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Operator
Good morning, my name is Theresa and I will be your conference facilitator today.
At this time, I would like to welcome everyone to the Royal Caribbean Q2 earnings release conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks there will be a q-and-a period.
If you would like to ask a question during this time then please press star and the number one on your telephone keypad.
If you would like to withdraw your question press the pound key.
I will now turn the call over to Mr. Richard Fain, Chairman and CEO of Royal Caribbean Cruise Lines.
Sir, you may begin your conference.
Richard Fain - Chairman and CEO
Thank you and welcome to all of you who have joined us this morning.
Thank you for being here.
With me this morning is Jack Williams, the President of Royal Caribbean and Celebrity Cruises, Bonnie Biumi, our acting CFO, and Erin Williams, Director of Investor Relations.
Um, this is actually the first conference call I have ever been involved with at Royal Caribbean where Dick Glasier wasn't here next to me.
And, um I think you all know we were sorry to see him go although it sounds like a good opportunity for him and we wish him well.
In addition, he's left a very good team that's now headed by Bonnie Biumi and I think many of the people on this call already know Bonnie.
She's been with us for a number of years, um before that she was CFO of another public company, and before that she was with PriceWaterhouseCoopers.
So I think we're, we're um well-prepared.
I'm going to make a few comments, unm and then turn the microphone over to Bonnie and Jack Williams.
First, I'll comment on a, the yield environment.
Actually I have mixed emotions about where we are right now.
I never like to report yield decline that's always something that we don't like to see and don't like to have to deal with um but that's especially true in a year when we were originally expecting such tremendous results.
We really were looking forward before 9/11 to the year 2002 as generating some impressive yield improvement.
Uh, obviously that all changed on 9/11 and nine months ago we never would have imagined that we would today only be talking about yield declines of 2-3%.
Given the circumstances that's a tremendous result.
Especially in a year where the industry is absorbing capacity increases at near double digit rates.
And our own capacity is growing uh, by 15% this year.
There aren't many industries where you would expect to absorb double digit rates without yield declines under normal circumstances and I don't think anybody looks at the post-9/11 situation as a normal circumstance.
So, as I say, mixed emotions, sad to be seeing any yield declines but frankly very reassured to be seeing yield declines at this level after 9/11.
And we think there are in fact four reasons.
Jack will talk a little more detail about what's happening.
But we think there are really four reasons for the improved yield expectations.
Number one of course, actually 2001 was a really lousy year for, for yields and so we start actually from a relatively low base and I think we should be clear on that.
Secondly, our marketing department insists that I point out that we have a very successful marketing campaign going on and two very strong brands and when you have two good brands and good marketing behind them we think that is a powerful combination.
But we also have two other things that we think have proven quite effective for us.
So the third item I would emphasize is the increasingly efficient yield management systems.
I think we've always been proud of our yield management systems at Royal Caribbean but the way they have responded to this fairly dramatic shift in events they've really proven their metal and we think they are a significant reason for the better than expected results.
The last thing I would point out too is that we think we made some fortuitous decisions about redeployments of ships.
We responded quickly, we looked quickly at what the situation was and we redeployed ships to take advantage of what we thought were the right opportunities.
And now in retrospect that appears to have paid off very well for us.
The next item I want to just touch on briefly is the status of our agreed merger with P&O Princess.
We're still working on it very hard.
It still makes excellent strategic sense and uh we are now focusing our attention on the progress in the US.
We are still not in a position to predict the final outcome, although I do have to say I have learned a great deal about antitrust law in this whole process.
I only wish I could find some way to sort of, in a casual way introduce Herfindahl-Hirschman's Index into my dinner table conversation but, while I may not be able to do that, I still learned a lot in the process.
Where we are now is that the um, we are working on, working with the FTC on their review.
We expect that to be completed probably in September and then, assuming that their conclusions are positive, we will seek shareholder approval.
The last thing I wanted to cover was just to touch on the two options that we have had for two Radiance-class ships.
They were due to expire about now and as we noted in the press release we have extended those to Sept. 20.
With that I'd like to turn, to turn the podium over to um Bonnie, who will talk about the financial numbers in a little more detail and then later to Jack, and then later we can come back for q-and-a.
Bonnie.
Bonnie Biumi - Acting CFO
Good morning, everyone.
I'm going to review the Q2 financial results and then Jack will give you an update on the booking trends in our new Celebrity advertising campaign.
Before I start I need to refer you to the first slide of our presentation.
This can be found at our website, www.rclinvestor.com.
Some of the comments we will be making are forward looking statements and are subject to change based upon the items listed in this slide and our disclosures in our SEC filings.
Our Q2 results are summarized on slide two.
Revenues for the quarter were essentially flat with 2001 at $822m.
Our capacity increase for the quarter was about 10% but this was offset by a decline in net revenue yield of 3.3%.
This change in yield is significantly better than we had expected at the time of our last conference call when we gave guidance for net yields to be down 5-7%.
Revenues were also lower as a result of a large drop in the percentage of passengers booking their air transportation with us.
About 15% of our guests booked air with us in 2Q02 compared to almost 27% 2Q01.
The yield environment is encouraging.
We are improving our previous guidance for net yields in Q3 from down 5-7%, to down 2-4%.
By the Q4 we are expecting net yields to increase in the range of 4-6%.
On a full year basis this would mean a yield decline in the range of 2-3%.
As Richard mentioned, I think everyone agrees, would agree, this is far better than anybody would have expected.
The drop in air/sea mix had a big impact on our operating expenses.
These expenses were $499m this quarter, down from $504m last year.
We continue to be very focused on controlling our SG&A expenses and on a dollar basis our SG&A expenses for the quarter were essentially flat YoverY at $107m.
This represents an improvement of 12% on a unit basis.
As we mentioned in the press release, we have decided to increase spend in this area.
The increase will obviously be weighted toward the back half of the year but we're still expecting a YoverY improvement of approximately 13-14% on a per available birthday.
If you turn to slide three you can see that our liquidity as of June 30 was $1.6b.
This consisted of $600m in cash and our $1b revolving credit facility.
Our liquidity today is actually slightly more at $1.7b and this is after taking delivery of Brilliance of the Seas.
In addition, we have approximately $600m in OECD facilities that are available on two of our remaining four new buildings.
One is available in 2003 and one is available in 2004.
At 6/30 our total debt was $5.6b and our net debt to cap was 56.6%.
Two weeks ago we took delivery of Brilliance of the Seas.
The ship was financed through the use of an operating lease.
As a result, the ship did not appear on our balance sheet but the transaction will be fully disclosed in our financial statements.
Because of the structure of this transaction our capital expenditures for 2002 will decrease and our new estimate for 2002 capital expenditures is $1.1b.
The lease has a 25 year term and can be cancelled in years ten and 18.
We are very pleased with this transaction because it was done with a European bank that was not an existing lender so it represents a new source of liquidity for us.
In addition, the lease has an effective interest rate of approximately 5.75%, which is a very attractive rate.
The financial impact to EPS for 2002 will be minimal however using an operating lease will mean that there are shifts between line items in our income statement.
The lease payments will be reflected in operating expenses.
We have incorporated the lease payments into our guidance of operating and SG&A per available birthday so the guidance given for the full year is still good.
There will also be no depreciation expenses associated with this ship.
This coupled with other refinements results in a new estimate for depreciation and amortization of between $340-350m for 2002.
Our original guidance for net interest was between $270-290m.
Based upon continued favorable interest rates, our fixed floating mix, and the financings we have completed this year, we expect that [indiscernible] will come in at the low end of this range.
Based upon these assumptions we believe the current 2002 full year consensus of $1.38 is reasonable.
However, analyst estimates appear to be too low for Q3 and too high for Q4.
Looking forward, the booking period for 2003 is just beginning.
This coupled with the limited visibility resulting from the current close-in booking environment makes it difficult to provide guidance for next year.
However, if 2003 yields return to 2001 levels the company expects that it will meet or exceed current consensus for a 2003 full year result.
At this point I'd like to turn the call over to Jack.
Jack Williams - President
Thank you, Bonnie and good morning ladies and gentlemen.
I'm just going to spend a few moments to talk a little bit about our booking activity, give you some highlights by major product, give you kind of a sneak preview of a exciting marketing campaign that's coming out on the Celebrity brand we just released now and then just talk a little bit about our two new ships.
Before I get into the booking activity I'd just like to draw your attention to slide number four where we do talk a little bit about the capacity projections for 2002 and 2003.
This is always of interest to this audience and as you can see we'll close 2002 with a 15% increase in capacity and 2003 we are projecting a 12% increase in capacity.
If you look at slide number five in the slide program, we have laid out what our deployment looks like in 2003 vs. our current deployment now in 2002.
And the most significant change you can see in those pie charts is that we'll see a substantial increase in our European capacity in 2003, as we redeploy three more ships back into the European market and our core seven-night Caribbean is currently 42% of our capacity and will continue to be 42% of the new capacity in 2003.
As we look at the booking activity, we continue to be very pleased with the booking activity from both the rate and volume perspective.
Pricing continues to strengthen and improve almost on a weekly basis.
If I can refer you to graph number six in our slideshow, I think this really illustrates what's been going on since 9/11 and we have had similar slides in our previous conference calls but this is a net APD build discount slide and as you can see coming out of 9/11 we had dramatic discounting and it really peaked in the November/December period.
It was really due to this kind of discounting that we had to do to stimulate demand that really caused us to uh, to uh see the kind of yield declines in 02 that we're seeing as Richard mentioned in his comments prior to 9/11 we were expecting to have a good yield environment in 2002 so we really had to discount the market to get the demand up after 9/11.
As we moved into the [indiscernible] period you can see that was really reduced discounting during that time period, in the low single digits kind of discounting and then as we move into the March period and you can see right up to the end of Q2 there, our net APD build was actually improved on a YoverY basis and this is really very encouraged by these kind of trends and as I say on the pricing front, both the rate and the volume performance is very good at this time.
We also continue to stimulate demand closer in without significant discounting.
If you look at chart number seven in our slideshow that shows you that this close-in booking pattern continues with us.
It has been with us since 9/11.
You can see Q1 sailings and Q2 sailings and then we put the month of July in there for another perspective but once you get about 10-11 weeks prior to departure, you get almost this hockey stick kind of jump in our load factors and that continues on and we're pricing against those kind of dynamic curves that we didn't see prior to 9/11 and its preventing us from discounting the product too early into the selling cycle and I think that's impactinf some of the better yield performance that we're seeing right now.
This has also allowed us to improve our load factors on the YoverY basis.
Q1 our load factor was 104% vs. 103% last year.
As we reported now in Q2 our load factor is 105% vs. 103%.
In Q3 our book load factor right now is just slightly behind last year but we are projecting that we will finish slightly ahead of last year as we get into these closer booking patterns and this is the same with Q4.
And, of course, that has helped our, quite substantially, our onboard spin as we continue to improve the occupancy.
So given these very, very positive trends, as Bonnie and Richard mentioned, our yield outlook has improved quite significantly from our earlier guidance.
We are now looking at a full year to be down approximately 2-3% and, as Richard mentioned, I think the two major decisions that we made coming out of 9/11, first to redeploy out of Europe and back into the [indiscernible] markets of North America, secondly to go ahead and do some dramatic discounts to stimulate demand so we could begin to revenue manage our way out of the situation we are in has proved to be, served us quite well and I think this is one of the reasons that we are seeing the kind of yield guidance today that we did [indiscernible] six, seven, eight months ago.
For 2003 our visibility remains somewhat limited given the new close-in booking fares but we are pleased what we see at least in Q1.
Our load factors are slightly behind where we were same time last year and pricing is slightly ahead of where we were same time last year.
As we continue on throughout 02 of course we'll get a lot more visibility in 03 and be able to talk to you about that in our next call.
Turning to some of the major product highlights, the seven-night Caribbean as I mentioned earlier in the deployment chart is 42% of our total capacity.
That is a 20% YoverY increase in capacity.
Our load factor is slightly behind last year and our APD's are also slightly down but this is one market where we really continue to stimulate strong demand on a close-in curve.
The Voyager class ships continue to be the ship of choice in the Caribbean and they performing quite nicely and they are getting a premium to the other competition out there as well to our other ships in the Caribbean so they are doing very, very well.
On the short products, they represent 17% of our total capacity.
We've seen a 7% increase in this product line YoverY.
Our load factor right now is flat with last year.
The APD's are slightly down but our current pricing in this product line is right on par with last year with the new bookings that we are taking on.
Alaska, a very, very important core seasonal market to uh, to us.
It's 8% of our total capacity.
We've had an 8% increase in capacity on the YoverY basis, load factors on par with last year, APD's are just slightly down but the new business that we are building in Alaska right now continues to [indiscernible] above same time last year.
Europe, as you know, we declined our capacity significantly after 9/11 when we reduced by about 42%.
It's now 5% of our total capacity and will go up to 9% in 03 as we redeploy back to Europe.
It has been a good story.
Our load factors are just slightly behind last year but our APD's are up substantially due to the uh, to the large decline in capacity.
Pricing in Europe remains very, very strong and uh and we think its going to continue on as we move these ships back into Europe in 2003.
Turning to the loading discussion about the Celebrity marketing campaign, we are in the process of launching a major new advertising campaign for the Celebrity brand.
The new campaign is really the result of about six months of very extensive research and evaluation of Celebrity brand positioning, primarily focused on defining the Celebrity mindset.
In your slideshow we have really provided just three of the trade ads that we have out there right now.
They're slides number eight, nine, and ten.
This is a campaign that they call "X Equals".
In our research we found that the major reasons that people do sail with Celebrity is they want rejuvenation, enrichment, and connections so we're going to make the "X" which is the major icon for Celebrity stand for enrichment, rejuvenation, reconnection.
We call it the "X Equals" campaign.
This is in the trade right now and we'll be moving to the consumer campaign in September.
With that I'll just talk quickly.
We have two new ships in the fleet.
Since we talked to you last we have the Constellation.
We have a picture of that.
We took delivery of, this has a capacity of 1950, total cabins, I'm sorry, total cabins of 975 with ocean-views at 780.
The ship is currently sailing in Europe and then will reposition into the seven-night Southern Caribbean in November.
And then we have the Brilliance of the Seas, beautiful ship, total cabins 1056, ocean-view 815, total passenger capacity 2100 and she is currently doing the twelve night Scandinavian cruises and will reposition to Boston in October to do Canada and New England cruises and then down into Miami in November.
But too, we have two new ships in the fleet we're very proud of.
And I think with that we'll turn it over to Richard to do the q-and-a.
Richard Fain - Chairman and CEO
Thanks Jack, Bonnie.
Um, operator I think we're now prepared to take questions and uh, if you can put them through.
Operator
At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad.
We will pause for just a moment to compile the q-and-a roster.
Your first question comes from Felicia Kantor of Lehman Brothers.
Felicia Kantor - Analyst
Hi, good morning.
Um, I have a couple of questions for you.
First um, just relates to the economic environment and you were giving concerns about the economy I would think that um, that um one of the questions that the cruise line has is that you mentioned you have you did some redeployment which really helped and um the press release indicated that the air/sea mix was lower so, you know I would think that the fact that there are more drive-to ports than ever, which does eliminate the air portion, it could perhaps create a cushion.
Now I'm wondering two questions.
One is what percent of your itineraries now come from drive-to vs. last year and where do you think it will be next year?
And then my second is if you could just comment on your um assumption in the release that the air/sea mix would return to, might return to normalized levels.
I was wondering why you would think that.
My next question does have to do with the operating leases and um Bonnie I wanted to thank you for the clarity there.
You answered a lot of my questions but I'm wondering if this is something you are going to pursue more in the future.
Richard Fain - Chairman and CEO
Um, OK Felicia, good morning.
You've asked a number of questions.
Um, um, just one comment to be clear, the reduction in the number of people who take our air/sea package is partially a function of the fact that people are driving, but actually I think we would say it's probably more a function of the fact that people are arranging their own air because of the, the frequent flyer mileage, because of the special arrangements that the airlines are offering, they are only done at last minutes or on noncancelable ticket.
So we actually think that that's um, um a bigger factor.
The other thing is, um I'm not sure we're prepared to make much of a prediction about what that percentage will be.
What we tried to do in our, in our report was to you know historically you could look at operating cost, since those numbers were, percentage wise were relatively stable, you could ignore it.
Now that those numbers seem to be more volatile, what we try to do in our statement and we will try and find better ways to show that in the future is to isolate out that factor since it is, you know we do the air portion pretty much as a pass-through and therefore it has relatively little economic value to us.
So, um what we're trying to say is that should be irrelevant and in the long term um, we're suggesting that you focus more on what we call the running cost and SG&A and we'll try and provide you in the future with more insight into that.
Um, ah, let's Jack answer the one and then maybe Bonnie wants to answer about more [indiscernible].
Jack Williams - President
Yes, just a quick comment please coming off what you said on the air market and your interest on whether or not we are returning to a more normalized market in that regard.
Right after 9/11 we saw a pretty significant drop-off in San Juan and that's the major air market for us and we had to rely upon a lot of the local market to fill the ship.
That's now returned back to its normal uh, kind of pattern of air/sea [indiscernible] and I think that's a good indication that people are flying and getting back to their normal ways of getting where they want to go and we're not nearly as dependent now on San Juan and the local market as we have been.
It's a good air market right now.
And I think that's just an indication of things being back a little bit more to normal.
Bonnie Biumi - Acting CFO
On the lease front, in financing our new build programs, we always try to remain the most flexible, maintain the most flexibility we can and for each ship we'll look into the market and see what the best financing alternatives are.
So it'll depend upon availability and pricing of all financing alternatives and of course we will take into consideration in that our desire to return to investment grade.
Richard Fain - Chairman and CEO
Felicia, I just want to ask, answer one question that's related to what you asked and that is I think its important that you and everyone else understand that the drive markets are actually something that probably we, that probably we were heading towards anyhow.
They do say every cloud has a silver lining and one of the silver linings here is that it has sped up the develoment of some of these new markets.
A perfect example is Galveston.
We were going to go to Galveston anyhow but it would have been later on and what we've done is we've gone to that market and we have found that independent of the affect of 9/11 it's a very strategic move for us so I think a lot of these which were accelerated or created because of 9/11 will now become a more permanent part of our portfolio and it does show the benefit of being in this industry where we can redeploy assets in a way that gets us the maximum levels of yield and again you're seeing that in Europe, where we expect to be going back next year and the early indications are quite positive there too.
Felicia Kantor - Analyst
Thank you very much.
Operator
Your next question comes from Jill Krutick of Solomon Smith Barney.
Jill Krutick - Analyst
Thank you very much.
Good morning.
Um, it seems that there's a lot of capacity going into Europe next year and I was hoping you could allay some concerns that that there might be some absorption issues that might be seen in certain markets there, um so I'd certainly be interested in your perspective on that.
And secondly in terms of just what all the recent stock market activity and recent trends that we've heard from Carnival over the past few weeks, have you seen more sensitivity to bookings or ongoing sensitivity to um any flare-ups on the terrorist side, or warnings as it relates to that, or general consumer jitteriness?
Thanks.
Jack Williams - President
Yes, Jill, on the first question about our perspective on Europe next year, I think we're all quite confident that we can, going back to Europe next year makes a lot of sense.
We expect we will benefit from some pent-up demand and we usually see that after a year when people don't travel to Europe, specifically the pent-up demand we see a very strong bite this year in the European market given the capacity that we left there and the demand came in quite well as well and so we're quite encouraged about the European front.
Of course, you don't know exactly what might happen as it relates to the mid-east crisis but as you saw after 9/11 we were able to redeploy quite quickly and we were able to get people on the books and manage our way through that process so we're pretty, we're pretty convinced that Europe's going to do quite well next year.
In terms of the stock market activity and the volatility there and how it might be impacting the bookings, it's amazing we just have not seen a significant impact as the market has been taking its wild ride over the last five or six weeks and we continue to get good demand and we continue to see the price is strengthening on a weekly basis.
Jill Krutick - Analyst
Just following up on Europe, um, could you give us a sense of what kind of capacity growth you anticipate um, the industry will see next year or if you have it, you know, more specific in terms of regions and whether you're anticipating a positive yield outlook next year in Europe.
Jack Williams - President
Uh, a little you know I'm not exactly sure what the industry growth is going to be obviously as we have three more ships our capacity will be up over 100% next year in the European market.
Um, I'm not exactly [indiscernible] exactly what everybody's going to do next in Europe and again not to be too repetitive about it, Europe's always performed well for us.
We had big ships there prior to 9/11.
They were all booked quite well before we had that event and it's always been in our long term strategical plan and interest to continue building our European presence.
We have a big demand from the North American market and we also have a good sales market in Europe where we can also fill from the European continent so Jill we're just, we're quite convinced this would be a good move and should help our yield performance as both summer 03.
Jill Krutick - Analyst
Great.
Thank you very much.
Jack Williams - President
OK.
Operator
Your next question comes from Robin Farley of UBS Warburg.
Robin Farley - Analyst
Right, thanks.
This is a great quarter.
I wonder if you can give a little bit of color on, you said one of the reasons for the yield improvement year to year was the yield management systems that you are using.
Can you talk a little bit about what type of yield decision-making might be different than what you were doing last year?
Jack Williams - President
Well clearly the one thing Robin that changed significantly are the booking periods and we continue a significant portion of our business within 30 days of sailing and so we had to really react to that quite quickly and we did.
I mean if we would have continued managing our pricing based upon the historical curves that had developed over many, many years we would have been making the wrong decisions about pricing so within a few weeks after 9/11 we saw these curves and we started making all of our revenue management decisions based on these new what we would call dynamic curves and we are still trying to understand and it's going to take more time to see if this is a permanent change in the booking behavior of our customers and whether or not it will go back to where it was prior to 9/11.
But that was the biggest change.
We have some very bright people in revenue management.
It takes a lot of willpower to move in that direction very quickly because you've got to be right and I think that they've done an outstanding job.
They are right.
They are withholding doing any significant discounting that they otherwise would have been doing had they been managing this business on the historical curves not on the new dynamic curves that are in place.
Richard Fain - Chairman and CEO
If I can just add some more color to that Robin, um, you know one of the things that I think everybody understands is that this is both an art and a science and we've had some fairly dramatic improvements on both levels.
The art element of this is, as Jack referred to, you know a whole yield management system is based on data and the more data you have the better you can manage it and also you assume the data is consistent.
I mean you have something like 9/11 and Jack talked about the change in the curves.
That changes all your modeling and that requires an awful lot of judgment, um, um and conviction and um, I think, but now by the way I am little bit concerned because I suspect that some of our yield managers may be on the phone and I don't want to, I don't want them to get too happy about their performance but I think they proved their metal and I'll say it while I know they're listening they did prove their metal in terms of their judgment, in terms of their ability to adjust their models to take this into account.
The other thing is which I think was part of your question they have also improved significantly the science of this so our systems that manipulate this data because it's staggering amounts of data that are used and the more the problem isn't getting the data the problem is getting the data in a meaningful way.
And their ability to review that data and turn it into an actionable form improves day by day.
Robin Farley - Analyst
Great.
And then in terms of forward guidance I know there are a lot of different pieces, I just want to make sure I understand in aggregate are you saying that for both the remainder of 02 and also in terms of what you're seeing so far in 03 bookings that at the moment you're still behind in terms of the total percent of capacity booked but that prices coming in today are in the positive territory for both the second half, or at least Q1, and then in 03 that prices coming today are a positive.
Jack Williams - President
That's correct, Robin.
Right now we uh, wecontinue to be somewhat booked behind where we were same time last year but given again the change in the booking periods that we've discussed we expect we are forecasting that we will, on a load factor, be above where we were last year off 02 and right now the pricing is on par with what we were getting last year.
And for 03, as I mentioned in my opening comments, very, very limited visibility at this stage but what we do see is what we expected to see, that is slightly below last year in the first quarter in terms of load factor and its slightly ahead in terms of price [indiscernible]?
Robin Farley - Analyst
Great.
Thanks.
Actually just two housekeeping numbers, I wonder if you can just quantify the impact of fuel in the quarter, and then any fees to extend the options which I guess would not be in the June quarter but do you expect any, to extend the options or anything unfavorable in terms of contract price for the options [indiscernible].
Bonnie Biumi - Acting CFO
Ok on the fuel basis, fuel was up this quarter.
On a pricing basis what we're paying at the pump actually has caught up with the trend in the [WDI] market.
Um, it was about $6m more this quarter from last quarter and $6m more from last year, so it's up $0.03 impact to the quarter.
On the ship basis, um there was no fees for the extension of the options and there has been no changes in the price.
Robin Farley - Analyst
OK.
Great.
Thank you.
Operator
Your next question comes from Richard [Rubin] of [Hawkeye] Capital.
Richard Rubin - Analyst
Is there any thought at this point to cut the dividend for liquidity reasons?
Richard Fain - Chairman and CEO
Uh, no.
Richard Rubin - Analyst
And are there any covenants with regards to the revolver that we need to think about?
Bonnie Biumi - Acting CFO
No.
There's four covenants.
There is a minimum liquidity covenant.
There is a total debt to capital, which is 62.5%.
There's a fixed charge ratio and a shareholders equity and, um as you can see we're not close to any of those.
Richard Rubin - Analyst
Good.
Thank you.
Operator
Your next question comes from John Maxwell of [P&B Therapists].
John Maxwell
Good morning.
Richard I wonder if you could just touch a bit on the options, kind of a follow up.
Kind of what your thinking is, is it more of a function of comfort with the market or you know, is it financing you know before you, and then how much longer could you [indiscernible] it before the delivery dates would have to be pushed out from the 05 and 06?
Richard Fain - Chairman and CEO
Um, OK.
Hi John.
John Maxwell
How are you?
Richard Fain - Chairman and CEO
Nice to talk to you.
Um, it's um, uh I don't think its appropriate for me to talk about the commercial side of the question of our possible capacity increases.
Uh, in terms of the technical side, um, I'm actually not sure of the answer.
I don't know whether Jack is.
He's shaking his head.
I think, um, I suspect let's see deliveries in 05, I think we would have to be doing something this year just mechanically uh, I mean physically, in terms of the yards' construction program.
Um, there may be other things effecting the yards but I think the yards construction program would require, I'm struggling a little bit on that because I don't actually know the answer but I suspect it would be just from a physical point of view by the end of this year.
And while I think its not appropriate to comment on the commercial side of that, I will say we are also fully intending to bring ourselves back to investment grade quality.
The continued improvement in the outlook helps that I think obviously.
Um, and that will play a part in our thinking as well.
John Maxwell
OK.
Um, and let's switch gears just a touch.
The, um the, if you could just update on the status of the joint venture for, with P&O, is that something that you still, you're still working on or is that kind of on hold until the, you know, until the merger is worked out one way or the other.
Richard Fain - Chairman and CEO
Well, um, it's um, I think we've commented on the joint venture before and we've, we, some of the things that had, that were specifically mentioned at the time but it's, it's really very difficult at this stage to talk about the joint venture without talking about the whole status of the transaction with P&O Princess and um, and I don't think that's something we would like to get into.
John Maxwell
OK.
Alright.
Thank you.
Operator
Your next question comes from [Chris Cox] of Goldman Sachs.
[Chris Cox]: During the year you had stated that the um, the redeployment, I guess from Europe would have a negative impact on your Q2 and Q3 yields.
I guess, based on what you, you guys can estimate, has that ultimately ended up being the case?
Um, and then next year it sounds like you're still expecting um, a positive impact from the ships going back to their prior itineraries and I just wondered if you can confirm that.
Bonnie Biumi - Acting CFO
Yes, um [Chris], we said that yields would be affected by 2% in Q2 and 4% in Q3 and that's still our best estimate of what happened.
Um, and as a result, when you move the ships back to their itineraries next year it should have a positive impact.
[Chris Cox]: That's fine.
Operator
Your next question comes from David Leibowitz of Burnham.
David Leibowitz - Analyst
Let me add my congratulations to a very fine quarter.
Three brief questions: in your comments you said that you thought that Q3 would beat the consensus of street estimates but that Q4 would be a bit lower.
Could you explain why Q4 would be lower.
The second question is that when we look at 2003 as a full year do you expect that pricing will be back to at least 2001 levels pre-9/11 and lastly, in terms of the brand identities, we have a major push on with Celebrity and yet Celebrity pricing appears to be lower than RCL pricing, at least in the Sunday New York Times Travel Section for specific overlapping routes.
Could we get into those three points, please?
Jack Williams - President
Um, why doesn't Bonnie answer the first question and I'll take the second two.
Bonnie Biumi - Acting CFO
OK.
On the first question I think it's important for you to remember that 4Q01 we lost close to $40m, or $0.20 a share.
And Q4 tends to be seasonally the weakest quarter, and when you couple that with um, the spending, um timing up our spending this year where it is back, it's weighted in the back half, I think that explains why you're going to see the change in the estimates.
David Leibowitz - Analyst
Thank you.
Richard Fain - Chairman and CEO
On the expectations for 2003, um what we've tried to make clear was that it's really too early for us to give um, a, a forecast for 2003.
But we wanted to be as helpful as we could and to give everybody a, uh, in effect a stake in the ground of what the year would look like under one situation, which I think everybody can relate to, which is that it recovers to the same levels we had last year.
Now it is too early to say that that is going to happen or its not going to happen and it's going to be better or worse than that.
You can make your own judgments on that.
Obviously we think 2001 was a lousy place to start so obviously we would hope to be doing better and as we and I think the [indiscernible] other cruise lines have indicated that if bookings were at the level we've experienced during 2002 or 2003, if it had been that way and we had not had all the kinds of negative pricing at the end of 2001, 2002 would have exceeded 2001 so um, but its too early for us.
First of all, it would be too early under any circumstances and its especially too early given the short booking cycle curves that Jack mentioned for us to have any, be able to give any significant guidance on profit.
Bonnie Biumi - Acting CFO
But I think there are some very important points to remember with respect to we are redeploying to Europe next year.
We will not hopefully have to make up the same hole that was created by 9/11 and the discounting that happened post 9/11.
And we do have a better mix of balcony cabins to non-balcony cabins so all those things should help wall to wall to working towards that goal.
Richard Fain - Chairman and CEO
And the last point...
Richard Fain - Chairman and CEO
Sorry, David but I think Jack's going to add something on that.
David Leibowitz - Analyst
Oh, I'm sorry.
Jack Williams - President
No, I was just going to talk to his last point in terms of the brand identity.
I think that's what you are referring to in terms of Celebrity's current positioning and its pricing vis-a-vis the sister brand, Royal Caribbean.
I think you made a comment, David that at least in the pricing in the New York Times for an equivalent itinerary, Celebrity was somewhat cheaper that week.
Keep in mind, those are lead-in pricings that you see in the Sunday Times.
That's to get the phones ringing and Celebrity on a, you know on average, on an equivalent itinerary will get a premium to Royal Caribbean.
And when you think about it, Royal Caribbean's been in the business a long time, is a very strong brand, has a very good product.
Royal Caribbean should be getting a premium to Celebrity.
They have not been in the business that long and they've come a long way, they've got a great product and for leverage pricing to even approach Royal Caribbean, as I said on average it will exceed it.
It is getting a good premium given its age in the marketplace and uh, the whole new advertising campaign that we just talked briefly about today, you'll see a lot of that in the coming months.
I think it's going to do a terrific job much like the "Get out There" campaign for Royal Caribbean in attracting the right mindset, the right demographic to the brand and so we're very, very excited about Celebrity's future and its upside in terms of ongoing and equivalent prices on that brand.
Richard Fain - Chairman and CEO
And I think, if I could just add David, you know, as you well know we've gone through a process at Celebrity in a very short period of time of moving it up to a critical mass.
We've built the brand in scale, I mean we had last year 30, no 33% increase, 35% increase in capacity last year.
In two quarters we had over 50% increase in capacity so I think we consciously made the decision, I know we've talked about it before, to um, um rapidly increase the size of that brand to a critical mass and we've now taken delivery of the last of the ships so we have the critical mass in place.
You saw the picture of it [indiscernible] to go back to it because it really is a spectacular ship and its doing very well and it think um, given a more normal situation now that the critical mass has been achieved, that will also be a factor.
David Leibowitz - Analyst
Um, I guess my only point would be that Celebrity is a luxury brand and they do a very, very fine job.
Royal Caribbean is a contemporary brand and it would be akin to General Motors putting a lower entry point on their least expensive Cadillac to the entry point on a Chevrolet.
I would just expect that Celebrity would be priced even for its lowest priced inside cabin, at a higher price than RCL and that was the only point I was trying to make and I apologize if it was misunderstood.
Richard Fain - Chairman and CEO
You have no need ever to apologize, David.
I'm glad you follow us that closely and we're definitely moving in the direction [indiscernible].
David Leibowitz - Analyst
Thank you.
Operator
Your next question comes from Dean from J.P. Morgan.
Richard Fain - Chairman and CEO
Hello, Dean.
Dean Gianoukus - Analyst
All my questions have been answered, thank you.
Richard Fain - Chairman and CEO
OK.
That's the best question of all.
Operator
Your next question comes from Helene Becker of Buckingham Research Group.
Helene Becker - Analyst
I just have a couple of questions, Bonnie, with respect to the capitalized lease on the, or rather the operating lease on the new ship.
Is that the first time you've done an operating lease.
Bonnie Biumi - Acting CFO
It's the first time we've done an operating lease for the ship.
We do have other operating leases on office buildings and other things.
Helene Becker - Analyst
OK, so when you talk about your leverage ratio, your net debt to cap, are you capitalizing that operating lease?
Bonnie Biumi - Acting CFO
No, we are not.
It only has, it has less than 2% effect on that though.
Helene Becker - Analyst
OK.
Um, so if we put it on your balance sheet at a 7.5% rate, would you argue with that?
Bonnie Biumi - Acting CFO
Well, the rate in the lease is 5.75% so...
Helene Becker - Analyst
Right, you said that.
Bonnie Biumi - Acting CFO
Yes, I would be disappointed.
Helene Becker - Analyst
Right.
Sorry.
Thank you.
And then the other questions is, with respect to your forward guidance, just to understand this correctly when you said that you thought that Q3 numbers were too high, too low rather and Q4 was too high, did you mean to imply in your response to someone else's question that you would in fact lose money in Q4 but less than what you lost last year.
Bonnie Biumi - Acting CFO
I think that that's possible given the weighting of the expenses in Q4 and that the yields are still depressed from pre-9/11 levels, I think that it's possible that that could happen.
Helene Becker - Analyst
OK.
Great.
Thank you very much for your help.
Bonnie Biumi - Acting CFO
You're welcome.
Operator
Your next question comes from Peter McMullin of Ryan Beck.
Peter McMullin - Analyst
Good morning.
To clarify a point, I guess in the conference call that Carnival had a month ago they mentioned they saw a slowdown in bookings in June.
That was confirmed by other leisure companies that we talked to.
I understand from your comments you did not see a similar slowdown and if not, why not?
Jack Williams - President
No, Peter.
We didn't see any significant slowdown in the time period that you referenced there.
I think a lot of it is, is the, that you mention in your opening comments this marketing campaign that we've had going on in Royal Caribbean for some time has really taken hold, all the research that we've done on this campaign is pointing to the fact that it's a major, major success and I'll just give you one example of the new Alaska commercial that we've been showing.
When we researched that independently 84% of the people who watched that commercial wanted to call us and take the cruise so that's one of the reasons that we put some more marketing spin back into the ground, because when you've got a success like that going on you want to keep it out there and keep the track in the [indiscernible] so we did not see a significant drop-off in that time period.
We continue to see good volume and internally we continued to dictate some of our expectations, primarily on rate which again is encouraging because typically, if you are stating your internal forecast on rates, not volume, it's more sustainable because you're not burning up all your [indiscernible].
Richard Fain - Chairman and CEO
Operator I think we have a chance for one more question.
Operator
Your final question comes from Andrew [Berg] of [FMA].
Andrew Berg - Analyst
Yeah, actually there're going to be a couple questions.
Um, just going back to the options, should we read anything into that as to how those are playing out vs. the potential merger.
Can I get you to comment at all?
Is that something where you're putting them off because you'd expect to, you're expecting this to go through and you might not exercise them then?
Richard Fain - Chairman and CEO
Um, uh I don't know that you should read anything into it other than what we've said.
We haven't tried to hide anything in our statement.
Um, I think we've just tried to be straightforward.
I think clearly if the merger does go through, as we hope it will, um, it has a lot of implications that one tends to rethink your strategic direction.
Um, in what way that is I can't answer so I think it's appropriate for us just to let that dust settle before we make those kinds of decisions.
Andrew Berg - Analyst
OK.
And then with respect to um, the leases, on Constellation it's set at LIBOR plus a point and a half.
Did you guys swap that in the fixed rate?
Bonnie Biumi - Acting CFO
No, we have not and that's not a lease that is just um, a straightforward financing.
Andrew Berg - Analyst
I'm sorry.
That's correct.
Is there any intention to swap that or are you going to leave it floating the whole time do you think?
Bonnie Biumi - Acting CFO
It'll depend you know we do have a, a hedging policy and we try to maintain a fixed floating percentage between 40-60% we're about midpoint in that range at this point so it'll come into play in our overall strategy and what we think is going on in the market.
Andrew Berg - Analyst
Ok and for Constellation that was what, about $325m?
Is that the right number?
Bonnie Biumi - Acting CFO
The contract was $350m and the financing was 80% of total costs and I don't have that number available right now.
Andrew Berg - Analyst
OK.
Do you happen to have what your capitalized interest was in the quarter?
Bonnie Biumi - Acting CFO
I don't, but if you call Erin Williams after the call I'm sure she'll be glad to give it to you.
Andrew Berg - Analyst
OK.
Uh, And then I just missed you guidance for interest expense for the year.
Bonnie Biumi - Acting CFO
The guidance for interest expense originally was $270-290m and I said we would be at the low end of that range.
Andrew Berg - Analyst
Great.
Thank you very much.
Bonnie Biumi - Acting CFO
You're welcome.
Richard Fain - Chairman and CEO
Thank you all for joining the call.
We appreciate the chance to talk about it.
Operator
Thank you for participating in today's teleconference.You may all disconnect.
Richard Fain - Chairman and CEO
Thank you, operator.