City Insider - FT journalist David Stevenson on the travel industry

2011 doesn’t look like it’s going to be a bumper year for Carnival. The week before last the Miami based outfit used its first quarter earnings shout to revise down full year numbers for 2011.

The good news was that those Q1 numbers were at the higher end of recent guidance. The bad news was that the forward looking full year EPS numbers were guided down by $0.45 off the back of higher oil prices and ‘itinery changes’ in North Africa.

According to Carnival “based on the above factors, the company now forecasts full year 2011 fully diluted earnings per share to be in the range of $2.50 to $2.60, compared to its December guidance range of $2.90 to $3.10 and fiscal 2010 of $2.47”.

Talking to analysts these revised numbers didn’t come as a great surprise – as one sourly declared “Carnival is just a play on oil now”. That sanguine reaction wasn’t mirrored on the markets – Carnival may proudly declare that it’s the only group in the world to be included in both the S&P 500 and the FTSE 100 but that simply gives the market two chances to kick a loser when its down and Carnival’s shares promptly plummeted.

Talk to most analysts and they now expect around $2.92 a share in earnings, putting the cruise giant on just over 13 times 2011 earnings. This disappointing prediction for 2011 poses a much bigger question amongst many institutional investors – when is Carnival going to do something about breaking its link to spot oil prices?

The big challenge is that Carnival doesn’t hedge its exposure to fuel and it’s also vulnerable to massive currency risk volatility given that most of its customers come from outside the US (yet the company reports in $).

This absence of hedging is now clearly getting in the way of Carnival’s bolder growth narrative (ten new s hips this year, for instance, and an expansion of the brand collection). Rival firm Royal Caribbean Cruises, by contrast, does hedge its fuel costs – currently at 58% for 2011, 55% for 2012 and 30% for 2013.

Carnival now clearly faces two inter connected choices. The first is to hedge that oil and currency exposure, even though it’ll inevitably come with financing charge.

The other equally obvious task is to take any other flexible costs out of its P&L and increase operational gearing to any recovery in demand. To me that means only one thing – remove all third party costs that Carnival can’t control which is obviously bad news for travel agent deals. Sell direct and cut out all middlemen.

Some good news from China

Not everyone is having a miserable start to 2011 in the wide and wonderful world of travel. Over the last few days China’s dominant travel brand C Trip, for instance, revealed some hugely impressive numbers which should remind us why every major institutional investor I know is still trying to buy into this amazing growth story.

But lurking beneath these headline numbers is an even more compelling piece of research commissioned by C Trip into the Chinese travel market. Over the last few months the Chinese firm talked to 330 Chinese consumers about their travel plans for 2011 – the results provide a fascinating insight into why everyone wants to grab their own piece of the China market.
The research focused on more affluent consumers with an income of more RMB 5000 a month – around £500 per month. Astonishingly 62% of this had taken more than two leisure trips in the past 12 months, compared to just 27% for lower income groups.

Nearly half of the target mass affluent category also said that they planned to spend more on travel in the next 12 months. This is clearly great news for C Trip as its grip on the Chinese market looks fairly impregnable.

According to research from CLSA, a brokerage firm in Hong Kong, 77% of consumers looking to make a travel booking online said they’d use the top Chinese brand. C Trip isn’t resting on its laurels and is now targeting new package products aimed at its wealthier clientele – which helps explain why it acquired Hong Kong’s leading travel agent Wing On Travel and already owns Taiwanese outfit eztravel. 

Perhaps the most interesting question is where all these mass affluent Chinese travellers are heading to. The research reveals that Greater China region is still the most favourable destination (70% of consumers) followed by visits to HK, Macau, Taiwan for holidays last year for the other 20%. Only 2% of Chinese leisure travellers went to Europe and 0.4% to US.

Yet the most staggering statistic for me comes from looking at the internet travel story , which shows no sign of running out of steam. Quite the opposite in fact – C Trips numbers reveal that online travel booking is actually gaining momentum. About 22% had made a travel booking online in 2010, compared to 16% a year ago, with 96% saying that they intended to make future travel bookings online.

As for the those who hadn’t booked online, about 39% of consumers who had never made a booking online before now said that they intended to do so in the future.