Royal Caribbean Cruise Lines 2003 Annual Report Download - page 14

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Several external events and factors have impacted our operat-
ing environment over the last three years. Consumer concerns
regarding the terrorist attacks of September 11, 2001, the war
in Iraq, the economy, Severe Acute Respiratory Syndrome
(“SARS”) and noroviruses had adverse impacts on our busi-
ness. As a result, we experienced lower cruise ticket prices
attributed to consumer apprehension towards travel. Net
income was $280.7 million or $1.42 per share on a diluted
basis in 2003, compared to $351.3 million or $1.79 per share
in 2002 and $254.5 million or $1.32 per share in 2001. Net
income in 2002 included a charge of approximately $20.0 mil-
lion recorded in connection with a litigation settlement. In 2003,
we reduced the amount of the charge by approximately $5.8
million. (See Note 12. Commitments and Contingencies.) Net
income in 2002 also included net proceeds of $33.0 million
received in connection with the termination of our merger
agreement with P&O Princess Cruises plc (“P&O Princess”).
(See Note 3. Termination of Proposed Combination with P&O
Princess Cruises plc.) The events of September 11, 2001
adversely affected our 2001 net income by approximately $47.7
million due to lost revenues and extra costs directly associated
with passengers not being able to reach their departure ports
during the weeks following the attacks. We incurred additional
costs associated with business decisions taken in the aftermath
of the attacks, including itinerary changes, charges related to
office closures and severance costs due to a reduction in force.
Outlook
On January 29, 2004, we announced that we expected Net
Yields for the first quarter of 2004 to increase in the range of 5%
to 7% and that Net Yields in the second quarter would increase
more than in the first quarter. On March 15, 2004, we stated that
we expected Net Yields for the first quarter of 2004 to be at the
low end of this range. Limited visibility and prior year compar-
isons make forecasting Net Yields for the full year difficult.
Assuming there are no external events and positive booking
trends continue, we expect Net Yields for the full year 2004 to
increase in the range of 5% to 7%. We utilize Net Yields for rev-
enue management purposes and believe that it is the most rele-
vant measure of our pricing performance. We have not provided
a quantitative reconciliation of projected Gross Yields to project-
ed Net Yields due to the significant uncertainty in projecting the
costs deducted to arrive at this measure. We utilize Net Yields
to manage our business on a day-to-day basis and believe it is a
more relevant measure of our performance. As such, we do not
believe that reconciling information is meaningful.
On March 15, 2004, we stated that Net Cruise Costs per
Available Passenger Cruise Day for the full year 2004 were
expected to increase approximately 1% to 2%. The increase
in Net Cruise Costs was primarily attributable to increases in
fuel prices, insurance expenses and port expenses (the lat-
ter associated with itinerary changes, increased occupancy
levels, and other increases). Based upon year-over-year
comparisons, we expected Net Cruise Costs, on an
Available Passenger Cruise Day basis, to increase in the first
half of the year and decrease in the second half of the year. In
measuring our ability to control costs in a manner that posi-
tively impacts net income, we believe changes in Net Cruise
Costs to be the most relevant indicator of our performance.
We have not provided a quantitative reconciliation of project-
ed Gross Cruise Costs to projected Net Cruise Costs due to
the significant uncertainty in projecting the costs deducted to
arrive at this measure. We utilize Net Cruise Costs to manage
our business on a day-to-day basis and believe it is a more
relevant measure of our performance. As such, we do not
believe that reconciling information is meaningful.
On March 12, 2004, we announced the cancellation of a one-
week sailing due to the unanticipated drydock of one ship,
which we estimate will negatively impact net income by approx-
imately $0.02 to $0.03 per share.
Internal Revenue Code Section 883 provides an exemption
from United States income taxes on certain income derived
from or incidental to the international operation of ships. Final
regulations under Section 883 were published on August 26,
2003. These regulations confirm that we qualify for the
exemption provided by Section 883. The final regulations nar-
rowed the scope of activities which are considered by the
Internal Revenue Service to be incidental to the international
operation of ships. The activities listed in the regulations as
not being incidental to the international operation of ships
include income from the sale of air and other transportation
such as transfers, shore excursions and pre and post tours. To
the extent the income from such activities is earned from
sources within the United States, such income will be subject
to United States taxation. These regulations will be effective
for our 2004 fiscal year. On March 15, 2004, we stated that we
estimated the application of these regulations would reduce
our 2004 earnings by approximately $0.04 to $0.05 per share.
On March 15, 2004, we stated that our zero coupon convertible
notes could become convertible during the first quarter of 2004
if the share price of our common stock closed above $34.27 for
20 days out of the last 30 trading days of the quarter. If the
notes became convertible, we expected earnings per share for
the quarter to be reduced by approximately $0.01. If the share
price of our common stock closes above $34.68, $35.09 and
$35.50 for 20 days out of the last 30 trading days of the sec-
ond, third and fourth quarters, respectively, our zero coupon
convertible notes will continue to be convertible. If the notes
continue to be convertible for the remainder of the year, full year
earnings per share would be reduced by approximately $0.06.
ROYAL CARIBBEAN CRUISES LTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)