uploads///Part_RCL_Net cruise yield_cost_operating margin

Key drivers of Royal Caribbean’s operating profitability


Jan. 27 2015, Updated 10:22 a.m. ET

Rise in net cruise yield

Royal Caribbean’s (RCL) margin in 2013 was driven more by an increase in yield and occupancy rather than a decrease in costs. Its margin is expected to increase further in 2014, as operating costs are expected to remain flat or decrease.

Net cruise yield reflects per-unit net revenue. It’s a measure of the cruise line’s pricing. Net revenue is calculated by deducting the company’s most significant variable costs including commission, transportation, onboard and other expenses from gross revenue and dividing it by available passenger cruise days (or APCD). Royal Caribbean’s (RCL) net revenue yield has increased by 13% since 2009. In 2013, the company’s net yield increased year-over-year by 2.7% to $178.86, which was higher than Carnival Corporation’s (CCL) $167.56 but lower than Norwegian Cruise’s (NCLH) $183.7. Yield has continued to increase in 2014 as the company shifted out of Southern Europe and other low-yielding markets and itineraries. The company estimated that its net revenue yield will increase by 1.5% to 2% in 2014.

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Increasing unit cost

Net cruise costs are another useful indicator that measures a cruise line’s unit cost. It’s calculated as gross cruise cost minus commissions, transportation, onboard, and other costs divided by available passenger cruise days (or APCD). Royal Caribbean’s net cruise cost has increased at a two-year compound annual growth rate of 3.6% from $122 in 2011 to $131.48 in 2013. For 2014, the estimate is that unit costs will remain flat or slightly lower than in 2013. The decrease in crude oil will have a positive impact, as fuel costs comprised ~13% of Royal Caribbean’s total operating costs in 2013. Since fuel costs depend on external factors of demand and supply and the price of crude oil, the cruise company’s ability to control costs is measured by trends in unit costs excluding fuel costs. Royal Caribbean’s unit cost excluding fuel had increased to $104 in 2013 compared to $99 in 2011.

The PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) ETF, the PowerShares Dynamic Large Cap Growth Portfolio (PWB), and the Consumer Discretionary Select Sector SPDR Fund (XLY) hold shares of the three major global cruise operators. They’re expected to benefit from rising yields and moderating costs for these cruise operators.


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