because of a change in cash flow and cruising habits on most of its brands.

Even though Carnival reports it is sitting with over $1.3 Billion dollars in cash, it is anticipating that (as occurred immediately post 9/11) (1) people are not as easily committing to cruises 6-9 months or longer in advance, so the immediate cash flow from the deposit payments is reduced; and, (2) people are not willing to travel as far to get to their cruise vacation (and the increases in air fares and reduction in airline service doesn't help). 

What this also means is that people are going to be booking more of the less profitable Caribbean cruises than the higher profit European cruises on most of the Carnival brands.  Ships are being repositioned as we speak; with, for example, Baltimore announcing it will be a home port for Carnival, Royal Caribbean and Celebrity on an extended (almost year round) basis.  [Note:  Seabourn is not taking these steps.  It has, in fact, announced its expansion into Asia and its commitment to finding additional unique European ports.  More to come on this.]

One other thing to consider, there will not be many new ships added to order books.  So what is seen as a lack of shipyard capacity today, may result in an overcapacity situation in a few years.  To me this is a classic example of how the economy is grown from the bottom up.  If the consumers aren't spending money...or even just aren't spending it as fast...the businesses contract, the investors get less in the short term and industry retracts. 

With Exxon Mobil announcing $13.8 Billion dollars in profits in the 3rd Quarter, one wonders what the effect of shorter cruising itineraries (driving first by the outrageous oil prices and now by reduced/changed itinerary demands) will have on the 4th Quarter 2008/1st Quarter 2009 profits.  We have all seen the drastic effect a 5% drop in U.S. driving has done on the price of a gallon of gasoline, so the cruise lines' changes will most definitely have some affect.  I think those investors - who have been extremely happy over the past few years - may see a bit less in the way of dividends and stock value increases.

While I am not thrilled with the concept of Carnival suspending dividends to its shareholders for 2009, in the long term (as Mickey Arinson asserts) this bit of fiscal conservatism (rather than gimmicks) is designed to assure Carnival will remain fiscally strong in the long term.  (Now reflect on some of the short term gimmicks I wrote about earlier in the week and you can better understand why I see some of them as Red Flags.)