The research paper is committed to analyzing the performance of the two public traded companies; Royal Caribbean Cruises Limited (RCL) and Carnival Cruise Line (CCL) regarding their year-on-year performance (horizontal analysis), vertical analysis, ratio analysis, and plans. The paper explores the 10K SEC filed reports and annual reports for the year 2017 and 2016 for the aim of finding reasons behind its various performance indicators.
COMPANY INFORMATION
Beginning
Carnival Cruise Line Corporation
The name of the company Carnival corporation, although did not come up until the year 1994, but the foundation was initiated when the brand of the Carnival Cruises line was started in the year 1972 by the pioneer of the industry, the founder Ted Arison. The company started by utilizing one ship, the Mardi Gras. It was a converted ocean liner. This ship had various innovative characteristics, including the festive ambiance which none other ship had at that time. The success of this ship has been instrumental in the growth of the Carnival Corporation (Carnival Corporation).
Royal Caribbean International
The company Royal Caribbean International formed in 1968, almost five years before the foundation of the carnival corporation. In 1970, it had built its warm-weather cruising which was also the first one for the industry. In 1985, the Royal Caribbean Cruises limited was organized. The company launched its first mega-ship “the sovereign of the seas” after three years of the organization. The progress then started after making the company ISO qualified and environmentally certified. The company has been very committed to its environment safety initiative. It started its ocean fund in 1996 (Royal Caribbean Cruises Ltd.).
Milestones
Carnival Cruise Line Corporation
The first milestone that the company achieved was in 1987 when it achieved its position of “The World’s Most Popular Cruise Line.” In the same year, the company also went public offering 20% of the common stock that provided the capital which was needed to grow and expand. The company then acquired representation in literally every market of the cruise industry. The company during this period acquired Holland America Line as well as Windstar Cruises, and the Holland America Tours. It also acquired the largest ocean liner in the world, the Queen Mary 2 of operator Cunard Line in 1998. In 2003, the company merger happened with the P&) Princess Cruises PLC (Carnival Corporation).
Royal Caribbean Cruises Ltd
The first milestone was achieved when the company was traded on the NYSE with its quote RCL. The next milestone was achieved when the company acquired its celebrity cruises fleet in 1997. In 1999, the company launched its environmental ship of the year competition program in expectation of promoting its commitment to the environmental preservation. In 2002, the company launched four new ships with the Celebrity Millennium in the three years. In the very next year, the company launched its largest cruise ship “Voyager of the Seas.” “Galapagos Fund” was established in 2006 for the preservation of the islands. In 2010, it won the Conde Nast Traveler World Savers Award (Royal Caribbean Cruises Ltd.).
Current Position
Carnival Cruise Line Corporation
The company is considered as the largest world leisure-travel company which owns over 100 ships which are sailed by ten brands. It also owns the Princess who is known famously as the Love Boat and also the Cunard, which is the largest ocean liner of that time, as well as Queen Mary 2, which has a planetarium as well. The company employs 120,000 employees while serving 11.5 million passengers every year. The Carnival Cruise Line is the biggest brand of the company with 25 ships which operated 1500 voyages on an annual basis (Carnival Corp.).
Royal Caribbean Cruises Ltd
The company comprises of six companies and is the second largest cruise company after the Carnival Cruises. The company is known for innovation at sea. The company has debuted many firsts for the industry, including the surfing at sea, ice skating, and rock climbing. The company has a total of 25 ships. Compared with carnival cruise line, it is the same number of ships. The company visits 77 countries with ports on six continents. The six companies under the banner are; celebrity cruises with 12 ships, TUI cruises with five ships, Pullmantur with four ships, Azamara ships with two ships, and sky-sea cruise line with one ship (Royal Caribbean International).
HORIZONTAL ANALYSIS (TWO-YEAR)
Analysis of Revenue
Carnival Corporation generates its revenue by selling tickets for the cruise traveling. The ticket price revenue is offered for the services of accommodations, meals, child care and youth programs, entertainment access, and visits to multiple destinations. Other than this, the company also generates revenue from its onboard and other activities like gift shop sales, photo sales, casino gaming, shore excursions, art sales, laundry sales, and internet and communication sales. The company has generated more revenue in the third quarter during the months of summer. The higher demand results in the higher sale of tickets and higher occupancy. 2016 has been a good year for the company as it achieved highest full-year earnings in its history. However, this increased by 7% in the year 2017. The company generated profits by driving strong operational improvements associated with the share repurchase program in 2016. The company is on its way to reach to increase ROIC to double digits. The company has increased its revenue by 4% in 2016 and 7% in 2017. The Net income has improved by 58% in 2016 but declined in 2017 by 6%. The increment in the year 2016 is attributed to the efforts of team, travel agent partners, and marketing and public relation campaigns. The multi-brand marketing has contributed to increased sales. The creation of TV programs aired on major networks has contributed to the sales as well (Carnival Cruises).
On the other hand, the Royal Caribbean International is targeted for the upper-class contemporary segment. The company collects revenues from passenger ticket revenue mainly which accounts for about 70% of the total revenue (Royal Caribbean Int. 16). Other than this, similarly like Carnival, the company generates revenue from its onboard and other activities. Royal Caribbean International is one of the six segments of the Royal Corporation. The company increased its revenue in 2016 by 2% and further by 3% in 2017. The increment of the net yields is attributed to the increases in ticket and onboard sales, by the desolation of the Pullmantur brand, from the success of the North American sailings. It is also attributed to the introduction of the two new ships in 2016. The company faced lower demand for its market of China and due to the turmoil in Europe (Royal Caribbean Int. 47).
Comparatively, Carnival is seen as doing better regarding revenue generation. It increased its revenue more than Royal Caribbean because of its sheer size, better advertising, and marketing efforts.
Analysis of Expenses
The operating expenses of Royal Caribbean include; commissions, transportation, on-board, payroll, food, fuel, and other operating expenses. The company is focused on finding efficiencies through synergies and cost reduction strategies. In the year of 2016, the net costs appreciated by 0.9% excluding the fuel costs. The company focuses on cost controls as depicted from its expense reduction. Royal Caribbean has reduced 2% of the cost of revenue in 2016 and further in 2017 as well. The operating expenses have also been reduced by 14% in 2016. The reduction in the operating expense is attributed to the favorable effect of foreign currency exchange rate effect and decreased fuel expense (Royal Caribbean Int. 48).
In 2017, however, the company operating expenses increased by 7%. It is also reflected in its reduced net operating income as compared to the year 2016. It is the same increment as Carnival Cruises which also reported an overall 7% increment in the operating expenses in 2016 and further 7% increase in 2017 as well. The company Carnival corporation operating costs include costs of passenger cruise bookings, onboard costs, fuel costs, payroll costs, food costs, and other ship operating costs. The operating costs declined very slightly in 2016. This reduction is attributed to; the $377 million decreased prices of fuel and appreciated fuel consumption by $23 million, foreign currency exchange rate effect, causing $136 million and $57 million by lowering dry-deck expenses. The S&G Expenses increased in 2016 due to the capacity increase, litigation settlements, and other initiatives (Carnival Cruises 52).
Comparing both companies, it is depicted that Royal Cruises did better in reducing its costs as compared to Carnival Corporation. The company Royal Caribbean decreased its total expenses by 14% in 2016 as compared to just 1% decline in the cost of revenue for Carnival, which was offset by the increments in S&G Expenses, making it increase to 7% overall.
Analysis of Income
The Carnival Corporation showed strong performance in 2016 by generating most profitable year in its history. The company had a record net income of $2.8 billion. The adjusted earnings reported are $500 million higher than 2015 which is 58% higher. It can be attributed to both increased capacity consequently increasing sales and reduced costs. The increment in income can be credited to the income generated by the increase in the ALBDs capacity and by the 3.9% increment in the net revenue yields (Carnival Cruises 57). The increment in net yields by tickets was caused by the improvement in revenue from the Caribbean and Alaskan programs from the segment of North America, North European, and Mediterranean Programs from the segment of EAA. There was also about 1.1% increment due to the accounting reclassification. It collectively increased the net income by 58% for Carnival in 2016. It, however, declined in 2017, by 6%. The company with its increased expenses by 7% and increased cost of revenue by 12% and 0% increment in gross profit as compared to the year 2016 yielded lower profits.
In comparison, the Royal Caribbean generated higher growth as depicted in the graph. Its Net income has improved by 93% in 2016 and further by 27% in 2017. The growth trend of the RCL is far better than CCL, which has suffered a greater decline in 2017.
VERTICAL ANALYSIS (1-YEAR)
The vertical analyses of the balance sheet of both companies show that the companies’ assets are majorly concentrated on the property, plant, and equipment. The cruise industry has specific features with being high capital extensive and with a high working capital deficit. For both companies, the working capital is extensively in the deficit, which is a norm for the industry. The reason behind it is that the cruise industry relies on advance consumer deposits which are considered as a current liability increasing the deficit. Carnival Corporation has a stable debt and equity level of sourcing which relies on ensuring the sharing of profits with its shareholders via repurchase programs and dividend declaration.
Analysis of Assets
The analysis of the assets of Carnival Corporation shows that out of 100% the 96% of the assets are concentrated in the non-current assets. Furthermore, the 84% of the assets are concentrated in the property, plant, and equipment. It is, of course, natural for a cruise business as it depends solely on its cruise ships for business which demands extensive capital. Only 4% of the company is in non-current assets out of which less than 1% is in the form of cash assets. It is also similar to the pattern for RCL as well. The company Royal Caribbean has 96% of its assets concentrated in non-current assets and largely on the property, plant, and equipment, i.e., 88%, which is also a greater ratio than carnival Corp. The company current assets comprise only 4%, and only half of 1% is spent on cash. Royal Caribbean seems to be more spending of its total assets on non-current assets as compared to Carnival Corp.
The Balance Sheet Data of RCL shows that the total assets value has increased from 2015. The company has 0.50% inventories, which include provisions, fuel, and supplies. The PPE comprises about 90% of the total assets which includes Ships, ship improvements, building, computer hardware, transportation equipment, leasehold improvements, and software. The Balance Sheet Data shows that Carnival Corporation total asset value has declined from 2015. But it has increased substantially in 2017 as compared to both years. It is major because of the increment in the noncurrent assets and property, plant and equipment category. The company has to spend large capital on purchasing, maintenance, and repairs of the cruise ships periodically. The Goodwill accounts for 7% of the total assets, which is 1.3% for the RCL. The property, plant and equipment cost include the cost of the net carrying value of the ships and also for the ships under construction. The other intangibles which account for 3% of the assets include the reclassified $70 million of the PPE as per alignment to the FASB adaptation (Carnival Cruises 17).
The Balance Sheet Data of RCL shows that the total assets value has increased from 2015. The company has 0.50% inventories, which include provisions, fuel, and supplies. The PPE comprises about 90% of the total assets which includes Ships, ship improvements, building, computer hardware, transportation equipment, leasehold improvements, and software.
Analysis of Liabilities
The liabilities of the company Carnival Cruise Line comprise about 40% of the total assets. The current liabilities are about 22% of the total assets and the non-current portion of the liabilities is comprised of 19%. It shows that about 19% of the funds are sourced from Long-term Debt. And 20% is sourced from the current liabilities like short-term debt, account payables, and deferred revenues. The company Royal Caribbean has a greater portion of its assets, sourced by liabilities as compared to Carnival. Total liabilities are about 52% of the total assets. Of this 52%, the 20% is funded by non-current liabilities, and current liability fund the other 21%.
The Royal Caribbean seems to be more dependent on debt as sourcing of fund as compared to Carnival Cruises. The higher the dependence on debt, the higher is the risk. Thus, the dependence on debt should be lower than 50%. The company is in $1.7 billion of contractual obligations. The company relies on a combination of cash flows from operations, insurance of the additional debts, drawdown form credit facilities, and from the refinancing of existing debt. The company has a deficit in working capital of $3.7 billion reported in 2016. Reported in this portion is the current portion of the debt which is about $899.5 million or 21%. The increment in the working capital deficit is attributed to the increment in the current liabilities from non-current debts and deposits of customers. The vast amount of current liability is due to the nature of the business. The cruise industry has similar figures. The ticket revenue remains a current liability until the sailing date as these are booked in advance (Royal Caribbean Int. 60). Both companies advocate their business model not taking into account the high working capital deficits and dependency on debt for the reason of the nature of the business.
Analysis of Stockholder Equity
As depicted in the pie charts, the equity comprises about 48% of the sources of the funds for RCL and about 59% for CCL. It means that for CCL, the major portion of the sourcing comes from equity; which is a good sign of stable cash flows. However, the RCL seems to more rely on the Debt and long-term loans for funding its capital expenditures. Carnival Co has in 2016, repurchased about $ 1 billion worth of its common stock (Carnival Cruises 66). The company Carnival Corporation had declared a 17 % dividend in 2016. The company CCL is committed to maintaining a reasonable debt maturity profile. They want to stabilize the debt level consistently to return profits to shareholders through both dividends and repurchase programs. The company reports that it can work with a working capital deficit because of the reason that its working capital includes current debt obligation and current customer deposit.
RATIO ANALYSIS (1-2 YEARS)
Current Ratio
The current ratio of both companies is expected to be lower than one as in the cruise industry the working capital deficit is high. A carnival Corporation current ratio of 2017 has declined as compared to the year 2016. In the year 2016, 0.24 current ratio shows that the current assets of the company cover only 20% of the current liabilities. This ratio has further declined to 0.18 showing that current assets now cover only 18% of the current liabilities. The company has a lower current ratio because the company operates by collecting payments of cruise tickets as advance payments. These payments are reported as current liabilities until the sailing date. Thus, the lower current ratio, even a highly negative trend is a characteristic of the industry.
The current ratio of the RCL is similar, lower than 1. The 0.17 ratio in 2016 has increased to 0.18 in 2017. It is because of the increase in the current assets as compared to the lower increase in the current liabilities. It shows that the current assets of the company cover about 18% of the current liabilities. The investors usually tend to look at the current ratio to have some guarantee of better financial performance and coverage of the company. However, looking at the high capital-intensive nature of the companies, the investor does not seem to mind lower current ratios, as it is a norm of the industry. Comparatively, the company Carnival has the better current ratio in 2016. However, it declined in 2017, whereas, for a Royal Caribbean current ratio improved and came to the same ratio of 0.18 in 2017.
Debt to Total Asset Ratio
The total debt ratio for the companies Carnival Cruises and Royal Caribbean has declined. The Carnival Cruises debt ratio in 2016 is reported to be 41%, which declined to 40% in 2017. The Carnival Cruises debt ratio declined due to the reason that the company’s total asset value appreciated more as compared to the increment in the total debt. The company Carnival Cruises is committed to consistently increase its debt ratio while maintaining its equity portion to share its profits through dividends and share repurchase programs. However, the increment in the total debt was offset by the increase in the total assets value, declining it.
The total Debt to asset ratio of Royal Caribbean also declined in 2017 as compared to 2016. It is because of the reason that the total debt value of the company declined substantially. It is a good indicator because of the reason that the company was relying heavily on debt for its fund sourcing, thus lowering it constantly to a stable threshold would make its operations less risky. The 52% lowered debt ratio shows that debt funds about 52% of the total assets of the Royal Caribbean Company. The debt ratio of Carnival cruises is better as compared to Royal Caribbean.
Profit Margin
The profit margin of the company Carnival Cruises has declined as compared to its last year. The company was able to generate a 16% profit from its operations in 2016 and a net profit margin of 14% in 2017. The profit margin declined due to the decline in the net income in 2017 and also because of the increment in the revenue value. It is interesting to understand that the increase in revenue here is playing negatively for the ratio of profit margin. It shows that the operating expenses consumed the major portion of the increased revenue, which was generated in 2017.
Comparing its performance with the Royal Caribbean, the RCL has generated better profit margins. The company has not only shown improved profit margin as compared to its last year, but also it is better than that of Carnival Cruises. The Royal Caribbean has shown improvement in its net profit margin because of the increment in the revenue and net income. Moreover, the increment in the net revenue is also transferred majorly in the net income by reducing of the operating costs. Thus, in this ratio, Royal Caribbean has shown improvement and better financial performance.
Payout Ratio
The payout ratio of a company shows that how much of its earnings are being shared with its shareholders. The portion of the earnings per share, which is distributed as a dividend to its shareholder shows the ratio of shared earnings. The company Carnival Cruises has reportedly shared more earnings than Royal Caribbean. The payout ratio has also increased on a year-on-year basis for both companies. However, the increment is more substantial for the Carnival Cruise Company. The company has reported 36% payout ratio in 2016 and 44% payout ratio in 2017. RCL, on the other hand, has reported a payout ratio of 28% in 2016 and 35% in 2017.
CURRENT NEWS & FUTURE MOVES
Financial News
The Royal Caribbean Company is expecting its 2018 earnings to grow by 13.5%. The company is planning on launching its new employee bonus program which is called Thank-you bonus (Grant, 2018). The company Carnival Cruises is committed to raise its debt maturity level and also repurchase its common shares during 2018.
Pending Lawsuits
There are no pending lawsuits on Royal Caribbean. One case is alleging Royal Caribbean for the delayed cancelation of the cruise because of the storm Harvey was canceled by the district judge (Simpson). Carnival Cruises, on the other hand, has been sued for slip and fall, but they all have been dismissed (Ziegler).
Future Plans
Carnival Cruises is planning on offering new cruises for the route of Cuba to Miami in the coming year 2019. Other than this, the company has expanded its fleet size by ordering a third new generation ship for Aida Cruises. The company has also planned to undergo massive renovation plans which will add water parks, balconies, new cabins, and staterooms to carnival paradise. The company has plans for new Australian season with Queen Elizabeth to be based on 2019-2010 summer seasons (Carnival Corporation & Plc).
The plans of Royal Caribbean include the launching of an oasis class ship Symphony of the Seas which has completed its sea trials. Other than this, the company is adding a virtual reality trampoline to its Mariner of the Seas ship (Grant).
CONCLUSION
In the end, it is concluded that the horizontal analysis of companies, Carnival Cruises, and Royal Caribbean, shows that Royal Caribbean has been better regarding increasing its revenue and reducing its expenses. The vertical analysis of both companies shows; the major portion of the assets of both companies is concentrated in plant, property, and equipment, i.e., in cruise ships. Other than this, the Royal Caribbean assets are more dependent on debt sourcing, whereas the Carnival Cruises has a better debt and equity combination of sourcing. The Ratio analysis shows that the current ratio of both companies is as per the industry trend, i.e., lower than 1. The profit margin is better for Royal Caribbean while the payout and Debt ratio are better for Carnival Cruises. Overall, both companies are performing well, but looking at the plans, and steady performance trend, Royal Caribbean is performing slightly better than Carnival Cruises.
Work Cited
Carnival Corp. “Quick Facts.” Carnival Corp. Carnival Corp, 2018. Web. 28 February 2018. http://www.carnivalcorp.com/phoenix.zhtml?c=200767&p=irol-funfacts.
Carnival Corporation & Plc. 2018 News Releases. Carnival Corp. Carnival Corp,2018. Web. 2 March 2018. http://www.carnivalcorp.com/phoenix.zhtml?c=200767&p=irol-news&nyo=0.
Carnival Corporation. Mission & History. Carnival Corp. Carnival Corp, 2018. Web. 1 March 2018. http://www.carnivalcorp.com/phoenix.zhtml?c=200767&p=irol-history.
Carnival Cruises. Annual Report 2017. Carnival Corp. Carnival Corp, 2017. Web. 1 March 2018. http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_CCL_2016.pdf>
Grant, Kinsey. “Royal Caribbean’s Strong Close to 2017 Makes for ‘Buoyant Outlook,’ CEO Says. “ The Street. The Street, 24 January 2018. Web. 28 February 2018. https://www.thestreet.com/story/14461333/1/royal-caribbean-s-strong-close-to-2017-makes-for-buoyant-outlook-ceo-says.html.
Royal Caribbean Cruises Ltd. “Our History.” RCL Corporate. RCL Corporate, 2018. Web. 1 March 2018. http://www.rclcorporate.com/about/.
Royal Caribbean Int.” Royal Caribbean International 10K Report.” SEC. Gov. SEC. Gov, 2017. Web. 1 March 2018. https://www.sec.gov/Archives/edgar/data/884887/000104746913001567/a2213132z10-k.htm.
Royal Caribbean International. “Our Six Brands.” RCL Corporate. RCL Corporate, 2018. Web. 1 March 2018. http://www.rclcorporate.com/about/.
Simpson, Dave. “Judge Sinks Suit Against Royal Caribbean Over Harvey Cruise.” A Lexis Nexis Company. A Lexix Nexis Company, 7 February 2018. Web. 28 February 2018. https://www.law360.com/articles/1010262.
Ziegler, Justin. “Carnival Cruise Slip and Fall Accident Claims for Injuries.” Florida Injury Law Firm. Florida Injury Law Firm, 2018. Web. 28 February 2018. http://www.justinziegler.net/carnival-cruise-slip-fall-injury-claims/.
Appendices:
Appendix A: Horizontal Analysis
|
Horizontal Analysis |
||||
| CCL | RCL | |||
| 2017 | 2016 | 2017 | 2016 | |
| Revenue | 7% | 4% | 3% | 2% |
| Cost of revenue | 12% | -1% | -2% | -2% |
| Gross profit | 0% | 12% | 11% | 9% |
| Operating expenses | ||||
| Sales, General and administrative | 3% | 6% | 8% | 1% |
| Restructuring, merger, and acquisition | -100% | |||
| Other operating expenses | 11% | 7% | 6% | -28% |
| Total operating expenses | 7% | 7% | 7% | -14% |
| Operating income | -9% | 19% | 18% | 69% |
| Interest Expense | -11% | 3% | -2% | 10% |
| Other income (expense) | -375% | -96% | 59% | 65% |
| Income before taxes | -6% | 57% | 27% | 93% |
| Provision for income taxes | 22% | 17% | ||
| Net income | -6% | 58% | 27% | 93% |
Appendix B: Vertical Analysis
|
Vertical Analysis |
||
| CCL | RCL | |
| 2017 | 2017 | |
| Short-term debt | 5.40% | 5.33% |
| Accounts payable | 1.87% | 1.61% |
| Accrued liabilities | 4.60% | 4.26% |
| Deferred revenues | 9.71% | 10.06% |
| Other current liabilities | 0.00% | 0.21% |
| Total current liabilities | 21.58% | 21.48% |
| Non-current liabilities | 0.00% | 0.00% |
| Long-term debt | 17.15% | 28.48% |
| Other long-term liabilities | 1.89% | 2.03% |
| Total non-current liabilities | 19.03% | 30.52% |
| Total liabilities | 40.62% | 52.00% |
| Stockholders’ equity | 0.00% | 0.00% |
| Common stock | 0.90% | 0.01% |
| Additional paid-in capital | 21.31% | 15.20% |
| Retained earnings | 57.12% | 40.46% |
| Treasury stock | -15.57% | -6.18% |
| Accumulated other comprehensive income | -4.37% | -1.50% |
| Total stockholders’ equity | 59.38% | 48.00% |
| Total liabilities and stockholders’ equity | 100.00% | 100.00% |
Appendix C: Ratio Analysis
|
Current Ratio |
||||
| CCL | RCL | |||
| 2017 | 2016 | 2017 | 2016 | |
| Current Assets | $ 1,596 | $ 1,689 | $ 843 | $ 748 |
| Current Liabilities | $ 8,800 | $ 7,072 | $ 4,790 | $ 4,442 |
| Current Ratio | 0.18 | 0.24 | 0.18 | 0.17 |
|
Debt to Total Asset Ratio |
||||
| CCL | RCL | |||
| 2017 | 2016 | 2017 | 2016 | |
| Total Debt | $ 16,562 | $ 16,339 | $ 11,594 | $ 13,189 |
| Total Asset | $ 40,778 | $ 38,936 | $ 22,296 | $ 22,310 |
| D/A Ratio | 40.62% | 41.96% | 52.00% | 59.12% |
|
Profit Margin |
||||
| CCL | RCL | |||
| 2017 | 2016 | 2017 | 2016 | |
| Net Income | $ 2,606 | $ 2,779 | $ 1,625 | $ 1,283 |
| Revenue | $ 17,510 | $ 16,389 | $ 8,778 | $ 8,496 |
| Profit Margin | 14.88% | 16.96% | 18.51% | 15.10% |
|
Payout Ratio |
||||
| CCL | RCL | |||
| 2017 | 2016 | 2017 | 2016 | |
| Dividends Per Share | $ 1.60 | $ 1.35 | $ 2.64 | $ 1.71 |
| Earnings Per Share | $ 3.59 | $ 3.72 | $ 7.53 | $ 5.93 |
| Payout Ratio | 44.57% | 36.29% | 35.06% | 28.84% |
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