Royal Caribbean Cruises Ltd Q3 FY2021 Earnings Call

Good morning. My name is Shelby and I will be your conference operator today. At this time, I would like to welcome everyone to Royal Caribbean Group's Business Update and Third Quarter 2021 Earnings Call. All participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. The operator provided instructions. I would now like to introduce Chief Financial Officer, Mr. Jason Liberty. Mr. Liberty, the floor is yours.

Good morning, everyone. And thank you for joining us today for our business update and Third Quarter earnings call. Joining me here in Miami are Richard Fain, our Chairman and Chief Executive Officer; Michael Bayley, President and CEO of Royal Caribbean International; and Michael McCarthy, our Vice President of Investor Relations. During this call, we will be referring to a few slides which have been posted on our investor website. Before we get started, I'd like to refer you to our notice about forward-looking statements, which is on our first slide. During this call, we will be making comments that are forward-looking. These statements do not guarantee future performance and do involve risks and uncertainties. Examples are described in our SEC filings and other disclosures. Please note that we do not undertake to update the information in our filings as circumstances change. Also, we will be discussing certain non-GAAP financial measures which are adjusted as defined and a reconciliation of all non-GAAP historical items can be found on our website. Richard will begin the call by providing a strategic overview and update on the business. I will follow up with a recap of our third quarter results. I will then provide an update on our latest actions and on the current booking environment. We will then open up the call for your questions. Richard.

Thank you, Jason, and good morning, everyone. As always, it's a pleasure to give an update on what's happening within the Royal Caribbean Group. It's certainly been a horrible year-and-a-half. Looking at our financial statements and seeing that sea of red ink is painful. But we are pleased to be looking at such a positive forward path. The reason we've gotten through this awful period of COVID as well as we have is because we've had our eye firmly on where we needed to go rather than on where we were at any given moment. The same approach is serving us well as we look to the coming months. Before I comment on our position going forward, I have to express my admiration for and appreciation of the men and women of the Royal Caribbean Group who have worked so hard, so diligently throughout this difficult time. The pandemic has cost us all dearly, but our people stepped up to the plate and worked so hard to get us through this period. They invented amazing protocols to protect our crew members and our guests. They put in place financing arrangements with the debt markets and they have taken care of themselves, their coworkers, and their families under some of the most trying circumstances any of us have ever experienced. To them, I say thank you; you are all true heroes. Now the pandemic is not yet fully behind us. It's still very present. But scientists have given us a good answer to this nightmare with effective vaccines and remarkable treatments. The Delta variant caused a temporary slowdown in our bookings, especially close in. But our trajectory for recovery remains very much intact. In this call, I intend to focus on where we're going rather than where we've been. We are all tired of talking about COVID-19. Every conversation doesn't need to start with a description of the trauma we've experienced. Every discussion doesn't need to dwell on how awful it's been. Fortunately, the path forward appears clear and very positive for our Company and for our industry. For some time now we have said that we hope to take advantage of the special features of cruising and make cruising one of the safest places on earth to spend your vacation. The numbers are now coming in and our objective appears to be validated. Our strategy has been to get the flywheel spinning. For over 18 months, our guests have had to deal with cancellations, interruptions, confusing rules, and changing protocols. These constant changes have added uncertainty. Thankfully, today, we are operating almost normally. Our published itineraries are being delivered on a consistent basis. Two-thirds of our ships are already operating and virtually everything will be back to normal in our core markets before the end of this year. Our goal is to start the new year with smooth, steady, consistent operations that will give our guests comfort and give travel advisors the confidence to book future cruises. Like the pilot of a plane during takeoff, prioritizing speed over altitude, we have prioritized spreading the wealth. We have prioritized starting up more ships even with lower loads per vessel, rather than trying for higher load factors on fewer ships. We have been executing this in a financially and medically prudent manner. January is the start of wave season and our goal is to have our core markets operating normally as quickly as possible. That will put us in an excellent position to have a good wave season. Our bookings are already showing that the public has a great deal of pent-up demand and is eager to travel again. We have a long period of poor bookings to make up for. But current booking trends give us a high level of confidence for 2022, especially from the summer on. We're not back to normal. However, predictions of a dramatic different new normal do not appear to be bearing out. Once aboard a ship, cruises today are remarkably similar to cruises before the pandemic. There are some changes, but most of these are not visible to the public and the remaining ones are likely to be temporary. Satisfaction levels among those who are cruising today are the highest in our Company's history and their onboard spending is also unparalleled. The recent announcement by the CDC that they intend to eliminate the prescriptive Conditional Sailing Order (CSO) in January is very welcome. Our own requirements and protocols are stricter than the CSO anyhow. The confidence level that they're demonstrating by the CDC's actions will help give confidence to the market. Now, while we are very encouraged about the strong bookings that we've been seeing, we do appreciate that we are still not in a normal travel environment. We are emerging from a period of lower than usual bookings. And our international sourcing, which has historically been a strength of the group, has been confusing due to the constantly changing travel restrictions, and is just now starting to build back. The image of the cruise industry from the early days of the pandemic is also weighing on the minds of consumers, albeit much, much less than previously. There's also a special story about what's happening in Asia and how that affects the Royal Caribbean Group. China was one of the fastest-growing markets, and we believe we'll continue to be an important part of our strategy going forward. However, as you know, China is essentially closed to international travel today and that includes cruise travel. We do not expect China to reopen until at least the Olympics in Beijing are over. Another important market for us is Australia. Australia's approach to containing the pandemic has been based on isolation. They are now rapidly switching to vaccines as a way of controlling the disease. We do not expect Australia to open to cruise travel until the spring. But since the summer season doesn't start until our next winter, anyhow, we're not counting on much from Australia until the end of next year. Against this background, our ability to predict a profitable 2022 is strong evidence of how quickly our future can get better. We are encouraged to see the return to profitability and strong cash flows as a rapid turnaround, rather than a slow, steady progression. It is unusual actually for us to provide any indication of next year's results this early. But we understand the need to have a frame of reference going forward and we wanted to be constructive in that regard. Obviously, there are a large number of factors that could shift us off this trajectory, including worsening spread of the disease, a new variant, inflation, etc. But on the current trajectory that we're seeing, we believe we can prudently predict at least this level of profitability and the cash flow. I'd also like to touch on two other subjects that are of interest to any Company: human capital and supply chain issues. Our people have been the strongest driver of our performance throughout our history so we watch this area very carefully and we are concerned by reports of labor shortages, especially in the hospitality arena. Fortunately, our shipboard jobs are seen as very attractive by crew members around the world. That has not been a serious problem as we restart and we do not expect that it will become one. Similarly, onshore, we have long been seen as a desirable place to work, and while the current situation is something every business person should watch closely, we do not expect it to interfere with our ability to operate successfully. Supply chain issues are impacting everyone and we're no exception. Fortunately, we have traditionally hedged our bets by buying key supplies forward. And this is cushioning us from the current volatility. Looking forward, we expect these contracts plus our purchasing power, plus our ingenuity to give us protection. Now while this pandemic has been all consuming, we have not been idle on other fronts either. The need to be a good corporate citizen, to behave in a way that we can all be proud of has remained an important part of our thought process even during this timeframe. Over the last few months, we've announced a significant number of highly significant steps forward on the environmental side of our ESG aspirations. A few weeks ago, we announced that the new Silversea ship called Project Evolution will contain some of the most advanced environmental features of any cruise ship on the water or in the construction docks. It will be a multi-fuel vessel capable of burning initially lower-carbon-producing LNG, and later as non-carbon-based fuels develop we'll work off of those. In addition, it will have fuel-cell technology, not as a demonstration project, but as a significant part of the energy capability of the vessel. As a result, it will be able to operate 100% of its hotel load purely on these emission-free fuel cells. That means not only won't a ship need to use its engines in port, but it can do so without even having to plug into shore power. This requires an amazing concentrated effort to develop the technology in conjunction with major partners and others. In addition, it will use waste-energy technology to convert rubbish to energy, and use advanced supply chain techniques to reduce the carbon generated during the construction process. An even bigger announcement this week was our disclosure of our new project called Destination Net Zero. This is an ambitious project to eliminate our carbon footprint by 2050. By signing up for the science-based targets initiative, we're not only setting a goal for the distant future, but also establishing the interim milestones that will allow us to get there with confidence. It's also interesting to look at the last 19 months and take note that during this period, we've taken delivery of five spectacular new vessels, and during the next nine months, we will accept delivery of three more. In fact, over the next fortnight, we will be naming two of these ships here in South Florida. We have not remained idle. Before I turn it back to Jason, I'd like to reiterate my appreciation for and the admiration of the people of the Royal Caribbean Group, who have gone above and beyond, not only to get us through the pandemic in far better shape than anyone would have expected, but have also prepared us to look forward to the future with confidence and, yes, even excitement. With that, I turn it back to Jason. Jason?

Thank you, Richard. Before I begin my remarks, I also want to echo Richard's comments regarding our incredible teams; the people of the Royal Caribbean Group are our strongest competitive advantage, powering our resurgence and delivering again the world's best vacations. I want to thank every member of the Royal Caribbean family for their ongoing and exceptional efforts and the incredible service and memorable experiences you provide to our guests every single day. I will now turn to discuss our performance for the third quarter. This morning, we reported an adjusted net loss of $1.2 billion or a loss of $4.91 per share for the third quarter of 2021. It's important to note that while these results may be below some of the Street estimates, our third quarter results and related cash burn were better than our internal expectations, driven by better cost and better onboard revenue performance. Onboard revenue strength contributed to a 12% increase in total revenue per passenger cruise day compared to the third quarter of 2019. In line with our expectations, our occupancy for the quarter was 36% with sequential improvements from one month to the next. From the very beginning of our restart, we talked about several tenets that would be the basis of our ramp up. The first was ensuring the health and safety of our guests and crew, the second was that we wanted to ensure that the vacation experience matched or exceeded our guest expectations, and the third was bringing the fleet up in a financially prudent way. So far we have delivered on all three of these tenets. We've carried over 500,000 guests since the restart, and have only had 150 COVID-positive cases amongst these 500,000 people. In addition to providing safe vacations, we're also clearly exceeding our guests' expectations with net promoter scores well above all-time highs. And once beyond the initial startup period, load factors on our core itineraries averaged 44% and all of those shifts were cash flow accretive. The last point I would like to make is that while we now have more than 65% of our capacity up and running, leading the industry by far on a relative basis, we are continuing to manage our load factors to ensure that we stay true to our healthy return-to-service tenets, as well as retaining price integrity. Now, I'd like to discuss capacity and load-factor expectations over the upcoming period. For the fourth quarter, a little over two-thirds of our capacity will be sailing core itineraries beyond the initial startup period. As such, our overall load factors will continue to trend up from one month to the next and are expected to be in the range of 60% to 65% in the fourth quarter. In addition, we do expect our fleet on our core itineraries to generate direct profit. Given our healthy return-to-service tenets and our focus on price integrity, we expect our load factors in 2022 to continue to steadily increase month-by-month and return to historic levels in the summer. From a capacity standpoint, we expect that 50 of our 61 ships will have returned to service by the end of this year. By the end of Q1 2022, we expect about 85% of our capacity to be operating with 100% back in service in the spring, in time for the lucrative summer season. While we are offering cruises in the vast majority of our key destinations, we continue to closely monitor both China and Australia and anticipate those markets will start opening in the spring. This timing could influence the return dates of a few of our ships. As to our balance sheet, we ended the third quarter of 2021 with $4 billion in liquidity. During the third quarter, we continued our efforts to manage and improve our balance sheet. To that end, we successfully issued $1 billion in senior unsecured notes at 5.5% due in 2026. These proceeds were used to replenish capital as a result of the redemption of 40% of 11.5% senior secured notes that were due in 2025. This redemption will result in a four-year interest savings of $51 million. As we discussed on other calls during the pandemic, we have taken and continue to take numerous actions to reshape our cost structure with a focus on further improving our leading pre-COVID margins. These actions include getting rid of older tonnage, and adding more leading, high-yielding, and cost-efficient hardware to our fleet. While these actions will improve our cost-structure and margin profile, we do anticipate the recent inflationary pressures and some transitory costs related to healthy return-to-service will weigh on next year's earnings. Now I'll give you an update on our 2022 sailings. At a macro level, we've seen a sequential improvement in new bookings from one quarter to the next. Bookings during Q2 were higher than Q1 and bookings during Q3 were higher than Q2. This Q3 improvement took place despite the long demand lull in August that corresponded with the rise in the Delta variant. September was a great booking month overall, with new bookings for 2022 more than 60% higher than the Q2 average. The momentum has continued for all three of our brands and bookings so far in October have been significantly better than September. Bookings from our two biggest markets, the U.S. and the U.K., have been improving week to week and are now exceeding 2019 levels. We have now restarted our brands' marketing programs, which are generating strong results and preparing us nicely for 2022 and 2023. From a cumulative standpoint, our booked load factors remain within historical ranges, driven by strong booking levels for the second quarter of 2022 forward. Load factors in the first quarter are lower than historical levels, but are aligned with our anticipated load-factor ramp up. Our booked APDs are up significantly both including and excluding the negative impact of FCCs for the full year and for each quarter of 2022. As always, trends do differ a little by itinerary with our core summer products in a stronger volume position than other itineraries. Our customer deposit balance is now $2.8 billion, an improvement of about $400 million over the past quarter, despite the significant quarter-over-quarter increase in revenue recognition, which reduces the customer deposit balance. Our customer deposit balance is less than 15% lower than it was at the end of September 2019 for the three brands with almost the entire difference driven by Q4 2021 sailings. Our customer deposit balance related to bookings in Q2 forward sailings for all three brands is higher than at the same time in 2019. Approximately 35% of our customer deposit balances are related to FCCs. Of all the FCCs, approximately 45% of them have been redeemed thus far. Now, considering everything I just said about the booking environment and cost, I would like to discuss our very early view of 2022. The Royal Caribbean Group possesses the best brands in their segments, the most innovative fleet in the industry, wholly-owned destination experiences like Perfect Day at CocoCay that are second to none, a nimble and effective global sourcing footprint and most of all the very best team both at sea and on land. This incredible and unique set of assets have helped us effectively manage through the pandemic and is now helping us accelerate out of it. As such, while it's still too early to provide guidance for next year, we currently anticipate the group generating positive EBITDA starting in the spring of 2022 and positive earnings for the full year of 2022. With that, I will ask our operator to open up the call for a question-and-answer session.

As a reminder, if you would like to ask a question, please use the operator's instructions. We do ask that you limit yourself to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. Your first question is from Steve Wieczynski of Stifel.

Hey, guys, good morning. I want to dig into your commentary about getting back to historical load factors by the third quarter of next year. What I'm wondering is how you're thinking about making that bridge from where you are today versus getting back to those levels. The question is, would you have been able to make that assumption if the CSO order was extended versus you guys being able to operate more independently? And I guess, asked another way, how much higher load factors does the removal of the CSO contribute and how are you guys now thinking about the vaccine mandates across different age demographics into next year?

Hey Steve, how are you doing? I'll just start off and talk a little bit about our load-factor build for next year. One, we didn't point specifically to the third quarter; I think we pointed specifically to the summer. We are preparing our business to maximize our revenues and profitability in this very lucrative peak summer season. Our load-factor ramp up is somewhere about 5 to 7 load-factor points per month. Again, we're doing this in a measured way. I'll have Michael on in a second here to talk about the CSO, but that's not governing our load-factor build. It's more about us thoughtfully ramping up our business based off of those three tenets of health and safety, guest experience, and doing things in a financially prudent way. But with that, I'll pass it over to Michael to talk a little bit about the things on the CSO side.

Thanks, Jason. Hello, Steve. I think with the CSO, we've been through quite a journey with the collaboration and the work with the CDC and I think if you think what we've been through in terms of determining the protocols and then executing them, I think it's fair to say that the industry and the CDC and the intergovernmental agency representatives who have been part of this return-to-service team feel like we've been very successful in implementing these protocols and they're proving, as we commented earlier, to be very successful. While the CSO comes to a technical end on January 15th, we will continue our ongoing collaboration with the CDC in terms of the protocols that will voluntarily operate after the CSO expires. And I think what's happened over this past several months is that we've really got a focused, collaborative effort and we found the relationship with the CDC has been very constructive. They certainly want to make sure that we're operating safely and they're also well aware that some of the protocols that we have in place will naturally fall away as the pandemic moves further and further into the rear-view mirror. I think as we move into 2022, hopefully what we'll see is the protocols become easier and less cumbersome for our customers. Having said that, and jumping on Jason's comments about load factor: while we've been extremely prudent and thoughtful about bringing back our fleet and managing the load factors, it's worth pointing out — and I'll use Royal Caribbean International as a proxy for the Company — we've brought back significantly more capacity, ships, beds, and berths than any of our competitors by a significant amount. And what that means is that operationally and logistically, we've already climbed over that mountain and we've now got a large number of our assets available for booking. More importantly, we've now gone through and absorbed many of those expenses, we've vaccinated all of our crew, we've managed to get all of our crew to these ships and we're operating them. One of the things that we were very cognizant of is the need to be very consistent with distribution and the customer because, as Richard pointed out, we'd had so many cancellations of ships over the past year and a half. And now we have this stability. So as we look into 2022, we feel pretty optimistic about what we've achieved with the CDC and the CSO. And I think we're feeling very optimistic about the fact that we've got so many of our ships already up and operating. And while we've talked about the load factors, it's worth pointing out that it's a story that's, for the purposes of this conversation, averaged out. Last weekend, Freedom of the Seas sailed from Miami with an occupancy of 85%. And that's one of the products that's particularly attractive to new-to-cruise customers. It's one of the products that we've been very focused on and making sure that we are learning and understanding exactly how our protocols are going to adapt to more capacity. We feel pretty good about what's happening. Thank you, Steve.

Thank you. That's terrific color. And then the second question would be maybe if you could help us, Jason, maybe help us think about some of the assumptions that you guys are embedding for next year to get you to that positive earnings level. I understand you're not ready to give guidance at this point, but maybe some high-level thoughts around how you're thinking about pricing from here, changes in onboard metrics, or how you're thinking about fuel for next year? Anything that you would call out to help us think about that would be extremely helpful.

Sure, Steve. Of course, we're still very much going through our planning process for next year. Our commentary around pricing and how we're seeing the business build back up are certainly what's supporting our current expectations around profitability for 2022 as well as the timing of cash flow. We have done a lot in the course of that consideration and we do expect there to be some additional costs that relate to inflation. We've hedged, I think, 53% of our fuel for next year. One of the things that will toggle here is that as Michael referred to healthy return-to-service protocols, there will be a series of transitory costs. A lot of those transitory costs we've absorbed this year as Michael talked about in ramping up of our fleet. But there will still be more ramp up that happens next year and depending on how some of these protocols, which are very much self-imposed around testing, evolve, that could impact our cost profile. But even considering all of that, that's why I think we feel at this point comfortable pointing the business towards profitability in 2022. As our plans start to firm up and as we get into next year, you will see us give more detail in terms of how 2022 is going to look through the course of the year.

Okay, great. Thanks, guys. Really appreciate it.

Your next question is from James Hardiman of Wedbush Securities.

Hey, good morning. I'm getting a couple of questions on fuel. Obviously, there's been a lot of inflation there. I guess first housekeeping question: can you give us the consumption and the cost per metric ton in the third quarter? But then more broadly, your fleet is going to be younger as we exit the pandemic into 2022 and 2023. Any way to think about consumption per berth as we look to those years?

First I'll answer your tactical question, James. In the third quarter, we burned exactly 237.6 thousand metric tons and the average price there was $497 per metric ton. As Richard mentioned in his remarks, we have taken on new capacity and we will be taking on additional new capacity into next year. We have retired older tonnage and so we do expect that our fleet will become more and more fuel efficient. Also, as we focus on our path here to net neutrality on the carbon side that will continue to help us focus on burning less fuel going forward. But saying all of that, the mix of that is that our fuel consumption on a per-berth basis should get lighter and lighter as time passes and that's what we would expect. At this point it's too soon to guide on what our fuel consumption will be as our deployment for next year is still not fully set.

Got it. And then, everything that you've given us with respect to 2022 is really encouraging. Obviously, it's way too early to talk about beyond, but it seems implicit with everything that you're saying. Is there any reason to think that 2023 wouldn't be a pretty normal year in terms of occupancy and pricing and the fleet and everything else?

It's very early to be talking about 2023, but based on what we've experienced, especially over the past 45 days, the acceleration we're seeing, the demand environment, and people's willingness to pay ahead of 2019 levels is really encouraging. We're very excited about it and our marketing efforts are further bolstering that demand profile. What I would say about 2023, again very early, is that we're seeing similar strong trends for 2023 and we're booked in a place that's better than where we would typically be booked this far out. If you were standing in 2019 at this same time and looking at 2021 bookings, we're in a better position than we were back then.

I would just add one thing that was interesting to me: as the Delta variant came on, it really hit our bookings for 2021 and 2022, but it didn't seem to have any impact on our bookings in 2023. I think what people have been doing is saying, 'I have this pent-up demand, I want to get out there, but I don't want to do it soon; I want to make sure things have stabilized.' I really do think it's quite dramatic that we saw essentially no impact from the Delta variant on 2023 bookings whereas it impacted 2022 and 2021 quite heavily.

I have to jump in, James, and I know Jason and Richard are probably fed up with me saying these things, but we launched the world's cruises with Royal Caribbean International literally about 10 days ago. We only made it available to our 16 million loyalty members. Within seven days, we were 70% booked. And the average price of a balcony room is $75,000 for the balcony. The Royal Suite sold within a week at $760,000 and all of these suites have booked with non-refundable deposits, so even we were taken aback by the unbelievable response of our loyalty customers. The fact that within a week we were 70% booked on a ship that carries around 2,100 guests and is on a nine-month world cruise was just remarkable and I think that's indicative of what we're seeing.

I never get tired of hearing that, Michael. In fact, maybe you could tell us just how booked we are on that cruise so far.

Seventy percent actually.

Amazing, I know. I think you forgot to mention that.

I knew it wasn't going to be an effort; I was just aware.

That's great color. Thanks, guys.

Your next question is from Jamie Katz of Morningstar.

Hi. Good morning. Can you give us some insight into what your prognosis is or what underlying thoughts you have surrounding the economic environment next year or over the near term that you're incorporating into your outlook? And then, to give Michael another turn at the wheel, I'd be curious to hear any updates on the private destination projects that you guys have maybe had on the backburner. Thanks.

Jamie, when we look further out we obviously have very good data on how guests are booking today and what the book of business looks like. We don't speculate a lot on how the macroeconomic environment will change. Of course, there are secular trends that very much support experiences and vacations and a lot of pent-up demand that makes us believe — and we've seen this in the bookings and the acceleration of bookings — that demand will continue. So we focus primarily on the daily booking activity to shape our assumptions rather than forecasting macroeconomics ourselves.

Jamie, on the private destinations: one of the things that we're already seeing is Perfect Day leading the charge in terms of demand and premium for those ships that are operating out of South Florida and in fact out of New York. We did press pause during the pandemic on some projects, but we've started to reengage. Quite literally last week there was a conference in Panama with many of the Caribbean countries and it was quite interesting to see the level of activity that we experienced in terms of re-engaging and talking about destination developments throughout the Caribbean and South Central region. We did have a plan in place pre-pandemic — we pressed pause — and we're now re-engaging on all of those plans. In the immediate future, we have an expansion taking place in Perfect Day with the addition of Hideaway Beach, which is a new adult-only experience that will open in late 2022 for Perfect Day. The beauty of Hideaway Beach is that it will allow us to increase our capacity by approximately 3,000 people a day in late 2022, which will help improve our overall profitability and drive more revenue both ticket and onboard. We're also close to finalizing the design, construction plans, and approvals for Beach Club in Nassau, which we're hoping to start work on very soon, and we have other projects that we've now started to re-engage with. Our aspirations never really moved away; we just had to press pause for a while. Also, of course, we've got our Galveston Terminal that's opening in 2022 and that will accommodate our Oasis-class ships and future Icon-class ships, providing remarkable access into Texas, Oklahoma, and that whole region as a market for driving bookings. We're continuing our journey, and Perfect Day is leading the charge on current bookings.

Thank you.

Your next question is from Stephen Grambling of Goldman Sachs.

Hi, thanks. I want to go back to something I recognize you don't want to provide too much input on for 2022, but I'd love if you could just provide some additional thoughts on what's driving some of the strength in revenues per passenger day and any details on where spend perhaps is more robust and where it could still be dampened by some of the limitations or social distancing that's being imposed?

Sure. I'll start with drivers on the demand environment. Over the past two to three weeks we've seen bookings occur at a rate higher than what we saw in 2019 on a daily basis. That's a combination of pent-up demand and our marketing efforts that are accelerating and reaching consumers, especially new-to-cruise consumers. We're seeing similar trends across all of our brands — early in the year strength was more concentrated in ultra-luxury, but now it's across the board — which increases confidence. We've also seen bookings pick up for Q1 and for Q4 of next year, and seeing the shoulder seasons begin to rise is encouraging and consistent across our brands.

Stephen, to add to Jason's comments, the onboard revenue environment is truly impressive. A few factors are at play: consumers appear to be spending more and it seems to be happening on our ships. We've also increased the volume of special groups, such as gaming groups, which are proving to be very profitable. Another factor is our investment in Hybris, new software that allows us far more capability in our pre-cruise revenue marketing, and that is beginning to show results. As we look into 2022, for example, pre-cruise revenue bookings for Q1 2022 are already well ahead of 2019, even though there's less volume on gas, so there are a lot of positive things coming through to help us.

Great, thanks so much. I'll jump back in the queue.

Your next question is from Robin Farley of UBS.

Great. Thanks. I wanted to ask about something that a lot of investors are trying to get a handle on. When you talk about load factor and Q1 being below historic range or lower than average, how much of that — you talked about expecting occupancy levels to end up around 85% for Q1. So can you quantify — are you actually sort of not selling — is 15% of your capacity not available for sale in Q1 on the ships that would be in service? Just to help quantify how much of the lower load factor in Q1 is what's not available for sale? And then also, probably the other big factor is that you had to rejigger a bunch of itineraries in the last few months and so what percent of your Q1 itineraries were rejiggered in the last year as opposed to the normal 12 months to sell an itinerary? Some of these itineraries you'd be selling in less than 6 months. Can you quantify that?

There are a few things in play. First, remember approximately 80% of our capacity is expected to be up and sailing by the end of this year. As we move into Q1, the remaining roughly 20% comes into play. Similar to what we've done from June onward, we slowly bring in ships to ensure crew are familiar with protocols, the guest experience is exceptional, and operations are stable. We're moderating load factors and ramping them up, and that's going to weigh on Q1 load factors and a bit into early Q2 as ships come into service. That's probably the biggest driver of why Q1 load factor would be lower. Regarding itinerary changes, my guess is there's probably 15% to 20% of our capacity where there have been more than moderate itinerary changes — a port here or there changed — but that's not the primary driver. Maintaining price integrity and ramping up ships in a manageable way is really what's driving the difference in Q1 load factors.

Great, that's helpful. Thank you. And just my follow-up is you talked about in Q3 how revenue per passenger day is up 12%, a lot driven by higher onboard spend per person. Can you comment a bit on ticket price? If you have a comparable seven-day Caribbean itinerary in 2019 versus Q3, how did ticket price compare? I realize itineraries vary, but any color would help.

Good question. We've seen a significant rise on the onboard side, and much of this is pre-cruise driven which has amplified onboard spend. Our ticket rates are better than in the comparable 2019 period, and the combination of ticket and onboard results in the improvement we highlighted. We called out the onboard impact specifically because it was a notable driver in the quarter.

Robin, I might add that as uncertainty has reduced and cancellations have stabilized, people are more comfortable booking. There's an overall effect rather than a vessel-by-vessel one. That's why we've been anxious to get everything up and running and stable.

Okay, great. Thanks very much.

Thanks, Robin.

Your next question is from Brandt Montour of JP Morgan.

Good morning, everyone. Thanks for taking my questions. First, to Jason: when you think about expenses next year, and I know you gave some color around fuel, but excluding fuel and excluding one-time restart costs, do you expect inflation to have a material impact on net operating unit costs? And are there residual savings that you guys achieved last year that might offset that?

Brandt, we do expect inflation to have an impact on our business and we've considered that in our planning. We will have transitory costs related to healthy return-to-service. On the other side, we've taken significant actions to reshape costs over the past several years. We believe a lot of the inflationary pressure is temporary, and as those transitory costs dissipate, our cost-shaping efforts will show up in improved margins as the business returns to historical load factors.

That's helpful. And then on 2022's itinerary slate and maximizing profitability for peak summer, are you expecting any dilutive impact to pricing from regional mix shifts given that some Americans are still wanting to travel domestically? Have you factored that into your planning for 2022's itinerary mix?

That is an important point. Restrictions on international travel, both the formal government restrictions and the psychological reluctance to travel long distances have made people be much more regional than normal. For our global brand strategy, that's not ideal, but it is a fact of life and we've incorporated that into our forward projections. Part of our strategy was to mix source markets — Americans on European cruises and Europeans on American cruises — and those dynamics have been dampened by restrictions and uneasiness about long-distance travel. We've factored reasonable expectations for that in our forecasts.

From our standpoint, we largely know our deployment for 2022 and we see the live booking activity each day. That sourcing mix is very much married to deployment and has been thoughtfully considered in how we model next year.

Okay, that's helpful. Thanks a lot, guys. And congrats on the progress so far. Good luck.

Thanks, Brandt.

Your next question is from Fred Wightman of Wolfe Research.

Hey, guys. Maybe just a follow-up on that last point. Richard, I think you called the international sourcing mix confusing. Can you maybe put some specific numbers as far as where you see those cross-border bookings for 2022 and how that compares to pre-COVID levels?

It's tough to put specific numbers at this point. When we think about next year, a lot of our deployment is married to the Caribbean and Alaska and other parts of North America, so we will be weighted more toward the U.S. and Canada than in a pre-COVID period. On the other side, deployments in the Mediterranean and Northern Europe will be sourced more out of Europe rather than North Americans flying over, but there will still be plenty of people traveling internationally. We're moderating those expectations in our forecasting.

Fred, to add to Jason and Richard: day-by-day and week-by-week, the news continues to get brighter and better. For example, the presidential proclamation a few days ago that opened up travel between the U.S. and European countries has been positive. We continue to see a leveling out of protocols and reasonableness, and you can feel that in bookings. Considering we're just entering November, this news flow over the next month or two will be critical as we get into wave season.

Great. And Jason, could you just comment on your current understanding of some of the U.S. tax proposals and what, if any, impact you think that could have for you guys?

Sure. It's evolving at this point in time, but we don't anticipate there being any significant impact to our business.

Great. Thank you.

Your next question is from Vince Ciepiel of Cleveland Research.

Great. Thanks for taking my question. When you look at your bookings as well as what you're sailing right now, are you seeing anything interesting in demand mix between interior versus balcony and what that might mean for onboard and pricing comparability of what you're sailing now versus 2019? And then as you think about ramping to full load into the second half of next year, is that reliant on selling out all the interiors like you did pre-COVID?

If you look at our book business, we're weighted more towards suites and balconies at this booking stage. Typically, when customers plan further out, bookings skew toward balconies and suites and then interior cabins fill in closer to sailing. In terms of pricing, it's coming in relative to 2019 and at rates similar to those seen in 2019. Our inventory is becoming richer as more cabins come online, which supports our yield profile going forward.

Great. And then a follow-up on CapEx. Not sure if you mentioned this yet, but how are you thinking about CapEx going into next year? Normally there's sustain capex and new ship payments. You also have Wonder and beyond covered by committed financing. How are you thinking about CapEx?

You're right: we have committed financing on all ships under construction. We're still going through our planning process, but we're very mindful of our capital structure and efforts to get back to pre-COVID balance sheet levels. As the business ramps up and firms up for 2022, that will form our expectations on capital investment and how we get the balance sheet back toward pre-COVID levels.

Thank you.

You're welcome. We have time for one more question.

Your final question is from Ben Chaiken of Credit Suisse.

Hey, how's it going? Jason, I think you mentioned strength in new-to-cruise. Should we think about this as a return of that customer that didn't exist understandably over COVID, and is that new-to-cruise acceleration versus 2019?

If you look at propensity to cruise from the early days of the pandemic to today, new-to-cruise bookings were largely turned off early in the crisis. Today they have certainly returned. Our marketing efforts have helped remind those customers of the experience on our leading fleet and our destinations like Perfect Day at CocoCay. Surveying shows they're open to returning and their booking activity supports that. It's an accelerating return of new-to-cruise customers.

Got you. It's a return of new-to-cruise. One clarification: I think you've said 85% of capacity by the end of Q1 2022. I believe that was from a fleet perspective. Can you help us bridge to ALBDs or is it similar?

On a capacity basis, by the end of the first quarter, we're close to 90% capacity. It's about five percentage points higher on a capacity basis versus number of ships.

Okay. Thanks.

You got it. Okay. Thank you for your assistance today, Shelby, with the call. We thank all of you for your participation and continued interest in the Company. Michael will be available all day for any follow-ups you might have. That's Michael McCarthy, by the way.

Thank you for clarifying. I'm available for any follow-ups and, of course, for any sales of the world cruise on Royal Caribbean.

Okay. I wish you all a great day and everybody be safe. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.