Carnival's Q3 2025: Contradictions on Booking Environment, Pricing, and Capital Returns

The above is the analysis of the conflicting points in this earnings call

Guidance:

• FY2025 net income expected ~$2.9B ($2.14/share); EBITDA >$7B, +15% YoY vs 2024.
• Q4 2025 yield outlook unchanged vs prior guidance; costs ex-fuel flat vs June guide.
• 2026 capacity +0.8% YoY; nearly 50% of 2026 booked at higher prices.
• Carnival Rewards launches June 2026; ~0.5pt yield headwind (H2-weighted).
• 2026 costs: +~0.5pt from Celebration Key/RelaxAway operations; up to +1pt from additional dry docks.
• End-2025 net debt/EBITDA ~3.6x; targeting <3x over time.
• Convertible redemption (settles Dec 5) improves net debt by ~$600M; pro forma ~3.5x early FY26 and ~13M lower diluted shares at $30.
• No ship deliveries in 2026; one per year thereafter.

Business Commentary:

• Record Financial Performance:
• Carnival Corporation achieved record net income of $2 billion for Q3 2025, surpassing their pre-pandemic benchmark by nearly 10%.

• This was driven by strong operational execution and a nearly 600% increase in net interest expense, with operating and EBITDA reaching the highest levels in almost 20 years.

• Same-Ship Yield Improvement:

• Yields increased 4.6%, all achieved on a same-ship basis, with yields being over 1 point better than guidance.

• The improvement was due to strong close-in demand and onboard spending, reflecting Carnival's successful delivery of same-ship yield improvements.

• Capital Refinancing and Deleveraging:

• Carnival refinanced over $11 billion of debt during the year at favorable rates, accelerating deleveraging efforts and reducing secured debt by nearly $2.5 billion.

• This was part of their ongoing strategy to rebuild their investment-grade balance sheet and return capital to shareholders.

• Destination Development and Impact:

• The opening of Celebration Key delivered an impressive guest experience, contributing to record same-ship yields and is expected to contribute significantly to 2026 results.
• The new destination, along with the upcoming RelaxAway expansion, is anticipated to drive future guest consideration and conversion, capturing over 8 million guest visits next year.

Sentiment Analysis:

• Management reported record revenues, yields, operating income, EBITDA, and customer deposits, with all-time high quarterly net income of $2B. ROIC reached 13% TTM, the first time in the teens since 2007. Full-year guidance was raised to ~$2.9B net income ($2.14/share) and EBITDA >$7B (+15% YoY). Booking trends improved, outpacing capacity at higher prices, with nearly half of 2026 already on the books at higher prices. Leverage reduced to ~3.6x net debt/EBITDA, with line of sight to ~3.5x early FY26.

Q&A:

• Question from Robin Farley (UBS): Are prices at historic levels across both North American and European sourcing, and has North America improved? Also, can you quantify the ticket premium from Celebration Key itineraries?
  Response: Both North America and Europe are at record price levels; Celebration Key is meeting expectations and driving ticket premiums, but management isn’t quantifying.

• Question from Brandt Montour (Barclays): Any signs of consumer fatigue or trading down in onboard behavior?
  Response: No; bookings remain strong (e.g., Carnival booked 8% more in Q3 vs last year) and limited capacity should support pricing.

• Question from Brandt Montour (Barclays): How are you approaching 2026 bookings given last year’s volatility?
  Response: Strategy is being optimized; with no election-cycle overhang, volatility is lower and positioning is more confident.

• Question from Steven Wieczynski (Stifel): How does 2026 look vs three months ago, and what does 'unprecedented' mean for 2027 bookings?
  Response: 2026 feels good with continued execution; 2027 saw record bookings for a Q3 13-week window.

• Question from Steven Wieczynski (Stifel): With ~200 bps of 2026 headwinds (loyalty, dry docks, destination costs), what mitigations exist?
  Response: Pros include ~50% of 2026 booked, full-year Celebration Key, minimal capacity growth, strong OBR; management will pursue efficiencies via brand operating plans.

• Question from James Hardiman (Citi): Clarify booking pace vs load factors and connect brand initiatives to pricing outperformance.
  Response: Prior comments referenced 2025; now focused on 2026; yield gains are broad-based from better execution, AIDA Evolutions, and investments in marketing, RM systems, and talent.

• Question from Benjamin Chaiken (Mizuho): Capital return timing and preference for dividends vs buybacks?
  Response: Upon ~3.5x net debt/EBITDA, expect to pivot to returns with a bias to reinstating dividends first; convert redemption aids share count and leverage.

• Question from Benjamin Chaiken (Mizuho): How is close-in demand shaping Q4 yields after Q3 upside?
  Response: Q3 beat came from stronger close-in demand and onboard spend; H2 upside is more limited due to spring volatility, but the team aims to outperform.

• Question from Matthew Boss (JPMorgan): How much runway remains for yields, margins, and returns?
  Response: ROIC at 13% is not a ceiling; longer-term targets coming, with continued improvement expected in margins and yields.

• Question from Matthew Boss (JPMorgan): Can yields grow faster than costs in 2026 and longer term?
  Response: Long term, yes; management will leverage scale and savings to offset 2026 cost headwinds.

• Question from Conor Cunningham (Melius Research): What’s improving at laggard brands, and do they need major investment?
  Response: Performance is mixed but improving; no glaring investment gaps—brands have been rightsized, and several are climbing quickly.

• Question from Conor Cunningham (Melius Research): Will dry-dock days ease in 2027?
  Response: Current plan shows fewer dry-dock days in 2027 than 2026, but plans can change.

• Question from Elizabeth Dove (Goldman Sachs): How do you weigh new builds vs midlife refurbishments like AIDA Evolutions?
  Response: Actively expanding midlife refurbishments across brands; higher dry-dock spend is justified by strong returns.

• Question from Elizabeth Dove (Goldman Sachs): How will you defend share and pricing in Galveston amid rising competition?
  Response: By elevating guest experience, optimizing ship deployment, and leveraging diversified destinations; portfolio breadth reduces reliance on any one homeport.

• Question from David Katz (Jefferies): Do you need to be under 3x leverage before recurring capital returns, and what could delay deleveraging?
  Response: No; pivot begins around 3.5x (Board decision). Planned investments are modest (e.g., refurbishments, Celebration Key Phase 2), far below newbuild costs.

• Question from Sharon Zackfia (William Blair): Early learnings at Celebration Key and timing of loyalty-related yield hit?
  Response: Tweaks include ship scheduling, more shade/chairs, beach refinements, and F&B adjustments; loyalty’s ~0.5pt yield impact is H2 2026.

• Question from Christopher Stathoulopoulos (Susquehanna): How will you protect Caribbean pricing power as peers add capacity?
  Response: Compete mainly vs land vacations; Carnival’s deep Caribbean focus plus new XL sisters and ACE class, and private destinations, sustain pricing and share.

• Question from Vince Ciepiel (Cleveland Research): Multi-year occupancy opportunity within yield management?
  Response: Focus is total revenue optimization, not maxing occupancy; there’s room to lift occupancy at the right price.