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Article by DailyStocks_admin    (09-06-11 04:13 AM)

Description

Royal Caribbean Cruises Ltd. Chairman & CEO Richard D Fain bought 66000 shares on 08-26-2011 at $ 22.72

BUSINESS OVERVIEW

General

Royal Caribbean International was founded in 1968. The current parent corporation, Royal Caribbean Cruises Ltd., was incorporated on July 23, 1985 in the Republic of Liberia under the Business Corporation Act of Liberia.

We are the world’s second largest cruise company operating 40 ships in the cruise vacation industry with an aggregate of approximately 92,300 berths as of December 31, 2010. Our brands include Royal Caribbean International, Celebrity Cruises, and Azamara Club Cruises along with our Pullmantur brand, which has been custom tailored to serve the cruise markets in Spain, Portugal and Latin America and our CDF Croisières de France brand which provides us with a custom tailored product targeted at the French market. In addition, we have a 50% investment in a joint venture which operates the brand TUI Cruises, specifically tailored for the German market.

Our ships operate on a selection of worldwide itineraries that call on approximately 420 destinations on all seven continents. In addition to our headquarters in Miami, Florida, we have offices and a network of international representatives around the world which focus on our international guest sourcing.

We compete principally on the basis of innovation and quality of ships, quality of service, variety of itineraries, choice of destinations and price. We believe that our commitment to build state-of-the-art ships and to invest in the maintenance and revitalization of our fleet to, among other things, incorporate our latest signature innovations, allows us to continue to attract new and loyal repeat guests and expand into growing international markets and provides us with the flexibility to deploy our ships among our brand portfolio.

We believe cruising continues to be a widely accepted vacation alternative due to its inherent value, extensive itineraries and variety of shipboard and shore-side activities. In addition, we believe that our products appeal to a large consumer base and are not dependent on a single market or demographic. Further, we believe our global brands possess the versatility to enter multiple cruise market segments within the cruise vacation industry. As a result, we strategically manage our brands as a single business with the ultimate objective of maximizing shareholder value.

Our Brands

Royal Caribbean International

We currently operate 22 ships with approximately 62,000 berths under our Royal Caribbean International brand, offering cruise itineraries that range from two to 18 nights. Royal Caribbean International offers a variety of itineraries to destinations worldwide, including Alaska, Asia, Australia, Bahamas, Bermuda, Canada, the Caribbean, Europe, Hawaii, the Middle East, the Panama Canal, South America and New Zealand.

Royal Caribbean International is positioned at the upper end of the contemporary segment of the cruise vacation industry, generally characterized by cruises that are seven nights or shorter and feature a casual ambiance. We believe that the quality of the Royal Caribbean International brand also enables it to attract consumers from the premium segment, which is generally characterized by cruises that are seven to 14 nights and appeal to the more experienced guest who is usually more affluent. This allows Royal Caribbean International to achieve among the broadest market coverage of any of the major cruise brands in the vacation industry.

Royal Caribbean International’s strategy is to attract an array of vacationing consumers by providing a wide variety of itineraries and cruise lengths with multiple innovative options for onboard dining, entertainment and other onboard activities. Popular product innovations include surf simulators, an interactive water park called the H2O Zone™, “Royal Promenades” (boulevards with shopping, dining and entertainment venues), ice skating rinks, bungee jumping trampolines and rock climbing walls.

Most recently, in October 2009 and October 2010, Royal Caribbean International took delivery of the sister ships, Oasis of the Seas and Allure of the Seas , respectively, which are the largest and most innovative cruise ships in the industry. In addition, during 2010, Royal Caribbean International introduced DreamWorks Animations ® themed activities onboard certain ships and the first Starbucks ® Coffee at sea onboard Allure of the Seas.

Royal Caribbean International offers a variety of shore excursions at each port of call. We believe that the variety and quality of Royal Caribbean International’s product offerings represent excellent value to consumers, especially to couples and families traveling with children. Because of the brand’s extensive and innovative product offerings, we believe Royal Caribbean International is well positioned to attract new consumers to the cruise vacation industry and to continue to bring loyal repeat guests back for their next vacation.

Celebrity Cruises

We currently operate 10 ships with approximately 20,500 berths under our Celebrity Cruises brand, offering cruise itineraries that range from two to 17 nights. Celebrity Cruises is positioned within the premium segment of the cruise vacation industry.

Celebrity Cruises’ reputation as an upscale cruise vacation brand appeals to experienced cruisers, resulting in a strong base of loyal repeat guests. The brand also appeals to experienced vacationers who have not yet cruised who seek the high quality, service-focused experience the brand offers. Celebrity Cruises offers a global cruise experience by providing a variety of cruise lengths and itineraries to premium destinations throughout the world, including Alaska, Australia, Bermuda, the Caribbean, Europe, New Zealand, the Panama Canal and South America. Celebrity Cruises is also the only major cruise line to operate a ship in the Galapagos Islands, Celebrity Xpedition . Celebrity Xpedition has 96 berths and provides this unique experience on seven day cruises with pre-cruise tours in Ecuador.

Celebrity Cruises’ strategy is to deliver an intimate experience onboard upscale ships that offer luxurious accommodations, a high staff-to-guest ratio, fine dining, personalized service, extensive spa facilities, and unique onboard attractions. In addition, during 2010, Celebrity Cruises introduced the new Celebrity iLounge and became an Authorized Apple Reseller of computers and other media devices onboard certain Celebrity Cruises ships.

Celebrity Cruises’ fleet, dining, service, and spa have been consistently recognized with numerous awards from consumer cruise travel polls, travel agents and travel industry publications.

Azamara Club Cruises

We currently operate two ships with a total of approximately 1,400 berths under our Azamara Club Cruises brand, offering cruise itineraries that range from four to 17 nights. Azamara Club Cruises is designed to serve the up-market segment of the North American, U.K., German and Australian markets, which segment is generally characterized as incorporating elements of the premium and luxury segments.

Azamara Club Cruises’ strategy is to deliver distinctive destinations, featuring unique itineraries with more overnight and longer stays, as well as specialty tours allowing guests to truly experience the destination. Azamara Club Cruises’ focus is to attract experienced travelers who enjoy cruising and who seek a more intimate onboard experience and a high level of service. Azamara Club Cruises sails in Asia, Western & Northern Europe, the Mediterranean, South America, the Panama Canal and the less-traveled islands of the Caribbean, with more overnight and late-night stays in every region.

Azamara Club Cruises offers a wide array of onboard services, amenities and activities, including gaming facilities, fine dining, spa and wellness, butler service for suites, as well as interactive entertainment venues. Starting in April 2010, Azamara Club Cruises also includes as part of the base price, certain onboard services, amenities and activities which are not normally included in the base price of other cruise lines. Some of these onboard services, amenities and activities consist of wine with lunch and dinner, bottled water, soda, premium coffees and teas, gratuities for housekeeping and dining/bar staff, self-service laundry and shuttle buses for certain ports.

Pullmantur

We currently operate five ships with approximately 7,650 berths under our Pullmantur brand, offering seven-night cruise itineraries. Pullmantur serves the contemporary segment of the Spanish cruise market and continues to expand into the Portuguese and Latin American cruise markets. Pullmantur has land-based tour operations and owns a 49% interest in an air business that operates four Boeing 747 aircrafts in support of its cruise and tour operations.

Pullmantur’s strategy is to attract cruise guests by providing a variety of cruising options and land-based travel packages. Pullmantur offers a range of cruise itineraries to the Baltic, Brazil, the Caribbean, the Mediterranean, Mexico and Portugal. Pullmantur offers a wide array of onboard activities and services to guests, including exercise facilities, swimming pools, beauty salons, gaming facilities, shopping, dining, certain complimentary beverages, and entertainment venues. Pullmantur’s tour operations sell land-based travel packages to Spanish guests including hotels and flights primarily to Caribbean resorts, and land-based tour packages to Europe aimed at Latin American guests.

CDF Croisières de France

We currently operate one ship, Bleu de France , with approximately 750 berths under our CDF Croisières de France brand, offering four to ten night cruise itineraries. CDF Croisières de France is designed to serve the contemporary segment of the French cruise market by providing us with a brand custom-tailored for French cruise guests. In November 2010, Bleu de France was sold to an unrelated party. As part of the sale agreement, we chartered Bleu de France from the buyer for a period of one year from the sale date in order to fulfill existing guest commitments. At the end of the charter period, Pullmantur will redeploy Horizon to CDF Croisières de France and prior to its redeployment the ship will undergo renovations to incorporate signature brand elements.

CDF Croisières de France offers seasonal itineraries to the Mediterranean. CDF Croisières de France offers a variety of onboard services, amenities and activities, including entertainment venues, exercise and spa facilities, fine dining, and gaming facilities.

TUI Cruises

In 2008, we formed a joint venture with TUI AG, a European tourism and shipping company which owns 51% of TUI Travel. The joint venture operates TUI Cruises, designed to serve the contemporary and premium segments of the German cruise market by offering a custom-tailored product for German guests. All onboard activities, services, shore excursions and menu offerings are designed to suit the preferences of this target market. TUI Cruises operates one ship, Mein Schiff , with a total of approximately 1,850 berths. As previously announced, we will be selling Celebrity Mercury to TUI Cruises to serve as its second ship. The sale is expected to close at the end of February 2011 and the ship will enter service with TUI Cruises in the second quarter of 2011, under the name Mein Schiff 2 , following an extensive refurbishment.

Industry

Cruising is considered a well established vacation sector in the North American market, a growing sector in the European market and a developing but promising sector in several other emerging markets. Industry data indicates that a significant portion of cruise guests carried are first-time cruisers. We believe this could present an opportunity for long-term growth and a potential for increased profitability.

We estimate that the global cruise industry carried 18.7 million cruise passengers in 2010 compared to 17.3 million cruise passengers carried in 2009. We estimate that the global cruise fleet was served by approximately 400,000 berths on approximately 281 ships by the end of 2010. There are approximately 20 ships with an estimated 53,000 berths that are expected to be placed in service in the global cruise market between 2011 and 2014. The majority of cruise passengers in the cruise vacation industry have historically been sourced from North America, and to a lesser extent, Europe.

North America

Although the North American cruise market has historically experienced significant growth, the compound annual growth rate in cruise passengers for this market was approximately 0.9% from 2006 to 2010. This more limited growth is attributable in large part to the recent international expansion within the cruise industry. We estimate that North America was served by 136 ships with approximately 190,000 berths at the beginning of 2006 and by 151 ships with approximately 241,000 berths by the end of 2010. There are approximately 13 ships with an estimated 36,000 berths that are expected to be placed in service in the North American cruise market between 2011 and 2014.

CEO BACKGROUND

Laura D.B. Laviada , 60, has served as a Director since July 1997. Since 2008, Ms. Laviada has served as Chairman of Grupo Aeroportuario del Pacifico, which operates 12 airports in Mexico, including Guadalajara, Los Cabos, Puerto Vallarta and Tijuana. She also serves on the board of Telmex International and Grupo Financiero Inbursa. Ms. Laviada is President of the Board of Trustees of the Museum of San Ildefonso. Prior to 2000, Ms. Laviada was the Chairman and Chief Executive Officer of Editorial Televisa, the largest Spanish language magazine publisher with 40 titles distributed throughout 19 countries. Ms. Laviada’s service on various boards of Mexican companies allows her to provide the Board with extensive experience in Latin America.

Eyal M. Ofer , 60, has served as a Director since May 1995. Mr. Ofer has served as the Chairman and Chief Executive Officer of Deerbrook Limited, an international real estate management company, since May 1991. Mr. Ofer provides the Board with an international perspective gained from his almost two decades of leading an international real estate management firm. As a member of the Board for nearly 15 years, Mr. Ofer also brings considerable experience and insight in matters affecting the Company and the cruise industry.

William K. Reilly , 71, has served as a Director since January 1998. Mr. Reilly is the Founding Partner of Aqua International Partners L.P., a private equity fund established in 1997 and dedicated to investing in companies engaged in water and renewable energy, and he is a Senior Advisor to TPG Capital, LP, an international investment partnership. From 1989 to 1993, Mr. Reilly served as the Administrator of the U.S. Environmental Protection Agency. He has also previously served as the first Payne Visiting Professor at Stanford University, President of the World Wildlife Fund and President of The Conservation Foundation. He is Chairman Emeritus of the World Wildlife Fund and Chairman of the ClimateWorks Foundation and the Nicholas Institute for Environmental Policy Solutions at Duke University. He serves as a director of E.I. DuPont de Nemours and Company, ConocoPhillips, Eden Springs Ltd., the National Geographic Society and the Packard Foundation. In May 2010, President Obama named Mr. Reilly to serve as co-chair of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, which released its report on January 11, 2011. Mr. Reilly’s leadership roles within various environmental protection organizations, including the U.S. Environmental Protection Agency, the World Wildlife Fund and the National Geographic Society, and his involvement with the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling allow him to bring substantial environmental knowledge and expertise to the Board. His service on various other boards also allows him to provide the Board with a variety of perspectives.

Arne Alexander Wilhelmsen , 45, has served as a Director since May 2003. Mr. Wilhelmsen is chairman of the board of directors of AWILHELMSEN MANAGEMENT AS, the management company for the companies affiliated with A WILHELMSEN AS. He has held a variety of positions within the AWILHELMSEN group of companies since 1995. From 1996 through 1997, Mr. Wilhelmsen was engaged as a marketing analyst for the Company and from 2001 through 2009 has served as a member of the board of directors of Royal Caribbean Cruise Line AS, a wholly owned subsidiary of the Company that was responsible for the sales and marketing activities of the Company in Europe. Mr. Wilhelmsen currently serves as the Chairman of the Board of The Containership Company AS, a Norway-based container shipping company launched in 2009. From 2005 through 2008, he served as a member of the board of directors of Awilco Offshore ASA (currently known as COSL Drilling Europe AS). Mr. Wilhelmsen’s varied business interests and shipping and maritime industry experience enable him to provide valuable business insight and knowledge to the Board. As the representative of the Company’s largest shareholder and one of the Company’s original founders, Mr. Wilhelmsen also provides a valuable historical perspective to the Board.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

The discussion and analysis of our financial condition and results of operations has been organized to present the following:


•

a review of our critical accounting policies and review of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us in managing our business;


•

a discussion of our results of operations for the year ended December 31, 2010 compared to the same period in 2009 and the year ended December 31, 2009 compared to the same period in 2008;


•

a discussion of our business outlook, including our expectations for selected financial items for the first quarter and full year of 2011; and


•

a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. (See Note 1. General and Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data .) Certain of our accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions. We have discussed these accounting policies and estimates with the audit committee of our board of directors. We believe our most critical accounting policies are as follows:

Ship Accounting

Our ships represent our most significant assets and are stated at cost less accumulated depreciation. Depreciation of ships is generally computed net of a 15% projected residual value using the straight-line method over estimated service lives of primarily 30 years. Our service life and residual value estimates take into consideration the impact of anticipated technological changes, long-term cruise and vacation market conditions and historical useful lives of similarly-built ships. In addition, we take into consideration our estimates of the average useful lives of the ships’ major component systems, such as hull, superstructure, main electric, engines and cabins. Given the very large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain. We do not have cost segregation studies performed to specifically componentize our ship systems. Therefore, we estimate the costs of component systems based principally on general and technical information known about major ship component systems and their lives and our knowledge of the cruise vacation industry. We do not identify and track depreciation by ship component systems, but instead utilize these estimates to determine the net cost basis of assets replaced or refurbished. Improvement costs that we believe add value to our ships are capitalized as additions to the ship and depreciated over the improvements’ estimated useful lives. The estimated cost and accumulated depreciation of replaced or refurbished ship components are written off and any resulting losses are recognized in cruise operating expenses.

We use the deferral method to account for drydocking costs. Under the deferral method, drydocking costs incurred are deferred and charged to expense on a straight-line basis over the period to the next scheduled drydock which we estimate to be a period of thirty to sixty months based on the vessel’s age as required by class. Deferred drydock costs consist of the costs to drydock the vessel and other costs incurred in connection with the drydock which are necessary to maintain the vessel’s Class certification. Class certification is necessary in order for our cruise ships to be flagged in a specific country, obtain liability insurance and legally operate as passenger cruise ships. The activities associated with those drydocking costs cannot be performed while the vessel is in service and, as such, are done during a drydock as a planned major maintenance activity.

The significant deferred drydock costs consist of hauling and wharfage services provided by the drydock facility, hull inspection and related activities (e.g. scraping, pressure cleaning, bottom painting), maintenance to steering propulsion, stabilizers, thruster equipment and ballast tanks, port services such as tugs, pilotage and line handling, and freight associated with these items. We perform a detailed analysis of the various activities performed for each drydock and only defer those costs that are directly related to planned major maintenance activities necessary to maintain Class. The costs deferred are not otherwise routinely periodically performed to maintain a vessel’s designed and intended operating capability. Repairs and maintenance activities are charged to expense as incurred.

We use judgment when estimating the period between drydocks, which can result in adjustments to the estimated amortization of drydock costs. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off to the gain or loss upon disposal of vessel in the period in which the sale takes place. We also use judgment when identifying costs incurred during a drydock which are necessary to maintain the vessel’s Class certification as compared to those costs attributable to repairs and maintenance which are expensed as incurred. (See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements under Item 8. Financial Statements and Supplementary Data ).

We believe we have made reasonable estimates for ship accounting purposes. However, should certain factors or circumstances cause us to revise our estimates of ship service lives or projected residual values, depreciation expense could be materially higher or lower. If circumstances cause us to change our assumptions in making determinations as to whether ship improvements should be capitalized, the amounts we expense each year as repairs and maintenance costs could increase, partially offset by a decrease in depreciation expense. If we had reduced our estimated average 30-year ship service life by one year, depreciation expense for 2010 would have increased by approximately $46.0 million. If our ships were estimated to have no residual value, depreciation expense for 2010 would have increased by approximately $151.0 million.

Valuation of Long-Lived Assets, Goodwill and Indefinite-Lived Intangible Assets

We review our ships and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of these assets based on our estimate of their undiscounted future cash flows. If estimated future cash flows are less than the carrying value of an asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its carrying value.

We determine fair value based on quoted market prices in active markets, if available. If active markets are not available we base fair value on independent appraisals, sales price negotiations and projected future cash flows discounted at a rate determined by management to be commensurate with the business risk. Quoted market prices are often not available for individual reporting units and for indefinite-life intangible assets. Accordingly, we base the fair value of a reporting unit and an indefinite-life intangible asset on an expected present value technique.

We review goodwill, trademarks and tradenames, which are our most significant indefinite-lived intangible assets, for impairment whenever events or circumstances indicate but at least annually. The impairment review for goodwill consists of a two- step process of first determining the fair value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. If the fair value of the reporting unit exceeds the carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value. The impairment review for indefinite-life intangible assets consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired.

We performed our annual impairment review for goodwill during the fourth quarter of 2010. We determined the fair value of our two reporting units which include goodwill, Royal Caribbean International and Pullmantur, using a probability-weighted discounted cash flow model. The principal assumptions used in the discounted cash flow model are projected operating results, weighted-average cost of capital, and terminal value. Cash flows were calculated using our 2011 projected operating results as a base. To that base we added future years’ cash flows assuming multiple revenue and expense scenarios that reflect the impact on each reporting unit of different global economic environments beyond 2011. We assigned a probability to each revenue and expense scenario.

We discounted the projected cash flows using rates specific to each reporting unit based on their respective weighted-average cost of capital. Based on the probability-weighted discounted cash flows of each reporting unit we determined the fair values of Royal Caribbean International and Pullmantur exceeded their carrying values. Therefore, we did not proceed to step two of the impairment analysis and we do not consider goodwill to be impaired. Royal Caribbean International’s reporting unit’s fair value exceeded its carrying value by a significant margin. Pullmantur’s reporting unit’s fair value exceeded its carrying value by 37% as of December 31, 2010.

We also performed the annual impairment review of our trademarks and trade names during the fourth quarter of 2010 using a discounted cash flow model and the relief-from-royalty method. The royalty rate used is based on comparable royalty agreements in the tourism and hospitality industry. Since these trademarks and trade names relate to Pullmantur, we used the same discount rate used in valuing the Pullmantur reporting unit in our goodwill impairment test. Based on the discounted cash flow model we determined the fair value of our trademarks and trade names exceeded their carrying value by 19%.

The estimation of fair value utilizing discounted expected future cash flows includes numerous uncertainties which require our significant judgment when making assumptions of expected revenues, operating costs, marketing, selling and administrative expenses, interest rates, ship additions and retirements as well as assumptions regarding the cruise vacation industry competition and general economic and business conditions, among other factors. The Spanish economy has been more severely impacted than many other economies around the world where we operate and there is significant uncertainty as to whether or when it will recover. If that economy weakens or recovers more slowly than contemplated in our discounted cash flow model, that could trigger an impairment charge of Pullmantur’s goodwill and trademark and trade names. In addition, it is reasonably possible that significant changes to our projected operating results utilized in the impairment analyses, especially our future net yield assumptions, could lead to an impairment of Pullmantur’s goodwill and trademark and trade names.

The factors influencing the Spanish economy discussed above could also affect the recoverability of Pullmantur’s deferred tax assets. As of December 31, 2010, Pullmantur had deferred tax assets of $35.6 million resulting from net operating losses.

We regularly review deferred tax assets for recoverability based on our history of earnings, expectations for future earnings, and tax planning strategies. We believe it is more likely than not that we will recover the deferred tax assets based on our expectation of future earnings and implementation of tax planning strategies. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income to support the amount of deferred tax assets. It is possible we may need to establish a valuation allowance for a portion or all of the deferred tax asset balance if future earnings do not meet expectations or we are unable to successfully implement our tax planning strategies.

Derivative Instruments

We enter into forward and swap contracts to manage our interest rate exposure and to limit our exposure to fluctuations in foreign currency exchange rates and fuel prices. The majority of these instruments are designated as hedges and are recorded on the balance sheet at their fair value. We have also entered into fuel call options to limit our exposure to fluctuations in fuel prices. These instruments are economic hedges which are not designated as hedging instruments for accounting purposes and thus, changes in their fair value are immediately recognized in earnings. Our derivative instruments are not held for trading or speculative purposes. We account for derivative financial instruments in accordance with authoritative guidance. Refer to Note 2. Summary of Significant Accounting Policies and Note 13. Fair Value Measurements and Derivative Instruments to our consolidated financial statements for more information on related authoritative guidance, the Company’s hedging programs and derivative financial instruments.

We enter into foreign currency forward contracts and interest rate, cross-currency and fuel swaps with third party institutions in over-the-counter markets. We estimate the fair value of our foreign currency forward contracts and interest rate and cross-currency swaps using expected future cash flows based on the instruments’ contract terms and published forward curves for foreign currency exchange and interest rates. We apply present value techniques and LIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments.

We estimate the fair value of our fuel swaps using expected future cash flows based on the swaps’ contract terms and forward prices. We derive forward prices from forward fuel curves based on pricing inputs provided by third-party institutions that transact in the fuel indices we hedge. We validate these pricing inputs against actual market transactions. We apply present value techniques and LIBOR-based discount rates to convert the expected future cash flows to the current fair value of the instruments. We also corroborate our fair value estimates using valuations provided by our counterparties.

We determine the fair value for our fuel call options based on the prevailing market price for the instruments consisting of published price quotes for similar assets based on recent transactions in an active market.

We adjust the valuation of our derivative financial instruments to incorporate credit risk, when applicable.

We believe it is unlikely that materially different estimates for the fair value of our foreign currency forward contracts and interest rate, cross-currency and fuel swaps and options would be derived from using other valuation models, assumptions, inputs or conditions suggested by actual historical experience.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

The discussion and analysis of our financial condition and results of operations has been organized to present the following:


•

a review of our financial presentation, including discussion of certain operational and financial metrics we utilize to assist us manage our business;


•

a discussion of our results of operations for the quarter and six months ended June 30, 2011 compared to the same period in 2010;


•

a discussion of our business outlook, including our expectations for selected financial items for the third quarter and full year of 2011; and


•

a discussion of our liquidity and capital resources, including our future capital and contractual commitments and potential funding sources.

Critical Accounting Policies

For a discussion of our critical accounting policies, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations within our annual report on Form 10-K for the year ended December 31, 2010.

Seasonality

Our revenues are seasonal based on demand for cruises. Demand is strongest for cruises during the Northern Hemisphere’s summer months and holidays. In order to mitigate the impact of the winter weather in the Northern Hemisphere and to capitalize on the summer season in the Southern Hemisphere, our brands have increased deployment to South America and Australia during the Northern Hemisphere winter months.

Financial Presentation

Description of Certain Line Items

Revenues

Our revenues are comprised of the following:


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Passenger ticket revenues , which consist of revenue recognized from the sale of passenger tickets and the sale of air transportation to and from our ships; and


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Onboard and other revenues , which consist primarily of revenues from the sale of goods and/or services onboard our ships not included in passenger ticket prices, cancellation fees, sales of vacation protection insurance, pre- and post-cruise tours, Pullmantur’s land-based tours and hotel and air packages.

Onboard and other revenues also include revenues we receive from independent third party concessionaires that pay us a percentage of their revenues in exchange for the right to provide selected goods and/or services onboard our ships.

Cruise Operating Expenses

Our cruise operating expenses are comprised of the following:


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Commissions, transportation and other expenses , which consist of those costs directly associated with passenger ticket revenues, including travel agent commissions, air and other transportation expenses, port costs that vary with passenger head counts and related credit card fees;


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Onboard and other expenses , which consist of the direct costs associated with onboard and other revenues, including the cost of products sold onboard our ships, vacation protection insurance premiums, costs associated with pre- and post-cruise tours and related credit card fees as well as the minimal costs associated with concession revenues, as the costs are mostly incurred by third-party concessionaires;


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Payroll and related expenses , which consist of costs for shipboard personnel (costs associated with our shoreside personnel are included in marketing, selling and administrative expenses);


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Food expenses , which include food costs for both passengers and crew;


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Fuel expenses , which include fuel and related delivery and storage costs, including the financial impact of fuel swap agreements; and


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Other operating expenses , which consist primarily of operating costs such as repairs and maintenance, port costs that do not vary with passenger head counts, vessel operating lease costs, costs associated with Pullmantur’s land-based tours, vessel related insurance and entertainment.

We do not allocate payroll and related costs, food costs, fuel costs or other operating costs to the expense categories attributable to passenger ticket revenues or onboard and other revenues since they are incurred to provide the total cruise vacation experience.

Selected Operational and Financial Metrics

We utilize a variety of operational and financial metrics which are defined below to evaluate our performance and financial condition. As discussed in more detail herein, certain of these metrics are non-GAAP financial measures, which we believe provide useful information to investors as a supplement to our consolidated financial statements, which are prepared and presented in accordance with GAAP. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

Available Passenger Cruise Days (“APCD”) is our measurement of capacity and represents double occupancy per cabin multiplied by the number of cruise days for the period. We use this measure to perform capacity and rate analyses to identify the main non-capacity drivers that cause our cruise revenue and expenses to vary.

Gross Cruise Costs represent the sum of total cruise operating expenses plus marketing, selling and administrative expenses.

Gross Yields represent total revenues per APCD.

Net Cruise Costs and Net Cruise Costs Excluding Fuel represent Gross Cruise Costs excluding commissions, transportation and other expenses and onboard and other expenses and, in the case of Net Cruise Costs Excluding Fuel, fuel (each of which is described above under the Description of Certain Line Items heading). In measuring our ability to control costs in a manner that positively impacts net income, we believe changes in Net Cruise Costs and Net Cruise Costs Excluding Fuel to be the most relevant indicators of our performance. A reconciliation of historical Gross Cruise Costs to Net Cruise Costs and Net Cruise Costs Excluding Fuel is provided below under Results of Operations . We have not provided a quantitative reconciliation of projected Gross Cruise Costs to projected Net Cruise Costs and projected Net Cruise Costs Excluding Fuel due to the significant uncertainty in projecting the costs deducted to arrive at these measures. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.

Net Debt-to-Capital is a ratio which represents total long-term debt, including the current portion of long-term debt, less cash and cash equivalents (“Net Debt”) divided by the sum of Net Debt and total shareholders’ equity. We believe Net Debt and Net Debt-to-Capital, along with total long-term debt and shareholders’ equity are useful measures of our capital structure. A reconciliation of historical Debt-to-Capital to Net Debt-to-Capital is provided below under Results of Operations.

Net Revenues represent total revenues less commissions, transportation and other expenses and onboard and other expenses (each of which is described under the Description of Certain Line Items heading).

Net Yields represent Net Revenues per APCD. We utilize Net Revenues and Net Yields to manage our business on a day-to-day basis as we believe that it is the most relevant measure of our pricing performance because it reflects the cruise revenues earned by us net of our most significant variable costs, which are commissions, transportation and other expenses and onboard and other expenses. A reconciliation of historical Gross Yields to Net Yields is provided below under Results of Operations . We have not provided a quantitative reconciliation of projected Gross Yields to projected Net Yields due to the significant uncertainty in projecting the costs deducted to arrive at this measure. Accordingly, we do not believe that reconciling information for such projected figures would be meaningful.

Occupancy , in accordance with cruise vacation industry practice, is calculated by dividing Passenger Cruise Days by APCD. A percentage in excess of 100% indicates that three or more passengers occupied some cabins.

Passenger Cruise Days represent the number of passengers carried for the period multiplied by the number of days of their respective cruises.

We believe Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel are our most relevant non-GAAP financial measures. However, a significant portion of our revenue and expenses are denominated in currencies other than the United States dollar. Because our reporting currency is the United States dollar, the value of these revenues and expenses can be affected by changes in currency exchange rates. Although such changes in local currency prices is just one of many elements impacting our revenues and expenses, it can be an important element. For this reason, we also monitor Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel as if the current periods’ currency exchange rates had remained constant with the comparable prior periods’ rates, or on a “Constant Currency” basis.

It should be emphasized that Constant Currency is primarily used for comparing short-term changes and/or projections. Over the longer term, changes in guest sourcing and shifting the amount of purchases between currencies can significantly change the impact of the purely currency based fluctuations.

The use of certain significant non-GAAP measures, such as Net Yields, Net Cruise Costs and Net Cruise Costs Excluding Fuel, allow us to perform capacity and rate analysis to separate the impact of known capacity changes from other less predictable changes which affect our business. We believe these non-GAAP measures provide expanded insight to measure revenue and cost performance in addition to the standard United States GAAP based financial measures. There are no specific rules or regulations for determining non-GAAP and Constant Currency measures, and as such, there exists the possibility that they may not be comparable to other companies within the industry.

Results of Operations

Summary

Quarter ended June 30, 2011

Total revenues increased 10.4% to $1.8 billion in the second quarter of 2011 from total revenues of $1.6 billion for the same period in 2010, primarily due to a 6.6% increase in capacity (measured by APCD for such period) and a 3.8% increase in Net Yields. The increase in Net Yields was primarily due to the favorable effect on our revenues of changes in foreign currency exchange rates, and, to a lesser extent, an increase in ticket prices. These increases were partially offset by the continuing effect of the impact of geopolitical events including the political unrest in Northern Africa and the earthquake and related events in Japan. These events resulted in deployment changes to avoid calling on ports in those areas and pricing reductions to stimulate demand in surrounding areas. The increase in total revenues was partially offset by higher operating expenses primarily due to the increase in capacity and fuel expenses. The increase was also offset by an increase in marketing, selling and administrative expenses primarily associated with our ongoing international expansion. As a result, our net income was $93.5 million or $0.43 per share on a diluted basis for the second quarter of 2011 compared to $53.7 million or $0.25 per share on a diluted basis for the second quarter of 2010.

Six months ended June 30, 2011

Total revenues increased 11.4% to $3.4 billion for the first six months of 2011 from total revenues of $3.1 billion for the same period in 2010, primarily due to an 8.3% increase in capacity (measured by APCD for such period) and a 3.8% increase in Net Yields. The increase in Net Yields was primarily due to the favorable effect on our revenues of changes in foreign currency exchange rates and, to a lesser extent, an increase in ticket prices. Our results for the first six months of 2011 were also positively impacted by an increase of $32.1 million in the fair value of our fuel call options due to an increase in fuel prices as compared to the corresponding period in 2010. These increases were partially offset by the continuing effect of the impact of geopolitical events including the political unrest in Northern Africa and the earthquake and related events in Japan. These events resulted in deployment changes to avoid calling on ports in those areas and pricing reductions to stimulate demand in surrounding areas. This increase in total revenues was partially offset by higher operating expenses primarily due to the increase in capacity and fuel expenses. The increase was also offset by an increase in marketing, selling and administrative expenses primarily associated with our ongoing international expansion. In addition, we also recorded a one-time gain during 2010 of approximately $85.6 million related to a litigation settlement that did not recur in 2011. As a result, our net income was $171.9 million or $0.78 per share on a diluted basis for the first six months of 2011 compared to $133.6 million or $0.61 per share on a diluted basis for the first six months of 2010.

CONF CALL

Brian Rice

Thank you, Andrea. Good morning. I would like to thank each of you for joining us this morning for our second quarter earnings call. With me here today are Richard Fain, our Chairman and Chief Executive Officer; Adam Goldstein, President and CEO of Royal Caribbean International; Dan Hanrahan, President and Chief Executive Officer of Celebrity Cruises; and Ian Bailey, our Vice President of Investor Relations. During this call, we will be referring to a few slides that we have posted on our Investor website, www.rclinvestor.com.

Before we get started, I would like to refer you to our notice about forward-looking statements. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Additionally, we will be discussing certain financial measures, which are non-GAAP as defined, and a reconciliation of these items can be found on our website.

We have a lot to cover this morning and issued our press release last evening to try to give you an opportunity to review all the materials. As usual, we'll start with Richard's comments. I will follow with a brief recap of our results and update our forward guidance. Adam and Dan will then talk more about our brands, and then we'll open the call for your questions. Richard?

Richard Fain

Thank you, Brian, and good morning, everyone. As always, I appreciate the opportunity to give a little more color and a reflection on how we've done and where we're heading.

First, I must express how embarrassed we all are about the accounting revision. Fortunately, while the initial error was an internal one, it was that same internal team, which found it and reported it. They quickly notified us, our auditors and our audit committee. I will take their willingness to respond correctly and transparently as something to be encouraged. There isn't a soul here, most certainly including myself, who doesn't regret the error. But fortunately, none of this affects our business trajectory, which remains intact as we enter what appears to be a more stable commercial environment.

Brian will provide more details on the revision in a moment. But in the meantime, I'll focus on the business environment. And it's certainly been a highly eventful year.

At the beginning of the year, who would have imagined the earthquake and tsunami in Japan, the upheaval in the North Africa and the Middle East or more recently, the senseless and tragic events in Oslo? Despite all this, it still looks like this will be one of the best years in our history. Not quite as fantastic as we originally hoped, but a very good year, nonetheless. In fact, I'm more encouraged than ever about our near-term future, not our long-term future, our near-term future, which is what I'm looking at and happy about. I'll talk more in a moment about the challenges. But when I step back and think about the economic mess we're all reading about every day and then I look at our yield performance in the bulk of our markets like the Caribbean, Alaska and Northern Europe, et cetera, I get very excited. I see our reports, which show that our booking volumes and our APDs are up for each of the next 6 quarters. And I realize just how bright our short- and long-term future will be.

The 2 big changes to our business outlook that we're reporting today are, first of all, the current weakness in our Eastern Mediterranean itineraries; and secondly, the cost savings, which our operating teams have been able to achieve.

Starting with the revenue, this is an important transition year for us as Brian, Adam and Dan will discuss in a moment. This is our last year of significant capacity growth for a while. And this is the year where we were implementing a dramatic repositioning of our ships. Naturally, our biggest redeployment was to substantially increase Mediterranean sailings because this was the area which showed the greatest promise. And naturally, that market where we expected the biggest improvement is also the market that suffered the most from the geopolitical changes.

Our next most aggressive deployment choice was to address the Chinese market earlier than ever before. And naturally, this was the market that suffered badly from the tragedy in Japan.

When we gave our guidance at the end of April, we already had several weeks of experience with the turmoil, particularly in Egypt and in Tunisia. That turmoil had a huge impact on sailings heading directly to those ports and a smaller impact on other itineraries in the region. But that impact appeared contained and manageable. Unfortunately, that situation didn't last as long as we had hoped. The Arab Spring not only failed to stabilize, it continued to fester and the turmoil brewed to other countries throughout the region. The result is that during the quarter, we reached a tipping point, and we saw significant declines in our pricing in that area. The net result has been a serious decline in our revenue in what was supposed to be one of our strongest markets.

That decline has been painful, but to put it in perspective, it's only amounted to a drop of 2% in our overall yield from what we had expected at the beginning of the year. How many other industries suffer such a plethora of challenges in one year and still only show a 2% revenue impact?

At the same time, our operating groups have been working diligently and effectively to control our costs. In previous calls, I've noticed -- I've noted that we are seeing inflationary pressures in selected areas such as food and transportation expenses. Unfortunately, I have to report that those pressures have not abated, and they continue to be a costly factor for us. But our operating teams have been extremely effective in reducing our costs in other areas, which has allowed us to reduce total cost for the year by about 100 basis points. At the same time, we've not wavered in our determination. We will not sacrifice our product delivery purely for cost purposes. It is, therefore, especially gratifying to report that while implementing all these cost savings, our guest satisfaction rates have risen to new highs. For that, I extend my congratulations and my thanks to the operating teams, who have made it happen.

Last week, we had the highly successful delivery and naming of the Celebrity Silhouette in Germany. This is the first time we've named a ship in Germany, and the reception demonstrated just how good the Solstice-class ships are and how receptive some of the European markets are to our product. We continue to work on ensuring that we deliver the best product and service in our competitive sense. And we continue to improve the quality of our offerings by taking the best features of our newer ships and incorporating them in our revitalization projects. At the same time, we're implementing new systems that enhance the guest experience and improve on our operating efficiencies.

While this is proving not to be quite as fantastic a year as we had expected, it is still proving to be a highly successful one and it augurs extremely well for 2012 and beyond. Thank you.

Brian Rice

Thank you, Richard. Before I go into our results, I would like to provide insight into the revisions we announced to our interest expense in the press release. During a recent review, our finance team discovered an error in the way we were amortizing certain fees, mainly related to a few of our export credit agency guaranteed loans. We've all asked ourselves how this could have happened. We have completed many of these types of financings, and there was a change in the timing of the payment terms of certain fees related to a few recent loans, which required a different accounting treatment than our past financing. The revision in essence accelerates the amortization of these fees. It does not have any cash impact and does not increase the total expense over the life of the loans. Frankly, this was a human error. And while we are very confident this was an isolated event, we have further enhanced our controls in this area to prevent this risk of future inaccuracies. Once this error was discovered, we notified our auditors and worked with them to determine the correct accounting treatment. We determined that the error was not material to prior periods, did not require a restatement and that our previous financial disclosures were reliable. We did conclude, however, that a revision to our interest expense was appropriate, and we have included a reconciliation of these adjustments in our press release. The revision announced to a change in earnings per share of $0.05, $0.15 and $0.06 in 2009, 2010 and the first quarter of 2011 respectively. To be clear, 2009 was the first year of the mistake. Obviously, we are very embarrassed by this revision. But because these adjustments fall below the line, they do not impact our operating results, net yields or net cruise costs.

If you will now turn to the second slide, I would like to summarize our performance in the second quarter. As you can see, we generated net income of $93.5 million or $0.43 per share, which was at the midpoint of our guidance despite a $0.05 impact interest expense from the changes to our fee amortization.

Net yields improved 3.8% on an as-reported basis and $0.08 of a percent on a constant-currency basis. From an itinerary point of view, yields were up about 9% in the Caribbean and up solid double digits in Alaska, the Baltic and the North Eastern itineraries. The Western Mediterranean was up single -- mid-single digits, but both the Eastern Mediterranean and Asia were down due to the geopolitical events we talked about on our last call.

April and May sailings in the Med came in about as we had expected, but we saw a further deterioration in close in bookings for June sailings.

From a source market point of view, excluding Mediterranean sailings, we saw solid pricing improvement from North America and throughout Europe with the one exception of Spain. Accordingly, we remain bullish on the demand environment and believe any weakness is isolated to the areas impacted by the geopolitical events in the Eastern Med and Japan.

Net cruise costs excluding fuel per APCD were up 2.3% on an as-reported basis and declined 0.1% on a constant-currency basis. While we continue to experience outstanding guest ratings and make prudent strategic investments, you can see our management team is very focused on tight cost controls and succeeded in offsetting the Eastern Mediterranean revenue declines for the quarter.

Fuel costs were very consistent with the calculations included in our previous guidance. Although WTI prices have fallen since our last call, we didn't see much of a change at the pump for the types of fuel we've used.

Also during the quarter, we've sold some of our shorter-dated fuel options, as well as the ones with strike prices of $120 and $150. This enabled us to monetize some of the gains we booked in the first quarter and avoided a negative mark-to-market adjustment as fuel prices fell.

Interest expense was about $10 million higher than our previous guidance for the quarter due to the new fee amortization schedule I previously mentioned.

Moving on to the booking environment. Overall, low factors and APDs are ahead of the same time last year for both the third and fourth quarter. And for the balance of year, all of our brands are showing positive trends.

I would now like to provide you with more product and source market detail than usual given the unique environment we are operating in. On Slide 3 and 4, we have provided you with our capacity allocations for all of our major product groups and our directional expectations for year-over-year yield changes for the third quarter and full year. The biggest changes we are seeing relate to the Eastern Mediterranean. On our last call, we adjusted our yield guidance as a result of the geopolitical events in Northern Africa. Much of this adjustment directly related to sailings deployed away from Egypt into a much lesser extent, Tunisia.

Subsequently, there has been additional unrest in Syria and Greece. If you draw a semicircle on a map from Greece to Syria to Egypt, it is easy to understand why headlines dominating this region would impact demand for the entire Eastern Mediterranean, including Israel and Turkey. Eastern Mediterranean itineraries will account for 18% of our total capacity in the third quarter and are unfortunately weighing down strong yield performance by most of our other products.

Western Mediterranean sailings, in contrast, are expected to have slightly higher yields than last year, which is still encouraging, given the large capacity increases in the region.

For all of our other major product groups, we are seeing very strong demand. The Caribbean, Alaska and the Baltic are all performing significantly better than last year and are all forecasted to generate solid double-digit yield improvements in the third quarter.

In addition, if we exclude Mediterranean sailings, our primary source markets are showing strong pricing performance this year with the United States, United Kingdom and Canada, each showing improvements in the mid- to high-single digits for the year. There is clearly a lot going on in the world, and the headlines could hardly be described as optimistic. The people continue to take their vacations and continue to see the value of cruising in our brands.

On Slide 4, we have recapped our expectations for the year. The Caribbean, which represents our largest capacity allocation, will have yield improvements approaching double digits. We continue to make good progress in the southern hemisphere, which includes South America and Australia. The Baltic and Alaska are the clear stars this year and likely benefited from some of the weakness in the Eastern Mediterranean. Asia is the only other product in our portfolio that is expected to show declines this year. The redeployment affects resulting from the events in Japan are expected to linger through October, but the environment is clearly stabilized, and we remain very bullish on this region's long-term prospects.

I'm sure you are curious about 2012, so here's what we know so far. It is very early in the selling cycle, and slightly less than 1/4 of our inventory is sold at this point. Our APDs and load factors are running ahead in all 4 quarters, but it is too early to provide any definitive yield guidance other than to say we expect improvements. Early bookings for Europe are showing better load factors than APDs, but there is very limited visibility at this point. It is encouraging to see the early order book, though, especially when you consider our comparables are prior to the turmoil in the Eastern Med.

Now I'd like to update our forward guidance. On Slide 5, you will see our guidance for the third quarter. We expect yields to be up 5% on an as-reported basis and up 1% to 2% on a constant-currency basis. Excluding the Mediterranean, yields are forecasted to be up around 11.5% or about 9% on a constant-currency basis.

Net cruise costs, excluding fuel, are forecasted to increase approximately 2% on a constant-currency basis and 4% to 5% on an as-reported basis.

We expect a little more food cost pressure in the second half as well as some higher marketing investments, but we continue to look for ways to mitigate the impact of the Eastern Mediterranean performance. We have also included $202 million of fuel expense in our forecast, and we are 53% hedged for the quarter. Our earnings per share are expected to be between $1.85 and $1.90.

On Slide 6, we show our updated full year guidance. We expect yields to increase approximately 5% on an as-reported basis and between 2% and 3% on a constant-currency basis. Excluding the Mediterranean, we expect to be up approximately 8% as reported and approximately 6% on a constant-currency basis.

Net cruise costs, excluding fuel, are expected to be up approximately 3% on an as-reported basis and between 1% and 2% on a constant-currency basis. We have included $763 million for fuel based on today's prices and our hedges, which cover approximately 55% of our consumption for the balance of the year.

As I mentioned previously, we have seen some inconsistencies between the movement in our current at the pump prices and WTI. While the cause and duration of this decoupling is debatable, as always, we have based our calculations on our current at the pump prices.

Interest expense for the year is currently expected to be between $355 million and $365 million, which is an increase of approximately $44 million or $0.20 per share due to the new amortorization (sic) [amortization] schedule.

Our gross interest expense equates to an average cost of debt of about 4.4%. To help you with your modeling, I will mention that based on current interest rates, our current fixed floating ratio in our existing loan structures, 2012 would also be approximately 4.4%. Earnings per share for the year are now expected to be between $2.85 and $2.95.

Earlier this month, we amended and extended our revolving credit facility that was set to mature next summer. We now have a total line of $1.4 billion split between 2 facilities with staggered maturities in 2014 and 2016. As you know, in October of 2008, our Board of Directors suspended our dividend. The combination of strong liquidity, flow in capital expenditures and improved operating performance has now given them the confidence to reinstate a dividend. We consider the quarterly payout of $0.10 a share to be conservative, but this reflects a balance between our objective of returning cash to shareholders while honoring our goal of returning to an investment grade credit.

Finally, as I am sure you're aware, starting with this quarter, companies are required to file the entire 10-Q under XBRL 2. Because of this, we expect to file the Q on Monday, but we have tried to provide more information in our press release.

I would now like to turn the call over to Adam for his comments about the Royal Caribbean International brand. Adam?

Adam Goldstein

Thank you, Brian, and good morning, everyone. As Brian and Richard have mentioned, we are pleased that many of our products have generated stronger revenues than we had expected and also that we have maintained strong cost control, and we are disappointed that our Mediterranean yields have turned out to be weaker than we had anticipated 3 months ago.

We have been clear for some time about our strategic intention to build our presence in Europe to capture at least our fair share of the impressive growth of cruise vacations in the world's largest holiday market. The Royal Caribbean International brand has deployed half of our 22-ship fleet in Europe this summer.

When we set our 2011 European deployment about 18 months ago, we placed our main emphasis on establishing homeports in our priority markets. This approach includes several ships that we have based in the U.K. and in the Nordic markets, which have performed well this summer. We placed most of our European capacity, however, in Italy and Spain. The geopolitical events of 2011 have had a disproportionate impact on these products, particularly the ships with itineraries in Greece, Egypt and Israel.

Looking to our 2012 deployment. With the departure of Voyager of the Seas on the Mediterranean to China and Australia, and the arrival of Serenade of the Seas in the Baltic, we will somewhat shift the balance of our European presence from south to north. While we would have done this irrespective of this year's events, one implication of this set of moves will be to further diversify our product range and lessen our exposure to any ongoing geopolitical risks that might affect the Mediterranean.

As the last comment in Europe, it is worth noting that while we have had to discount our pricing more than we would have liked, we have been able to vary substantially increase our number of European guests in 2011. Given our brand's slack capacity in 2012 and the Voyager, Serenade ships I mentioned earlier, we will only need to achieve marginal growth in the number of European guests next year and will, therefore, be able to focus even more on driving APD growth.

Three months ago, I began with an update on the tragic developments in Japan and their emerging effects on Legend of the Seas 2011 China program. This series of events directly affected only our smallest ships, but its impact was significant as it forced substantial changes in legends itineraries from March through October. Although we will fall far short of our pre-event yield aspirations for this 2011 program, I think it reflects well on our young offices in that region that our colleagues were able to attract customers in the volumes they achieved, given the magnitude of the dislocation and the consequential changes in our itineraries and market sourcing. We continue to believe that China's emergence of the cruise market and the high level of satisfaction that our Chinese guests have expressed about our brands bodes well for our market development efforts in the region.

As you have also heard from Richard and Brian, the outlook for our ships in Alaska, the Northeast U.S. and the Caribbean remains positive based on our load factors and rates as we go through the summer season and begin to turn our focus towards maximizing yield in the upcoming winter season.

Finally, in June, we completed the revitalization of Radiance of the Seas under the umbrella of our Royal Advantage Program. Later this year, we will revitalize Splendour of the Seas, and we are planning on continuing our revitalization program throughout the next several years. With 15 ships in our Voyager, Radiance and Vision classes and a slower rate of new capacity coming on line, we are committed to offering an outstanding and up-to-date Royal Caribbean experience on our older ship classes. Dan?

Daniel Hanrahan

Thank you, Adam. Good morning, everyone. The momentum for Celebrity remains strong. As Richard mentioned, we just took delivery of Silhouette, our fourth in the series of 5 Solstice-class ships. We named her in Hamburg this past week, and she is as stunning as her 3 sisters. She set sail on our main voyage last week, and in just a few short months, Silhouette will offer 12-night Caribbean cruises on the Cape Liberty this fall and winter.

We are extremely excited to be taking the Solstice-class ship to the greater New York market. New York has been a historically strong market for Celebrity, and the opportunity to put a Solstice-class ship there is a great way to tell the Celebrity story.

Silhouette has another host of industry first venues in the Lawn Club, all designed to enhance onboard revenue, including the interactive Lawn Club Grill, the relaxing private WiFi-enabled cabanas called the Alcove, the Porch, a casual dining spot and with dining spots with sandwiches, coffees and views of the ocean and the ship's lawn and the art studio, where our vacationists can work with one of our art partners. The ship will also present a new twist on Celebrity's Michaels Club with a selection of more than 50 craft beers from around the world to broaden our appeal to a growing market segment.

During the second quarter, we had healthy demand for many of our products with cruises in Alaska, Bermuda and Northern Europe performing particularly well for the brand. Pricing for these products was significantly higher year-over-year, and all products came in about where we thought they were going to on the previous earnings calls and are trending well for the remainder of the summer.

As you have heard, our sailings and operating in the Holy Land region and the Eastern Med have been more of a challenge due to continuing global events. As has been the trend, our Europe product is about 40% sourced from outside of the U.S. and Canada, and we have not seen any significant differences in booking patterns from these main booking markets.

Looking ahead, we'll have all 4 Solstice-class ship operating in the Caribbean in this fall and winter, and we'll have over 60% of our capacity in this market during this time period. Since our cruises to the Caribbean booked closer in and those to Europe and Alaska, we have less visibility to performance for this time period, but we are on pace to finish ahead of where we finished in Q4 2010 and Q1 2011. Our non-Caribbean products, which represented 40% of our capacity for the period are also performing well. We are particularly pleased with the performance of our South American products and are soon to be Solsticized Infinity, as well as the reintroduction of our brand in the Australia and New Zealand market.

Finally, I'm very excited to announce that once Reflection joins the fleet next year and the last of Armonian class ships has been revitalized, over 90% of our fleet will be Solstice-class or Solsticized. Our Solsticizing schedule is ambitious, as we will Solsticize Infinity this November, Summit in January and Millennium next April. However, given the success of the Constellation project, we're looking forward to completing the program quickly. Brian?

Brian Rice

Thank you, Dan. We would now like to open the call for your questions. As a reminder, we ask that you limit your questions to no more than 2. If you have more, after, we'd be happy to address them after the call. Andrea?

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