Carnival Cuts Profit Outlook as Iran War Pushes Up Fuel Cost

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1:39Scarlet Fu:Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's turn our gaze to the cruising business. I know nothing about the cruising business. That will change in October when I take my first cruise. I know he's finally taking the plunge. Finally taking the plunge. But with the guy we have here now, our next guest is an expert on all this stuff. Brian Egger, he covers all the fun stuff, gaming, casinos, hotels, and cruises for Bloomberg Intelligence.

2:21Carnival, what's going on in Carnival here? So they came out with what otherwise would have been a very good quarter in terms of bookings demand, 85 % of the year sold, actually raised revenue yield guidance, but they had to cut EBITDA guidance because the cost it from fuel due to the war in Iran. And so the underlying demand part of the business is quite good. You know, the concern would be if that war persists, they are modeling in a level of fuel cost assumption for the second half that might not be conservative enough.

2:51Scarlet Fu:The thing that people like about these cruise lines and cruise line operators is that they have a lot of visibility into their bookings because people book years in advance or months in advance, as in the case of Paul Sweeney and his upcoming cruise. But that also locks in the revenue that they brought in. Do cruise lines add a fuel surcharge later on because, you know, oil prices have gone up so much or is it something they just have to eat? Well, I think the revenue yield management part of it is always the science behind it, because 85 % of bookings sold, if you oversell too much and demand goes up, you're left with inventory that could have been sold at a higher price or you're missing inventory.

3:31you're not saying so much in terms of a fuel cost surcharge but i mean the um the reality is even with 150 million dollars in offsetting cost savings from efficiencies their estimate is that the full year impact on their adjusted net income from the fuel price increases we've seen since december could be about 500 million dollars and our concern is that assumes 80 to 90 rents in the second half. And what if that's much higher? That's the concern. What are these cruise lines saying about their underlying demand at some point, some of these inflation pressures, if they do remain here a little bit longer than maybe we initially thought, fuel in particular, but other areas as well?

4:16What does that typically impact the top line for those guys? So I think, generally speaking, cost inflation can have an impact. The assertion of the industry would be that they are relatively affordable per day compared to other forms of vacationing and travel. And so that's been a big underpinning behind their assumption. They continue to get more consumer penetration.

4:39Scarlet Fu:And, you know, people might have pre-booked their cruises, but the amount that they spend is also another big, big revenue increase for these cruise line operators. I mean, that's where they make up a lot of ground. How do you expect that to play out if oil prices stay high. I mean, people are still going to go on their cruises, but they're not going to spend for the all-you-can-drink package. Yeah, I mean, that may be a concern. Right now, the yield outlook is quite favorable. It's still solid, low single digits. Over time, an increasing portion of the overall revenue has come from either onboard ticket spending or pre-cruise purchases of excursions and other amenities.

5:16And all that could be subject to vulnerability if there's a major change in discretionary spending. it on fuel for these big crews they don't use a lot of the uh alternative fuels do they they're just burning that big bunker fuel kind of stuff it mixes over time increased more more towards lng and other other forms of uh i guess more efficient fuel and cleaner fuel i think one of the cruise line just announced its first hydrogen powered ship so they are looking at alternative of uses. And a big offset to these cost increases has been fuel cost efficiencies. The amount of metric tons of fuel consumed per passenger capacity a day has over time gone down.

6:00So they've tried to get some offset and have gotten some offset from increased efficiencies, both from just the general way they operate, but as well as more efficient ships. All I know is I'm sitting on the beach in Aruba and I can see the smokestack from the the court there of Aruba and as it shops are docked and it's just billowing out the black. And you're thinking, well, I'm going to join those people one day. Exactly. Exactly. But boy, I could just, that's just brutal. And they don't hedge, do they? Or do they hedge? Carnival has not hedged historically. They've had over, in past years, have had some collars.

6:31Norwegian and Royal Caribbean do hedge. And so there's a cost benefit analysis to whether or not you put hedges in place. Yeah. Because George Ferguson was just telling us that the airlines don't hedge.

6:40Scarlet Fu:Well, they got messed up during the pandemic, right? And they all came out worse for it. Yep. All right, Brian, thanks so much, Brian Neger. Appreciate that. Senior Gaming and Lodging Analyst, Bloomberg Intelligence, joining us live here in our Bloomberg and Eric. I have a cool question. How many cruises do you go on a year? A year? Oh, that's... Over time, I have gone on a number of cruises. Double-digit? Well, maybe... Of course, I've been covering this sector for longer than... Yeah. As long as Paul's been... doing this too. So yes, long time. Long time. Yeah, so I've been out on the Disney cruise a couple of times when they have a new ship.

7:17We'd fly out to LA, hop in the thing. They take us out overnight. Oh yeah, but that's as an analyst. Exactly, as an analyst. So yeah, I mean. Yes, I have taken a vacation cruise separate from my role as an analyst. Yeah, there you go.

7:30Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this.

7:36Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Well, if you're anything like me, you probably feel like you spend too much time on your phone, particularly with scrolling through the social media sites. New Year's resolutions every year usually include, you know, let's spend some less time on the personal device. But that doesn't always work. It's tough to do. There's actually been the subject of a lot of litigation against some of these social media platforms, Meta, Alphabet, those types of folks.

8:13And there's been some cases coming down against these companies as well. So let's see what it means for a lot of these social media companies and tech companies in general. Matthew Sheltonhelm joins us here. He's media litigation analyst of Bloomberg Intelligence. Hey, Matt, it seems like we've had a couple of court rulings come down against some of these social media companies. Summarize what's going on out there, And does those a risk to these companies? Yeah. So this is litigation that has been developing for the past three to four years. And it's finally in the first couple of cases in line reached the stage of juries making decisions.

8:51So Meta had a loss in New Mexico state court when a jury announced a verdict of three hundred and seventy five million dollars. We also, as you said, had this California jury come down with a personal injury suit on behalf of a woman who claimed that she was harmed by the social media's features. There, the jury came down with an initial$3 million award against Meta and Google's YouTube and then added$3 million of punitive damages on top of that. These are just the very tip of the iceberg. There are a number of other cases lined up to go to juries this year. And the whole goal here is to try to shape a settlement potentially.

9:37These are bellwether cases to try to give information about, OK, do these cases have legs or not? And how should everyone think about trying to quantify them to settle them? So I think pretty much every parent out there would say, boy, my kids are spending way, way too much time on their devices here. What is that? What do these companies say? I mean, because otherwise they're just going to be in litigation forever. Absolutely. I mean, I think you're looking at a lot of tough headlines here because you have a lot of parents on these juries. And maybe these these, you know, social media isn't the most popular thing right now.

10:14So it's going to be sort of an assault of headlines for the companies here. Now, the companies say, look, you know, there are lots of problems in the world. We're not responsible for it. In fact, we add a lot of value to the world as well. And there are real legal problems that the companies say with these cases. One is that the companies say, look, we have a First Amendment right to speak and to develop our product. We have a liability shield under federal law, Section 230. All of that sort of looms behind these jury decisions. And you can guarantee that the companies are going to appeal these initial decisions to higher courts on those tough legal questions.

10:55So, you know, the amounts being awarded here are immaterial to these companies. Six million dollars a year, 300 million dollars there, 375 million dollars there. I mean, they're just not material to the finances of these companies. Is there a scenario where we could get really, really multi-billion dollar type things that might get the attention of these companies? So these personal injury lawsuits, probably not. This California case was brought by a single person, and there's no vehicle really to bring it as a class action because damages are so individualized. The thing to watch here are the state attorneys general lawsuits and also slightly behind that lawsuits brought by school districts because they both offer opportunities to pool a number of supposed victims and to bring claims on their behalf.

11:49So I think Meta has been sued by 30 to 40 different state attorneys general. And a number of those cases are consolidated in federal court in California. That's a bigger ticket item. And so that's the one to watch. I think these individual personal injury suits are lower down the line because of their individualized nature. Meta made$60 billion in profit last year, and a$6 million loss isn't a huge deal. Has it been a deal for the stocks at all? Is this an overhang at all for these stocks, thinking that? Or could it be like the tobacco industry where investors are like, it's just cost of doing business kind of thing?

12:26Well, you know, it's been a tough couple of days for Meta's stock. And there's just been a barrage of headlines on this. And as I said, this is just the beginning. But there are a lot of people that don't feel that great about social media right now and use these decisions as an opportunity to jump on top of it. And so in that sense, I think it's going to be a lingering and ongoing risk. That helps drive a global settlement here to make this litigation go away. And I think that's the decision the company is going to have to make is, do we have to make this go away sooner rather than later? Or do we test these legal theories, which might be pretty strong to make this stuff go away?

13:08But it's going to take a long time for those appeals to play out. Stay with us. More from Bloomberg Intelligence coming up after this.

13:18Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right, let's bring in George Ferguson. He is our senior aerospace defense and airlines analyst. And George, there was a headline earlier this week that got my attention, which is JetBlue looking to team up with someone, looking for a partner in some capacity. It was reported from Semaphore, and JetBlue has tried this before. It tried to merge with Spirit Airlines or tried to buy Spirit Airlines, and it failed in that quest.

13:57Scarlet Fu:What do we know about JetBlue's M &A ambitions? Yeah, so we haven't heard anything out of JetBlue, right? But when you look at JetBlue, I think that one, sort of their financial performance hasn't been great since the pandemic, partly due to this failed merger with Spirit Airlines. And so you could see as they're looking out at the US market right now, fuel prices have doubled. They're probably thinking demand is going to come down pretty hard. It's going to be hard to sort of turn around financial improvement in that environment. And so I'm not sure who Semaphore talked to inside, but I don't think it's hard to see how JetBlue would be starting to think about what might be different permutations.

14:46of how they could get the carrier through what I think is going to be a difficult summer for the business. George, typically, can airlines pass along fuel increases like we're seeing here, these huge jumps in fuel prices? Can they pass that along to consumers or that goes into their bottom line? So I think the opportunity to pass it along is pretty good this time. And typically, they do. Typically, they pass it along at a lag. And so the airlines usually will go through a bumpy ride in their profits for a little period of time for, I don't know, a quarter or something like that as they're getting ticket prices up.

15:22If you look at the U.S. airline business right now, though, nobody hedges inside the business anymore. It used to be there was a smattering of airlines that hedged. Southwest was one of the bigger ones that hedged. And you might have some Alaska, some JetBlue hedging. Nobody really hedges anymore. And that means everybody has to increase ticket prices so that it can remain profitable. And I think that means the move to higher ticket prices goes faster this time.

15:50Scarlet Fu:So when they increase ticket prices, is that something that's kind of static? Once it goes up, it goes up, it doesn't come back down? Or would any of them consider adding kind of a fuel surcharge the way a UPS or FedEx does? Yeah, I mean, look, I always think of a fuel surcharge as a way of reminding your customer that the reason you're increasing the cost of the product that you're delivering to them is because of fuel. And I think not your fault, in other words. Yeah, exactly. So FedEx goes, hey, look, sorry about it. You know, the world economic environment is such that I'm going to have to charge you more because fuel prices are higher.

16:27Look, I think at airlines, airlines are very competitive business. And so airlines see a lot of movement up and down in ticket prices. And so I think because of that competitiveness, yes, you could see where they would rise here. And then, you know, as soon as you start to get decreases in the price of fuel, we typically see some of the airlines that want to take market share. They'll lower fares. They'll add to the airplane and people to the airplane. And then the game starts over again. Right. We start moving the wrong direction in fares if you're if you're a shareholder. George, what are the airlines doing in terms of capacity?

17:04Are they adding capacity to the system? Are they taking it down? What are they doing? So we're not seeing much yet. My colleague Francois Duflo put out a report this week. It's on our AIRLN dashboard. We haven't seen much movement. And my guess is that the airlines are probably waiting to see if this war could end quickly. If it ends quickly, you know, maybe they don't have to take any capacity out for summer season. Summer is their peak season. They probably sold a lot of it already. But I think if these higher fuel prices persist, I think you'll see as you get through summer, they'll have to start to cut capacity to keep fares higher.

17:43And that becomes part of the risk as well for the companies like JetBlue, Spirit, Frontier, that cater to the lower tier of the traveling public. you know the challenge is their customers are probably going to be uh their budgets will be stretched a little bit more and i think you know if you're united and you're american it's actually especially united and delta uh and you've got a fair amount of premium travelers flying in your airplanes they're gonna they're not going to really be bothered right by a 20 or 30 percent increase in their in their fare price they're going to keep flying and those airlines are They're going to continue to subsidize the back of the airplane, that discount traveler.

18:25And it's going to make it harder to fill airplanes, I think, at the low-cost carriers here for a bit.

18:31Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Because it is Friday, let's just take a step away from the market action, at least for a few minutes, the Warner Run, and talk a little bit about the business of sports because the owners of NBA teams have voted to consider expanding their league and adding franchises in a couple of other cities.

19:10Scarlet Fu:Let's bring in Randall Williams, our Bloomberg Business of Sports reporter on this story. And Randall, we're now looking at possibly a Las Vegas franchise, a Seattle franchise? Yep, and it was always going to be those two cities. The league was open to listening to more offers from other cities. You think Nashville, you think Kansas City, you think maybe Vancouver or Mexico City. But Seattle and Vegas are proven sports towns. Seattle used to have the Supersonics, and Las Vegas has a bunch of different sports teams I would consider at the sports capital of the world right now. So they'll be listening to bidders over the course of many months, and if they find the right price and if the bidders get the right number, then we'll go from 30 to 32 NBA teams.

19:47All right. If I want an NBA team, what's it going to cost me to get in the door? I would guesstimate it is going to cost you at least$8 billion. They're saying 7 to 10 is the range. I think Seattle will go for probably between 7 and 8 and a half. And I think that Vegas team could easily reach 9 to 10.

20:04Scarlet Fu:And who are the obvious bidders here? Who are the people who are right away going to be putting together packages? Sure. So Samantha Holloway, who is David Bonderman's daughter, is the owner of the Seattle Kraken. She just formed this holding company called One Roof Sports and Entertainment. She owns the arena or has partial ownership of the arena, which is Climate Pledge Arena in Seattle. She's the heavy favorite in Seattle. In Vegas, you have Bill Foley, who is the Vegas Golden Knights owner. He controls alongside MGM and AEG, T-Mobile Arena. And so I think if you have arena ownership and you don't have to spend another billion and a half to$2 billion, then that's going to enable you to get a bit ahead.

20:43Now, who knows? Maybe someone does come in and say, look, I'll build a stadium in Las Vegas or in Seattle. I think it would be difficult. But those two would be my leading favorites right now. All right. So we just had opening day for Major League Baseball. Let me take it down to the dark side. Uh-oh. Are we going to get a work stoppage next year in Major League Baseball? Absolutely. You think so? I think so. Absolutely. I think so. I mean, look, you think about the collective bargaining sessions that we just finished with the WNBA. I think we talked about it last week. everyone that I've talked to around sports has said that that is the prelude to what is coming with baseball which is really a war of do they want to have the owners have a salary cap or do the players who are probably going to be negotiating for a minimum floor spending because you have teams that are just content with not spending any money and being loser franchises and then you have those same owners complaining about how you have franchises like the Yankees the Dodgers the Blue Jays who spend so much on players that there's nothing left so it's gonna it's really going to

21:37Scarlet Fu:be an argument for the heart of baseball feast or famine in the MLB essentially is there parity in the MLB I mean are there changes they can make to create more parity I'm in favor of having a minimum floor spending and the reason for that is because like you think about the NFL and the NFL turns over playoff teams literally every single year that doesn't mean that that team is able to win the Super Bowl but we have we see a lot of turnover different teams make it and in baseball it does feel like the same teams are winning. Now, I'm definitely rooting for the Dodgers in terms of the dynasty effect.

22:10I think having a franchise to chase, having a franchise to beat, then gives the hero and the villain side of things. The city of Los Angeles thinks they're the heroes and everybody else thinks they're the villains. At the same time, there are other franchises out there. You think about the Pittsburgh Pirates, you think about the Florida, the Miami Marlins. These are franchises that no one really talks about. And it's because of the fact that we might not see the investment from their owners in terms of how, you know, you compare that to the Yankees, the Dodgers. And maybe they don't have the deep pockets.