Recently, Disney Cruise Line’s annual report for fiscal year 2019 was filed and it includes interesting insight within the strategic report compiled by the directors on the impacts of the coronavirus pandemic on the cruise line.
Before we get into the details, it is worth mentioning The Walt Disney Company released their FY19 earnings report back in November 2019. Disney Cruise Line is part of the Disney Parks, Experiences and Products division, More often than not, there is very little mention of the cruise line during the quarterly earnings webcast and report. Due to the company’s size, Disney Cruise Line’s financials are bundled in the Disney Parks, Experiences and Products line item leaving little insight into the cruise line’s business. Since, Disney Cruise Line is actually Magical Cruise Company, Limited registered in London, it is required to submit an annual report to the United Kingdom. Most years, the annual report is published in the summer, but this year it was delayed until early October.
Remember, the financial information in the annual report is for FY19 (year ending September 28, 2019), we will get to this eventually. The interesting information, prepared on behalf of the Board dated September 23, 2020, from the strategic report is transcribed below.
Magical Cruise Company, Limited
Strategic report for the year ended 28 September 2019
The Directors present their Strategic report for Magical Cruise Company, Limited (the ‘Company’) for the year ended 28 September 2019 (prior financial year ended 29 September 2018).
Principal activities, business review and future developments
The Company’s principal activity is the operation of luxury cruise vessels. It is considered that the Company’s activities will remain unchanged for the foreseeable future.
The Company’s profit for the financial year is $406,170,000 (2018: $405,197,000). The Directors consider the results for the year and the financial condition of the Company at the end of the year to be satisfactory and look forward to the future with optimism.
Revenue and Operating Income increased year over year primarily due to higher average ticket prices for sailings.
On 10 September 2019 the Board of Directors approved the reduction of share premium of $613,442,000 to be transferred to a distributable reserve.
In December 2019 there was an outbreak of COVID-19, which the World Health Organization declared a pandemic on 11 March 2020. COVID-19 pandemic created a significant impact on the short-term operations of the Company.
Cruise ships have been suspended since 14 March 2020 and have not yet resumed operations. There is uncertainty on when operations will resume as this is reliant on government guidance. All departures are suspended until at least December 2020.
The Company has experienced increased cancellation and booking postponement requests which has led to refunds, cruise credits of 125% of the reservation amount as well as future booking payment deferrals. The Company has introduced a short term cruise date flexibility booking policy allowing guests to change their sail date up to 15 days before departure.
Operational expenses have been reduced or mitigated as a result of the suspension of all cruises, this includes reductions in operating labour.
DCL Maritime LLC (a related legal entity) has credit facilities to finance three new cruise ships, which were originally scheduled to be delivered in calendar 2021, 2022 and 2023. The impact of COVID-19 on the shipyard has resulted in a delay to the delivery of the cruise ships.
As the situation continues to evolve, the Directors continue to monitor closely by way of ongoing risk assessments and revised projections for the business. The Directors are managing day to day working capital requirements closely with its related parent entity in order to meet the Company’s liabilities as they fall due.
The Directors have assessed COVID-19 as a non adjusting post balance sheet event. It is believed that the long lived assets of the Company have longer term prospects for sustained performance relative to the uncertain duration of the effects of the pandemic. Therefore, it was concluded that it was premature to consider any of these assets for impairment.
Principal risks and uncertainties and future outlook
From the perspective of the Company, its principal risks and uncertainties and future outlook are integrated with those of The Walt Disney Company (‘Group’) and are not managed separately. Accordingly, the risks and uncertainties of The Group, which include those of the Company, are discussed in The Group’s annual report which does not form part of this report. However, the Directors view the following as being the principal risks facing the Company:
1) Our sales may be adversely affected by changes in economic factors, political uncertainty and changes in consumer spending patterns
Many economic and other factors outside our control, including consumer confidence, consumer spending levels, political uncertainty, employment levels, consumer debt levels, inflation and deflation, as well as the availability of consumer credit, affect consumer spending habits. A significant deterioration in the global financial markets and economic environment, recessions or an uncertain economic outlook adversely affects consumer spending habits and results in lower levels of economic activity. Any of these events and factors could cause consumers to curtail spending and could have a negative impact on our financial performance and position in future financial years.
2) Our industry is highly competitive and competitive conditions may adversely affect our revenues and overall profitability
The cruise industry is highly competitive and our results of operations are sensitive to, and may be adversely affected by, competitive pricing and other factors.
3) A variety of uncontrollable events may reduce demand for our products and services, impair our ability to provide our products and services or increase the cost of providing our products and services.
Demand for our products and services is highly dependent on the general environment for travel and tourism. The environment for travel and tourism, as well as demand for other entertainment products, can be significantly adversely affected in the U.S., globally or in specific regions as a result of a variety of factors beyond our control, including: adverse weather conditions arising from short-term weather patterns or long-term change, catastrophic events or natural disasters (such as excessive heat or rain, hurricanes, typhoons, floods, tsunamis and earthquakes); health concerns including global pandemics (such as Covid-19); international, political or military developments; and terrorist attacks. These events and others, such as fluctuations in travel and energy costs and computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide our products and services or to obtain insurance coverage with respect to these events.
4) Changes in regulations applicable to our businesses may impair the profitability of our businesses.
These regulations may include, but are not limited to:
- Federal, state and foreign privacy and data protection laws and regulations.
- Regulation of the safety of consumer products and Cruise Line operations.
- Domestic and international wage laws, tax laws or currency controls.
- Environmental protection regulations.
5) Fuel prices
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline. With respect to the risks the Directors regularly review such matters to mitigate their respective impact on the Company.
Key performance indicators (“KPIs”)
The operations of the Group are managed at an operating segment level. For this reason, the Company’s Directors believe that an analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the business of the Company. The development, performance and position of the Parks, Experiences and Products operating segment of the Group, which includes the Company, are discussed on page 39 of the Group’ s annual report, which does not form part of this report.
On behalf of the Board on 23 September 2020.
W Diercksen Jr
3 Queen Caroline Street
London W6 SPE
For FY19, Disney Cruise Line reported a profit of $406,170,000 on $1,604,344,000 in revenue, and the directors consider the results for the year and the financial condition of the Company at the end of the year to be satisfactory and look forward to the future with optimism.
Revenue and operating income increased year over year due to higher averages cruise fares. The report addresses the significant impact of COVID-19 on the cruise line. Due to the cruise cancellations, operational expenses have been reduced or mitigated including reductions in operating labor.
Disney Cruise Line was originally scheduled take delivery of of 3 new cruise ships from Meyer Werft in calendar 2021, 2022 and 2023. However, the impact of COVID-19 on the Meyer Werft shipyard resulted in a delay to the delivery of the cruise ships with the Disney Wish slated to sail in Summer 2022.
Currently, Disney Cruise Line has operating leases for two luxury cruise ships through September 2023 and September 2024. The company makes semi-annual payments of $12,500,000 on these leases which were renegotiated in FY11.
The new cruise ships on order are LNG-powered, therefore, Disney Cruise Line entered into an agreement on March 29, 2019, for the exclusive procurement of liquid natural gas for the fleet expansion. Under this agreement, Disney Cruise Line is not required to make any payments on the LNG contract until 2022, the year the Disney Wish is slated to enter service.
The report shows the Directors have assessed COVID-19 as a non-adjusting post balance sheet event (occurring after the close of FY19). It is believed that the long lived assets of the Company have longer term prospects for sustained performance relative to the uncertain duration of the effects of the pandemic. Therefore, it was concluded that it was premature to consider any of these assets for impairment (recoverable amount of the asset with future cash flow is worth more than the fair value less cost to if the asset were to be sold or scrapped like some other cruise ships) . The Directors are managing day to day working capital requirements close with The Walt Disney Company, which issued a letter of financial support to the Directors for at least 12 months from the date of the the annual report in order to meet the cruise line’s liabilities as they fall due.
Furthermore, the Directors have reasonable expectation that Disney Cruise Line has adequate resources to continue operational existence for the foreseeable future.