Fuel Costs Sink Carnival's Operating Margins

Despite declining operating income in the second quarter, we believe Carnival's growth opportunities remain intact

Warren Miller 23 June, 2010 | 10:08AM
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Carnival's second-quarter growth was offset by a decrease in profitability. The company increased revenue 8% from the second quarter of 2009 thanks to an 8% increase in ticket sales and a 10% increase in onboard revenue. Both of these metrics were driven by slightly higher occupancy and an 8% increase in capacity since 2009. However, a 71% increase in the company's cost of fuel drove operating costs to grow faster than revenue. Consequently, operating margins shrank 100 basis points to 10% and operating income declined 1% from the second quarter of 2009.

We believe Carnival's growth opportunities remain intact, as evidenced by the 12% increase in customer deposits. This is the highest growth rate in customer deposits the company has seen in two years. Still, with economic recovery often comes inflation, and Carnival's reliance on fossil fuels could put a damper on free cash flow growth. In healthy markets, Carnival was able to pass on much of its higher fuel expenses with a passenger surcharge. It is yet to be seen whether Carnival would be able to successfully pass on fuel price increases to the consumer in the current recovery. We are leaving our fair value estimate unchanged.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carnival PLC1,533.00 GBX-1.54Rating

About Author

Warren Miller  Warren Miller is a senior quantitative analyst at Morningstar.

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