Carnival Cruises 2013 Annual Report Download - page 94

Table of Contents
2013 Executive Overview
The past two years have been challenging as we have had voyage disruptions that drew public attention to the safety and reliability of our products and
services. Although the frequency of our incidents relative to our size is below the cruise industry average, the negative publicity we received significantly
impacted the reputation and, accordingly, the demand for two of our largest brands, Costa and Carnival Cruise Lines. We have, and continue to, take steps to
help ensure that our cruise products and services are safe and reliable and that in the rare event of a ship incident, our guests and crew are comfortably
returned to port. Safety of our guests and crew is our utmost concern and key to our continuing success. These incidents, in combination with the uncertain
global economic conditions, significantly impacted our results in 2012 and 2013. However, Costa did return to profitability in 2013, excluding the impact of
ship impairment charges related to two of its smaller vessels. We are confident that our business will continue to recover over the next few years.
As a result of the 2013 voyage disruptions, we commenced a corporate-wide vessel enhancement program to improve emergency power capabilities, to
introduce new or enhanced fire safety technology and to increase the level of operating redundancies. The corporate-wide program of enhancements is expected
to cost as much as $700 million and will take place over the next several years. In addition to these operational enhancements, we are committed to rebuilding
the image and reputation of Carnival Cruise Lines, which in turn will drive additional guest demand and increase profitability. To help rebuild its image and
reputation, we have introduced a number of innovative product initiatives, launched a nationwide advertising campaign and travel agent outreach program, as
well as an industry-leading vacation guarantee.
With over 100 ships and more than 10 million guests, we have a scale advantage in the cruise industry and are aggressively seeking opportunities to use it to
drive top line improvements and obtain economies of scale and synergies by utilizing our purchasing power and implementing cross-brand initiatives aimed at
cost-containment.
We recently realigned our leadership team and changed our work processes and our incentive structures to enable our brands to more efficiently collaborate and
coordinate among each other, which will help us to further optimize our operations. Our leadership team has identified and will continue to identify
opportunities to use our scale to drive initiatives to increase our revenues, while optimizing our cost structure, with the goal of improving our return on invested
capital. In addition, we have heightened our focus on the guest experience and further exceeding guest expectations.
We also realized major milestones in the emerging Asian cruise region in 2013 by more than doubling our presence in China, as well as launching our first
season of cruises originating from Japan. In addition, in 2013 we opened ten sales offices throughout Asia to support our continued expansion plans in this
important emerging cruise region.
Net income for 2013 was $1.1 billion, compared to $1.3 billion for the prior year. This decrease was caused by a 2.6% decrease in constant dollar net revenue
yields and a 4.6% increase in constant dollar net cruise costs excluding fuel per ALBD, partially offset by lower fuel prices and fuel consumption per ALBD.
The 2.6% decrease in constant dollar net revenue yields was driven by our North America brands, which was primarily due to promotional pricing at
Carnival Cruise Lines. In addition, our EAA brands’ constant dollar net revenue yields decreased, which was affected by the ongoing challenging economic
environment in Europe. Although Costa’s constant dollar net revenue yields increased, they were more than offset by decreases at our other European brands.
In 2013, the constant dollar net cruise costs excluding fuel per ALBD increase of 4.6% compared to the prior year was primarily due to voyage disruptions and
related repair costs, higher advertising spend, new market development initiative costs in Japan, China and Australia and vessel enhancement expenses.
Our 5.3% lower fuel consumption per ALBD compared to the prior year continues our multiple-year fuel consumption savings trend, which has reached 23%
since 2005. In 2013, we furthered our environmental efforts through the successful testing of a new exhaust gas cleaning “scrubber” technology and plan to
install scrubbers on most of our ships between 2014 and 2016. In addition to exceeding stricter air emission standards, this technology will help mitigate
higher fuel costs on these ships.
During 2013, we generated $2.8 billion of cash from operations and used $2.1 billion to fund net capital expenditures, leaving us with almost $0.7 billion of
free cash flow (defined as cash from operations less net capital expenditures). All of this free cash flow was returned to shareholders through our regular
quarterly dividend. In addition, during 2013 we repurchased $103 million of Carnival Corporation common stock. Over time, we expect to have higher levels
of free cash flow, which we intend to return to shareholders in the form of additional dividends and opportune share buybacks.
We are building new innovative ships and continue to invest in our existing ships in order to strengthen the leadership position of each of our brands and to
achieve our mission and primary financial goals. Our newbuilding program is the primary platform for our capacity growth. In 2013, we continued the
enhancement of our fleet with the debut of Princess’ 3,560-passenger Royal Princess and AIDA’s 2,194-passenger AIDAstella. In addition, we announced an
order for a Seabourn ship, which is expected to enter service in 2016. This ship will replace the capacity of the three original Seabourn ships, which were sold
in 2013 and will be leaving the fleet by May 2015. Finally, we announced the retirement of a small Costa ship.
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