Cruise line downgraded

PANAMA. The financial health of Royal Caribbean cruise line, which started operations in Panama last December, and was projected to bring an additional 73,000 travellers to the country, is faltering, as the company uses low prices to attract the few people not curtailing discretionary spending.

Last week, Moody's Investor Service lowered its rating on Royal Caribbean Cruises Ltd. following the company's release of weak fourth-quarter earnings. Royal Caribbean operates the Celebrity Cruises, of which “Enchantment of the Seas” stands out for using Panama as its port of origin.

The rating service lowered its corporate family rating and probability of default rating to "Ba2" from "Ba1" among other downgrades. Approximately $3.73 billion of rated debt is affected. Moody's said the outlook for the company is negative.

Royal Caribbean said last week that its fourth-quarter earnings tumbled 98 percent, missing Wall Street's expectations, as cruise bookings fell and the company's fuel costs were higher than expected.

According to Moody’s, Royal Caribbean’s fourth quarter earnings decline provides “further evidence that the cruise price environment is deteriorating rapidly” as consumers continue to curtail discretionary spending. Although the company's fiscal 2008 earnings dropped by only 2.3%, fourth quarter 2008 earnings declined 24%.

This decline combined with higher debt levels at December 31, 2008, increased the debt/earnings ratio.

Royal Caribbean also announced that it expects net revenue yields could drop between 9%-13% in 2009.

Even as bookings stabilize, the company cannot afford to raise prices and risk losing its clients to competitors. Worse yet, Moody’s sees the risk of downward price pressure.

Royal Caribbean Chief Financial Officer Brian Rice is hopeful on bookings, saying on a statement that "the start of the wave period has produced booking volumes consistent with last year, albeit at significantly lower prices." Bookings are higher during the “wave period” which runs from January to March.

"We recognize this will be a very challenging year and do not expect any quick turnarounds in our pricing," Rice said. "Consumers are certainly delaying their purchase decisions, but as they get closer to their vacations, they appreciate a great value and are buying cruises."

Moody’s warns the company might be forced to lower prices even more, however, pointing out the risk of a downward price pressure on the company with the negative rating outlook.