Royal Caribbean Q4 Earnings Preview: Can Cruise Line Stay Afloat Despite FX, Oil Headwinds?

As the cruise industry continues to rebound from the COVID-19 pandemic, Royal Caribbean Group (RCL) is set to report its fourth-quarter earnings on Tuesday, February 28. Investors will be closely watching the company's performance, particularly in light of recent headwinds from foreign exchange (FX) and oil prices. This article will explore the potential impacts of these factors on Royal Caribbean's earnings and discuss the company's strategies to mitigate these risks.

Foreign Exchange Fluctuations

Foreign exchange fluctuations can significantly impact Royal Caribbean's revenue and earnings. The company operates in multiple currencies, and changes in exchange rates can affect both its revenue and costs. For instance, a stronger U.S. dollar can make Royal Caribbean's products more expensive for international customers, potentially leading to a decrease in demand and revenue. Conversely, a weaker U.S. dollar could make the company's products more affordable, increasing demand and revenue.

To manage these risks, Royal Caribbean can employ several strategies, such as hedging, diversification, pricing strategy, and cost management. Hedging involves using financial instruments like forwards, futures, and options to protect against currency fluctuations. Diversification entails expanding operations in different regions and currencies to reduce the impact of currency fluctuations on the company's overall revenue and earnings. Pricing strategy involves adjusting prices in markets where the company's currency is strong and decreasing prices in markets where its currency is weak. Cost management includes negotiating long-term contracts with suppliers in different currencies to lock in prices and reduce the impact of currency fluctuations on costs.

Oil Prices

Oil prices have been volatile in recent months, with the cost of West Texas Intermediate (WTI) crude oil spiking above $130 a barrel in 2022, a 13-year high. This volatility can significantly impact Royal Caribbean's fuel costs, as cruise ships rely heavily on oil for propulsion. To mitigate the effects of rising oil prices, Royal Caribbean has implemented hedging strategies for its fuel purchases. According to a 10-K filing with the U.S. Securities and Exchange Commission, the company came into 2022 with more than half of its fuel needs for the year locked in at lower prices using futures contracts.

Additionally, Royal Caribbean has been investing in fuel-efficient ships and exploring alternative energy sources like Liquified Natural Gas (LNG) to reduce its dependence on oil. The company's new Icon Class ships, for example, are designed to be more fuel-efficient than previous generations, helping to mitigate the impact of rising oil prices on the company's costs.

Pricing Strategy and Onboard Spending Trends

Royal Caribbean's pricing strategy and onboard spending trends have contributed to its resilience against headwinds from foreign exchange and oil prices. The company has maintained strong pricing power, as evident in its third quarter 2023 results, with net yields increasing 7.9% in constant currency and as-reported. This pricing power, driven by the company's differentiated vacation experiences and innovative new ships, has helped offset some of the impacts of foreign exchange and oil price fluctuations.

Onboard spending has also been increasing each quarter throughout the year, indicating that passengers are willing to spend more on additional services and experiences while on board. This trend helps to offset the impacts of higher costs related to foreign exchange and oil prices. Royal Caribbean's focus on enhancing guest experiences, such as the expansion of its private destinations portfolio and the development of new hotels, further drives onboard spending and contributes to the company's resilience against headwinds.



In conclusion, Royal Caribbean faces challenges from foreign exchange and oil price headwinds, but the company's hedging strategies, pricing power, and onboard spending trends have helped it navigate these challenges. As the company reports its fourth-quarter earnings, investors will be watching closely to see how Royal Caribbean has managed these risks and whether it can maintain its resilience in the face of these headwinds.