Carnival Corporation (CCL), the largest cruise operator in the world, experienced a setback last month as a fire broke out in the engine room of the Carnival Splendor off the coast of Mexico. Though nobody was injured, the ship had to be towed back to port. The Splendor was scheduled to resume services on January 16, 2011, but Carnival has postponed this to February 20, as the repair work is not yet complete.
Carnival said the ship needs time to be fixed as it was badly damaged by the fire. Some of the parts are not even readily available and are being manufactured in Europe. The Splendor is now in San Diego and will sail to San Francisco in mid-January, where it will be finally made operational.
The Miami, Florida-based company failed to bring the ship back into service at the promised time, leading to many guest cancellations during the holiday season. Some of these guests were affected earlier and had to cancel their bookings again. The company will refund the affected guests’ fares and will also give them a 25% discount on a future cruise.
Earlier, when the Splendor incident took place, the company estimated that the voyage disruption and related repair costs will negatively impact fourth quarter earnings by 7 cents a share, but will have minimal impact on first-quarter 2011 earnings. However, now that the Carnival Splendor voyage is cancelled through January and most of February, we believe the first quarter results will also be hurt significantly.
The company is set to release its fourth quarter 2010 earnings on December 21, 2010 and competes with Royal Caribbean Cruises Ltd. (RCL).
Currently, we have a Zacks #3 Rank (short-term Hold rating) on the shares of Carnival. We also reiterate our long-term Neutral recommendation.
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