Royal Caribbean Cruise Lines 2008 Annual Report Download - page 41

Royal Caribbean Cruises Ltd. 25
The current economic environment has also led to more dramatic levels
of volatility in fuel prices and foreign exchange rates which have become
extremely volatile with significant daily or even hourly price fluctuations.
For planning purposes, we do not forecast future fuel prices or exchange
rates, but instead use current spot prices for calculation purposes.
In an effort to offset the impact of the weaker demand environment,
we have increased our focus on cost reductions and on preserving cash
and liquidity. The cost cutting initiatives we announced in July 2008 are
on track to produce the anticipated savings and we have implemented
a number of new initiatives including the targeting of synergies and
capturing deflationary opportunities from our vendors. As a result of
these initiatives, we expect a reduction in our 2009 Net Cruise Costs
in the range of 7% to 9% per APCD compared to 2008. Approximately
2 percentage points of this decrease relates to reductions in the price of
fuel in 2009.
We have also discontinued our quarterly dividend commencing in the
fourth quarter of 2008, curtailed our non-shipbuild capital expendi-
tures, and currently do not have plans to place further newbuild ship
orders. We are also exploring other activities to improve our liquidity.
We believe these strategies will enhance our ability to better fund our
capital spending obligations and improve our balance sheet.
While cutting costs throughout the organization, we have not altered
our strategy of substantially growing our sourcing of passengers out-
side of North America. We continue to increase our investments in
growth outside of North America with the goal of diversifying our
sources and increasing our opportunities for revenue growth.
We have four Solstice-class vessels under construction in Germany, all
of which have committed bank financing arrangements and include
financing guarantees from HERMES (Euler Hermes Kreditrersicherungs
AG), the export credit agency of the German government for 95%
of the financed amount. We also have two Oasis-class vessels under
construction in Finland each of which has commitments for financ-
ing guarantees from Finnvera, the export credit agency of Finland for
80% of the financed amount. We are working with the relevant export
credit agencies and various financial institutions to obtain committed
financing for Oasis of the Seas. This includes exploring opportunities to
increase the guarantee level and obtain partial funding support from
the relevant export credit agencies. Although we believe that we will
secure committed financing for these ships before their delivery dates,
there can be no assurance that we will be able to do so or that we will
do so on acceptable terms.
SUMMARY OF HISTORICAL RESULTS OF OPERATIONS
Although the operating environment has deteriorated since September
2008, total revenues increased 6.2% to $6.5 billion from total revenues
of $6.1 billion for 2007 primarily due to a 5.2% increase in capacity and
a 1.0% increase in Gross Yields. Net Yields increased by approximately
0.5% compared to 2007. The increase in Net Yields was primarily due
to an increase in ticket prices partially offset by a decrease in onboard
and other revenues. The increase in total revenues was partially offset
by an increase in expenses primarily due to the increase in fuel and to
a lesser extent, payroll and related expenses. In addition, we recorded
a one-time litigation gain of approximately $17.6 million related to the
settlement of our pending case against Pentair Water Treatment (OH)
Company (formerly known as Essef Corporation). As a result, our net
income was $573.7 million or $2.68 per share on a diluted basis for
2008 compared to $603.4 million or $2.82 per share on a diluted basis
for 2007.
Highlights for 2008 included:
s Total revenues increased 6.2% to $6.5 billion from total revenues
of $6.1 billion in 2007 primarily due to a 5.2% increase in capacity
and a 1.0% increase in Gross Yields. Net Yields increased by approxi-
mately 0.5% compared to the same period in 2007.
s Net Cruise Costs per APCD increased 3.7% compared to 2007.
s Fuel expenses per APCD, net of the financial impact of fuel swap
agreements, increased 25.7% per APCD as compared to the same
period in 2007.
s Our Net Debt-to-Capital ratio increased to 49.3% in 2008 from
44.7% in 2007. Similarly, our Debt-to-Capital ratio increased to
50.8% in 2008 from 45.7% in 2007.
s As of December 31, 2008, liquidity was $1.0 billion, including cash
and the undrawn portion of our unsecured revolving credit facility.
s We took delivery of Independence of the Seas, the third Freedom-
class ship for Royal Caribbean International in the second quarter
of 2008. To finance the purchase, we borrowed $530.0 million
under an unsecured term loan due through 2015. The loan bears
interest at LIBOR plus an applicable margin. Currently, the rate is
approximately 5.40%.
s We took delivery of Celebrity Solstice, the first Solstice-class ship
for Celebrity Cruises in the fourth quarter of 2008. To finance the
purchase, we borrowed $519.1 million under an unsecured term
loan due through 2020. The loan bears interest at LIBOR plus 0.45%;
the rate is currently 4.28%.
s We implemented a cost savings initiative expected to save approxi-
mately $125.0 million annually. As part of this initiative, we eliminated
approximately 400 shore-side positions. In addition, we discontinued
some non-core operations, including The Scholar Ship. As a result of
this initiative, we incurred charges of approximately $14.3 million, or
$0.07 per share.
s We settled our pending case against Pentair Water Treatment (OH)
Company (formerly known as Essef Corporation). Pursuant to the
terms of the settlement agreement, we were paid, net of costs and
payments to insurers, approximately $17.6 million which we recog-
nized during the third quarter.
s We finalized our contract with Meyer Werft GmbH to build a fifth
Solstice-class ship for Celebrity Cruises, for an additional capacity
of approximately 2,850 berths, which is expected to enter service in
the fourth quarter of 2012. We signed a credit agreement to finance
approximately 80% of the contract price at delivery.
PART II