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Cruise lines hit by rising fuel costs

Cruise lines are feeling the pinch of higher fuel costs, but industry officials say demand remains steady even after Hurricane Katrina.
/ Source: The Associated Press

Higher fuel costs caused by Hurricane Katrina are expected to cut into cruise lines’ profits, but industry officials said the deadly hurricane season hasn’t kept passengers away.

Carnival Corp., the world’s largest cruise operator, and No. 2 Royal Caribbean Cruises Ltd. both reported much higher profits last year despite a record hurricane season that forced cancellations and itinerary changes. While rising oil prices this year are hurting, the companies still expect stronger earnings.

The companies’ fuel costs rose as much as 37 percent in the second quarter, and the increases have continued. Crude oil futures hit $70 a barrel last week as Gulf of Mexico rigs and refineries were damaged or closed, but have since slipped back to around $66.

UBS analyst Robin Farley estimates that every additional 10 percent increase in fuel costs would reduce next year’s earnings per share by 15 cents for Royal Caribbean and 10 cents for Carnival. A.G. Edwards & Sons analyst Tim Conder puts it at 6 cents a share for Carnival and 10 cents for Royal Caribbean.

Carnival expects costs such as renting three ships to the federal government for refugee housing and scheduling disruptions to reduce earnings per share by a penny to 3 cents, mostly in the fourth quarter. But that doesn’t include the impact of higher fuel costs, which company spokesman Tim Gallagher said would be disclosed later this month when third-quarter results are announced.

Before the hurricane, Carnival expected earnings per share to be $2.70 for the full year, up from $2.24 last year. Royal Caribbean expected a range of $2.70 to $2.80, up from $2.26 last year. Royal Caribbean spokesman Michael Sheehan declined to comment about Katrina’s effect on the company. An A.G. Edwards survey from Aug. 29 found that despite the rising fuel costs, ticket prices have been mostly flat or even slightly lower.

Miami-based Carnival hasn’t seen any significant drop-off in reservations since Katrina, except in the hard-hit areas of New Orleans and the Gulf Coast, Gallagher said.

Cities there didn’t handle much cruise traffic, limiting the impact on Carnival and Royal Caribbean, Standard & Poor’s credit analyst Craig Parmelee said.

It will be at least three or four months before cruise ships will be sailing normal voyages from New Orleans, the busiest cruise port in the area, according to the president and chief executive of the city’s port, Gary P. LaGrange.