Forecasting for the Love Boat: Royal Caribbean Cruises in 1998

Much like Kate Winslet leaning over the bow of the Titanic, the North American cruise industry seems poised to either take flight or suffer a precipitous fall. The number of cruise passengers has grown from 500,000 in 1970 to 5,400,000 in 1998, a compounded average of 8.9 percent per year. Further, as the baby boomers mature, an increasing proportion of the population will fit the profile of a typical cruise customer-someone between 40 and 59 years old earning about $60,000. But all the news isn't bright.

Based on the number of new ships that have already been ordered by major operators, the number of available berths in the North American market is expected to increase by over 40 percent in the next five years. Will the increase in demand for cruise vacations be sufficient to fill all the cabins on these new ships? Given the large fixed costs of operating a cruise vessel and the debt necessary to fund this capacity expansion, the cruise industry risks an encounter with an iceberg as it steams into the new millennium.

This case focuses on Royal Caribbean Cruises in 1998. The first part of the case asks you to conduct a detailed analysis of Royal Caribbean's past financial statements and to compare them with their rival, Carnival Cruises. The second part of the case asks you to forecast the financial performance of Royal Caribbean for the next three years. Note that the chilling effect of September 11, 2001, on the travel and vacation business occurs mostly after the three years that you will be forecasting, so you don't have to pretend that you don't know about this major event.

The case material that follows will provide you with a comprehensive picture of the North American cruise industry as it stood in 1998 along with specific financial and operating details of Royal Caribbean Cruises and Carnival Cruises. There is a wealth of information available and no single correct way to put it all together in your financial analysis and forecasts. Please limit your analysis to the information available in the case. The data supporting the graphs in this case are given in the appendix and are included with the case's Excel files, along with files containing input data for eVal. (Please note that Global Access did not code Royal Caribbean's preferred dividend. You will need to modify the financial statements in eVal to correct for this.)

PART. FINANCIAL FORECASTS

This part of the case asks you to forecast the financial performance of Royal Caribbean for the next three years. This is where you should bring together the industry facts given in the beginning of the case, the results of your financial analysis, and your understanding of Royal Caribbean's unique attributes gleaned from a careful reading of their SEC filings. Note that, while the events of September 11, 2001, had a dramatic effect on subsequent travel and tourism, this is largely after the periods you are forecasting. In their 2001 annual report, Royal Caribbean estimates a net cost of $47.7 million due to passenger's inability to fly to their departure locations, subsequent cancellations, and other costs incurred as a direct result of this event. Make your forecasts without regard to this event, but then subtract an extraordinary loss of $47.7 million from your final income estimate to control for this effect.

Your answers will not be graded on their accuracy but, rather, on the logic you give to support them. Use eVal to derive the forecasted financial data. Although your answers should be in the format given in eVal, your analysis should be far more detailed than a simple extrapolation from Royal Caribbean's past performance (as the eVal defaults will do). Note that Royal Caribbean paid a preferred stock dividend of $12.5 million in 1998 but that this amount is not in the Global Access data. You will have to correct the financial statements once they are loaded into eVal. (Note: case data can be imported by going to the Case Data sheet in eVal and selecting the yellow block of data for the company, and then pasting this block of data into the yellow cells at the bottom of the Financial Statements sheet using Paste Special - Values from

the Edit menu.) Excerpts from Royal Caribbean's 20-F filing and Carnival's 10-K filing are included as online exhibits at www.lundholmandsloan.com.

1. Based on all the information provided in the case, forecast Royal Caribbean's gross revenue for 1999, 2000, and 2001.

Please explain your reasoning.

2. Forecast the remaining portions of the income statement for 1999, 2000, and 2001. Comment only on the forecast components that differ significantly from past trends or ratios-do not discuss each line item if you don't have anything substantive to say.

3. Forecast complete balance sheets for the end of 1999, 2000, and 2001. Comment only on the forecast components that differ significantly from past trends or ratios-do not discuss each line item if you don't have anything substantive to say.

4. Can Royal Caribbean afford to purchase the ships that it has on order in the next three years? How do you anticipate that these acquisitions will be financed?

5. For this question, do not use eVal (because it is easier not to). Suppose your analysis indicated that Royal Caribbean will spend $810,261 thousand on additions to property and equipment in 1999. Given this, estimate the ending balance of property and equipment for 1999.

6. For this question, do not use eVal (because it is easier not to). Suppose your analysis indicated that Royal Caribbean's 1999 ending balance of customer deposits was $515,308 thousand. Estimate the amount of cash collected from customers in 1999.

Attachment:- Royal Caribbean Case supplement.rar