Royal Caribbean Cruises Ltd Q1 FY2026 Earnings Call

Good morning. At this time, I would like to welcome everyone to the Royal Caribbean Group First Quarter 2026 Earnings Call. I will now turn the conference over to Mr. Blake Vanier, Vice President, Investor Relations. The floor is yours.

Good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings call. Joining me here in Miami are Jason Liberty, our Chairman and Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of the Royal Caribbean brand. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements 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 items can be found on our investor website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter, the current booking environment and our outlook for 2026. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason.

Thank you, Blake, and good morning, everyone. This morning, we reported first quarter results that exceeded our expectations, along with a record WAVE season that reinforced the continued strength in demand for our leading vacation brands. Revenue grew 11% year-over-year, earnings were 11% higher than guidance, and we returned $1.1 billion of capital through dividends and share buybacks. Our performance reflects consistently strong execution by our teams and the compelling value proposition and differentiated experiences our brands offer consumers who continue to prioritize experiences. The consumer backdrop remains healthy, and demand for our vacation experiences continues to be strong. Across our portfolio, we see consistent engagement from guests, strong booking volumes and onboard spending that remains well above prior years. Before diving into the first quarter results, I want to briefly touch on recent geopolitical developments, starting with the Middle East. From an operational standpoint, two of our TUI Cruise ships sailing in the Middle East region were directly impacted by the conflict and therefore had to temporarily pause operations. Both ships have since safely repositioned out of the area and are heading to the Mediterranean where they will welcome guests beginning in the middle of May. The most notable financial impact from the Middle East conflict has been on fuel costs. While we are approximately 60% hedged for 2026, fuel prices at current spot levels are expected to increase costs by roughly $0.62 per share this year. In addition to fuel, we saw a short-term moderation in demand trends for 2026 for high-yielding Mediterranean sailings, which modestly impacted our outlook for the upcoming summer season. The softer booking trends lasted for a few weeks, but we have now turned a corner and are experiencing improved demand for the limited inventory we have remaining for Q2 and Q3 sailings. Lastly, we experienced some disruption in demand for select West Coast of Mexico itineraries, driven by travel disruption concerns during the quarter. Demand trends for other products remain largely consistent with our expectations. Overall, our diversified portfolio and disciplined operating model position us well to manage through these dynamics, while remaining focused on delivering exceptional vacation experiences, accelerating growth and executing our long-term strategy with conviction. We expect to drive another year of double-digit revenue and earnings growth, supported by a strong book position, a fortified balance sheet and robust cash flow generation. I want to thank our crew members and shoreside teams around the world. Their passion, focus and commitment to our guests are the foundation of our success and continue to set our company apart. Now turning to the results. We experienced another record WAVE season, highlighting the continued strong demand environment for our leading and trusted brands. Our book position is strong and remains within optimal prior year ranges at record prices. During the quarter, we delivered over 2.5 million unforgettable vacations at industry-leading guest satisfaction scores. Revenue grew 11% year-over-year and net yields grew 2%. Costs came in very favorably, and we saw better-than-expected performance from our joint ventures. As a result, adjusted earnings per share was $0.37 higher than our guidance. These results reflect the continued appeal of our vacation experiences, diversified portfolio and disciplined execution. Naftali will elaborate on Q1 results shortly. We closely monitor consumer behavior through millions of daily interactions on our commercial platform and with 170,000-plus guests on our ships every day. What we see is a consistently engaged consumer who prioritizes vacations and seeks quality, variety and value, which is exactly what we deliver. Based on our most recent research, our consumers remain very healthy, supported by excess cash, strong employment trends and a continued preference for consuming experiences over purchasing things. Travel remains a top priority, ranking as the number one leisure category where consumers intend to spend more. Thirty-one percent of consumers say traveling more is a top priority for the next year, behind only physical health and finances. Our vacations offer compelling value, flexibility and choice relative to alternatives. This continues to be reflected in the level of interest and engagement we see across our brands and the continued strength in onboard spending. Now let me provide an updated outlook for 2026. Revenue is expected to grow roughly double digits year-over-year, and net yield is expected to grow 1.5% to 2.5%. We continue to expect yield growth across our key products, including the Caribbean. As we entered the year, we saw strong demand for Europe, which are high-yielding itineraries, and that strength was embedded in the outlook we provided in January. Due to the geopolitical events affecting itineraries in the Mediterranean and the West Coast of Mexico, we've adjusted our full year net yield expectations. Our overall outlook for the itineraries remains largely aligned with our January guidance. We also remain committed to enhancing margins through rigorous cost discipline, continuously identifying efficiencies across operations, prioritizing spend and utilizing technology and AI without compromising the quality of the guest experience. We are expecting another year of strong earnings growth and cash flow generation. Full year adjusted earnings per share is expected to grow double digits and be in the range of $17.10 to $17.50. This includes $0.74 per share from fuel headwinds, as well as lower income from joint ventures. We are also on track on our Perfecta performance program, targeting a 20% compound annual growth rate in adjusted earnings per share through 2027 and a ROIC in the high teens. Our large-scale, leading margin profile and strong cash flow generation allow us to continue advancing strategic investments into our future while enhancing growth with capital return through competitive dividends and opportunistic share repurchases. Our vacation ecosystem integrates the best brands and ships, unique destination experiences and technology platforms wrapped around a loyalty program that connects it all. I want to spend a moment on how technology and AI are shaping the way we operate and how guests experience our vacations. Disruptive technology and AI have been embedded in our business for years, particularly in areas that require complex real-time decision-making at scale. As these technologies advance rapidly, we are continually discovering new ways to accelerate their integration throughout our ecosystem, making it easier for us to deliver amazing experiences and for guests to keep vacationing with us. Across our digital booking channels, guest engagement has undergone a fundamental shift since 2019. Digital penetration of bookings has more than doubled over that period with most of that growth coming through our app. Monthly active users for the app are five times higher than 2019 levels, with adoption over 90%, confirming mobile as a way guests increasingly plan and manage their vacation. Today, more than half of onboard revenue is booked before guests ever step on board with the vast majority of those purchases made digitally. Guests are engaging earlier, planning more intentionally, and personalizing their vacations in ways that were simply not possible a few years ago. Our focus is on a unified intelligence layer that delivers seamless, relevant experiences and supports meaningful enhancements throughout the vacation journey from dreaming and booking to onboard experiences and service to post-cruise engagement. What differentiates us in this space is not access to tools, but the combination of a deep understanding of our guests, a fully integrated digital ecosystem, the ability to deploy these capabilities across a multi-day end-to-end vacation experience and the commitment to excellence and innovation. Our ships are floating cities where we design and operate every guest touch point across numerous activities for a prolonged vacation period. That level of integration creates conditions where disruptive technology and AI enhance our moat in ways that are very difficult to replicate. We are deploying these capabilities in a disciplined manner, measuring performance, reacting to guest feedback and then scaling what works. We are in the early innings. As we develop the capabilities further, it reinforces a flywheel that compounds over time. We also continue to make meaningful progress in other strategic initiatives. Our loyalty program is designed to better recognize and reward our guests, driving higher engagement, increased frequency and repeat travel. Since launching initiatives to drive cross-brand awareness in 2023, including our industry-first status match program in 2024, which allows guests to enjoy equivalent status across our brands, cross-brand bookings have increased significantly reinforcing the strength of our connected ecosystem. We recently launched our new Royal ONE co-branded credit cards, which further expand and strengthen our loyalty ecosystem, building on recent enhancements like Points Choice and Status Match. The Royal ONE credit card is the most powerful way for our guests to earn rewards across our brands, allowing them to accumulate points faster and to redeem those points seamlessly across our ecosystem. Since 2019, cardholder accounts more than doubled, and as we continue to enhance the value proposition and deepen integration across brands, we believe there's an opportunity to double it again. We also recently announced orders for Icon VI and Icon VII, reflecting the success of the Icon platform and our confidence in its ability to consistently deliver industry-leading guest experiences and returns. We continue to innovate the Icon series to maintain high satisfaction scores and superior economics. Following the launch of Royal Beach Club Paradise Island last year, we recently opened the Royal Beach Club Santorini. Demand for the Beach Club has been very strong. Developed with local stakeholders, it's the centerpiece of our ultimate Santorini Day, offering guests an elevated way to experience the island. We are also advancing the Royal Beach Club in Cozumel, now expected to open in early 2028, and are actively progressing Perfect Day Mexico and Costa Maya expected to open in late 2027 and ramp up in early 2028. Together, these initiatives are differentiating our experiences and are nicely accretive to yield growth. Finally, the upcoming delivery of Legend of the Seas, our third Icon class ship, is another exciting opportunity for us. Consumer receptivity is remarkable; it is in a very strong book position with prices higher than those that we saw for Icon and Star. In summary, demand for our brands continues to be very strong, and we expect another year of double-digit revenue and earnings growth. We are executing decisively on key initiatives as we look to win a greater share of the large and growing vacation market. With that, I will turn it over to Naftali. Naftali?

Thank you, Jason, and good morning, everyone. I will start by reviewing first quarter results. Adjusted earnings per share were $3.60, $0.37 higher than the midpoint of our guidance and 33% higher compared to last year. The outperformance was driven by better-than-expected revenue, lower costs and better performance from our joint ventures. In the first quarter, we delivered 12% more vacations than last year. Notably, we observed an increase in number of young guests, mainly Millennials and younger demographics, as well as an increase in repeat guests compared to the previous year. We finished the quarter with net yield growth of 2%, which was above the high end of our guidance range. Yield performance was supported by all key itineraries and improvements in gross margin. Net cruise costs, excluding fuel, performed better than expected, driven primarily by continued cost discipline as we find more efficient ways to deliver the vacation experience without compromising the product. Adjusted EBITDA was approximately $1.7 billion, representing an EBITDA margin of 38%, an increase of more than 300 basis points year-over-year. Operating cash was $1.8 billion, an increase of 13%. As Jason mentioned, we had a record WAVE season, and our booked load factor is within historical ranges and at record APDs, reflecting strong demand for our vacation experiences and a healthy consumer. The Caribbean represents 57% of our deployment this year, and 50% of capacity in the second quarter. Caribbean yields are expected to be positive for the year even with elevated industry capacity, reflecting the continued strength of demand and the differentiation of our product. Our competitive position in the region is further supported by our industry-leading hardware and destinations including the introduction of Legend of the Seas into the Caribbean in November following its redeployment from Europe as well as the continued benefit from the new Royal Beach Club at Paradise Island. Europe will account for 14% of capacity for the year and 18% of capacity in the second quarter. Bookings for the high-yielding Mediterranean itineraries, which began the year on an exceptionally strong trajectory, moderated following recent geopolitical developments late in the first quarter, partially driven by increased air travel cost, airline capacity reductions and flight disruptions. These factors mainly affect the second and third quarters, when these high-yielding itineraries represent a larger share of deployment. In recent weeks, bookings from Mediterranean itineraries have been rebounding. Bookings for West Coast of Mexico itineraries, which represent 5% of capacity, also moderated during the quarter, reflecting geopolitical-related considerations specific to that region. Lastly, Alaska is expected to account for 5% of total capacity and 9% in the second quarter. Now let me talk about our guidance for 2026. Our proven formula for success—moderate capacity growth, moderate yield growth and strong cost discipline—is expected to drive significant earnings growth and higher cash flow generation this year. Capacity is expected to grow 6.7% for the year, with first and third quarters growing at a higher rate than the second and the fourth. Net yield is expected to grow 1.5% to 2.5%. Our yield guidance compared to January is influenced by region-specific geopolitical developments affecting the Mediterranean and West Coast of Mexico, which are mostly pronounced for the second and third quarters. Otherwise, expectations for the rest of the portfolio remained similar to January. As Jason noted, we continue to see very engaged consumers, which supports strong quality demand for both ticket and onboard. Furthermore, we have been investing in enhancing our commercial capabilities to remove friction and enable guests to book the best experiences for their vacation needs. As a result, we continue to see over 70% penetration in our pre-cruise booking engines with over five items purchased per booking and a year-over-year increase in spend per night. For the full year, net cruise costs, excluding fuel, are expected to be approximately flat, or 50 basis points better than our prior guidance, reflecting ongoing efficiency improvements and prudent cost management without impacting the guest experience. While we manage our costs more on an annual basis, the cadence of our cost growth varies throughout the year. As I mentioned on our last call, the first half cost growth is expected to be higher than second half, driven mainly by timing of dry docks and other year-over-year comparison factors. The most notable impact from recent geopolitical events is on our fuel costs. We expect fuel expense to be $1.35 billion for the year, and our forward consumption for the remainder of 2026 is 59% hedged at significantly below market rates. Our guidance is based on spot rates as we always do. However, fuel expense would be approximately 4% lower if rates were based on the forward curve. Based on current fuel prices, currency exchange rate and interest expense, we expect adjusted earnings per share between $17.10 and $17.50. Our earnings guidance includes a $0.62 headwind from fuel rates for the remainder of the year, as well as a $0.12 headwind from lower expected earnings contribution from TUI Cruises. We expect to continue to increase cash flow generation, allowing us to grow margins, continue investing in our strategic initiatives, maintain solid investment-grade balance sheet metrics and expand capital return to shareholders. Now I will discuss our second quarter guidance. In the second quarter, capacity will be up 4.9% year-over-year. Net yields are expected to be up approximately 0.2% in constant currency. Year-over-year comparison elements, including increased dry dock days and impact from geopolitical events contribute almost 200 basis points headwind to yields in the quarter. We also expect a similar impact from these factors on third quarter yields. Net cruise costs, excluding fuel, are expected to be up in the range of 4.6% to 5.1% in constant currency. This quarter has almost 400 basis points of cost headwinds related to additional dry dock days and year-over-year comparisons as well as increased costs mostly related to crew travel resulting from air travel disruptions and reduced capacity. Taking all this into account, we expect adjusted earnings per share for the quarter to be $3.83 to $3.93. Earnings are impacted by almost $1 from the items I just mentioned for the quarter, including lower earnings contribution from TUI Cruises. Turning to our balance sheet. We ended the quarter with $6.9 billion in liquidity and leverage below 3x, consistent with our goal of solid investment-grade metrics. During the quarter, we accessed the capital markets through a $2.5 billion investment grade bond offering. The transaction was well received and was significantly oversubscribed, reflecting continued strong institutional demand and confidence in our credit. Net proceeds were used to refinance existing indebtedness, including near-term maturities. Also during the quarter, we repurchased 2.9 million shares for a total of $836 million. This reflects our strong financial position and commitment to capital allocation priorities. We will continue to invest in growth while also returning capital to shareholders. We have $1 billion remaining under our current program authorization. In closing, we remain committed and focused on our mission to deliver the best vacation experiences responsibly as we work to deliver another year of strong results. With that, I will ask our operator to open the call for a question-and-answer session.

Your first question comes from Steve Wieczynski with Stifel.

So Jason, as we think about the rest of the year, we obviously have your second quarter yield guidance, and I have to assume based on Naftali's comments that your third quarter yields are going to look somewhat similar to your second quarter given the exposure you have to Europe. So then if that's true, that would imply your fourth quarter yields are going to be growing, let's call it, somewhere in that mid-single-digit range to kind of get you into that 2% midpoint. So wondering what gives you the confidence the fourth quarter could grow that much. And I guess then that actually to me would imply that without the European headwinds you guys encountered you would have actually been able to raise your full year yield guidance. Am I kind of thinking about that all the right way?

Yes, Steve. Well, first, thanks for the question and hello to everybody. I think that's exactly the way to think about it. So the year is a little bit of a smiley face in terms of yield, and that's really impacted, as we said, by our commentary on the Mediterranean, and to a lesser extent, the deployment to the West Coast of Mexico. If you just zoom out to the beginning of the year, demand from North Americans to go to Europe was really off the charts, which was very much taken into our guidance. And so when the activities started to occur in the Middle East, you saw some level of moderation in demand for the Mediterranean. When you think about it through the course of the year, those itineraries are more pronounced in Q2 and Q3 and very little in Q4. All of our products are doing very well. By the way, Europe is doing well; it's just that it's less than what we had anticipated, while the other ones are doing well. So when you look at our book position in Q4, which, of course, has less of the Mediterranean product, it is in a very strong book position at very strong rates. You look at the comps with Legend and we have an easier comp in Q4. That's why we feel very good about the fourth quarter of this year. By the way, we feel good about Q2 and Q3. It's just that we did see that moderation, and fortunately, that has now turned the corner over the past several weeks, but we have just less inventory to sell to be able to take that price.

Your next question comes from Matthew Boss with JPMorgan.

So Jason, maybe if we take a step back, despite geopolitical developments and the elevated industry capacity in the Caribbean, your yield guide at the high end this year stands at 2.5% constant currency. So maybe could you speak to the drivers of durable multiyear growth, which seem intact here regardless of the macro, and just how you see the company set up today relative to pre-pandemic?

Sure. First, I want to touch on the capacity in the Caribbean. That has been, I think, much more of an outside-looking-in observation or concern than it actually has been for our company. The reality is we own the Caribbean, especially the Royal brand owns the Caribbean. We have the best assets in the world in the Caribbean. Of course, we have a Perfect Day, and now we have the Royal Beach Club. All those islands also attract an elevated amount of demand and people's willingness to pay more to have those elevated experiences. When we look at our business, our brands are positioned in what we think are the perfect segments for them. They are the leaders in those segments. They're supported by great ships and supported by destinations which we continue to add on to. I think we're positioned very well, and our expectation is we'll continue to generate high-quality demand. One point on high-quality demand, which I commented on earlier, is we're getting more and more repeat customers inside of our ecosystem. At this point, about 40% of our customers are coming from our current customer base, and historically that was roughly one-third. That reflects all the things we're doing around loyalty, investments in AI and other technology that help curate and engage with our guests. Those tools are highly effective. Pricing and other tools allow us to meet our guests where they're looking to go and what they're willing to pay. That is creating more repeat and higher-quality demand for us. The leisure marketplace is $2.1 to $2.2 trillion; this industry is a small sliver, but cruising is a core vacation experience. It's mainstream. That's why you're seeing durability in demand for cruise. And you couple that with the reality that we still trade at about a 15% plus discount to land-based vacation, which also helps position us well amid noise.

Your next question comes from Brandt Montour with Barclays.

Great. I just wanted to circle back on the third quarter and the Mediterranean. Could you put a finer point on it? How much do you have left to book at this point in the year, how much impact do you think was done over the last few weeks? What are you baking into your forward guidance in terms of how the conflict plays out and how bookings play out from here?

Brandt, I wouldn't describe it as damage. I would describe it as booking trends that we saw for the Mediterranean in the early parts of WAVE and when we gave guidance moderated as we got out of February with the activity happening in the Middle East. It was driven by two things: people's concern about vacation disruption, and more importantly, air costs went up by over 40% at one point; it's now moderated down to about 15%. It was getting to a point where the cost of a flight was more than the cruise, but that kind of settled out. We did have to address that demand. Where we sit today, at the end of April, there's very little inventory left to sell for the quarter, and there's still very little inventory to sell for the third quarter. We are continuing to actively manage this environment. If we see things continue to accelerate, that could be positive for this quarter and Q3.

Your next question comes from James Hardiman with Citi.

I wanted to zoom in on the idea that we're turning the corner. The weeks following the initial geopolitical disruption were probably the worst. Could you indicate where we stand today in terms of the booking trajectory versus where we were in February before a lot of this started? Are we fully back or just heading in that direction? And as we think about Q2 and Q3 being most pronounced, is that because those are what's next or are consumers comfortable booking beyond the third quarter into 2027 assuming this disruption will go away?

James, to be clear, we have turned the corner. The moderation we saw has reversed. There's always the possibility that events could change consumer sentiment, but the moderation has turned. It's just that we have limited inventory in place. We do not see this affecting next year in people's booking behaviors. Guests are starting to book next year clearly. We're talking about a specific product; our commentary around the Caribbean and other products should be heard as very good. Bookings for Europe are very good; they are just a little less than we had anticipated when we started the year based on exceptionally strong demand and pricing.

James, one other point: we used the word moderation because that's what we saw. We didn't see a dip and then an immediate full return. It wasn't a very strong trajectory at first. Even following that, we saw potential to accelerate. So there was a moderation, but bookings were still good.

Your next question comes from Lizzie Dove with Goldman Sachs.

I was wondering if you could give us a refresh on Perfect Day Mexico. You mentioned opening late 2027 and ramping in 2028. Could you share more details on the cadence of that ramp? And bigger picture, your latest thinking around the long-term structural yield growth opportunity in the Western Caribbean market and particularly around the Galveston, Texas penetration opportunity?

Lizzie, I'll talk about construction and cadence. We are incredibly excited about Perfect Day Mexico. We have a lot of support for the project from the government in Mexico. The project is proceeding. We announced a soft opening in Q4 2027, and as we move into 2028 we'll fully open the whole experience, similar to how we open big attractions or new ships. The project is generally on track and its impact in terms of the region, particularly out of Galveston and for the Texas and regional market, is incredibly significant. We will have the biggest, best, most attractive destination experience for that whole Gulf region. If you look at the opportunity in Texas, it's a market much larger than Florida with a much lower penetration rate. We're expecting to own the Texas market as it relates to cruising into the Caribbean. Perfect Day Mexico, combined with Royal Beach Club and Costa Maya, will be the centerpiece of that, along with our Icon class ships. The combination of the hardware, the brand and the destination is going to be a massive accelerator for overall financial performance for the business. We're very excited about the project. It is epic in nature and will be a stunning experience. We did have some issues reported regarding environmental matters; those have been resolved and are behind us, so we're continuing on track.

Lizzie, I'll add that the pictures and videos you've seen of it reflect the final product; we aim to live up to and hopefully exceed the marketing. We're very excited. As Michael said, it's about owning the Texas market, increasing catchment for the drivable market and unlocking more potential in the West. The cost to get to Houston is lower for many, so we're excited. It's not that far away.

Your next question comes from Robin Farley with UBS.

I had a question on yields and a quick follow-up. Michael's comment may have answered it, but it sounded like there had been a pause in construction in Mexico because of environmental issues. So I want to clarify if construction has resumed? And thinking about next year, if there's a 200 basis point impact in Q2 and Q3, is it fair to assume you expect that to come back in 2027, meaning the impact is largely a near-term issue and shouldn't persist?

Yes, construction has resumed.

Great. And on the yield point, just help us size that—are you expecting the European yields to fully recover next year?

The commentary about Europe is that some structural aspects were known already, and the geopolitical events added more near-term impact. The bottom line is this is an issue for this year. We don't see those issues extending into next year. Bookings for next year are strong. We don't see consumers being impacted next year; it's really a near-term issue for Q2 and Q3.

Your next question comes from Xian Siew with BNP Paribas.

You talked about the co-branded credit card and several changes to the loyalty program and how repeat guests have stepped up. I'm wondering what implications this has for net yield growth. Maybe repeat guests are booking further ahead or spending more onboard. Any learnings on how higher repeat penetration could be a benefit and where you expect that to show up?

Thanks, Xian. Repeat guests tend to sail with us more often and spend about 25% more than new-to-cruise or first-to-brand guests. New-to-cruise customers can have high indices when the product is short and can introduce high-yielding new-to-cruise consumers for us. Our goal is to go from a vacation of a lifetime to a lifetime of vacations. We're expanding into River to use our trusted platform to keep guests inside our ecosystem. Initiatives like Points Choice, status recognition across brands and the co-branded card incentivize guests to stay within the ecosystem. That unlocks lifetime value, makes us more efficient by leveraging our platform, and requires the tools to connect with guests where they prefer. We've significantly evolved our digital capabilities so guests can see their loyalty status and engage at any point in their vacation journey. All these elements combine to increase repeat penetration and lifetime value.

To add, when you put everything Jason mentioned together, it increases customer lifetime value. In addition to having more frequency with us, shortening the time between cruises, higher spend and lower acquisition cost are benefits. We also can serve guests better because we know them better and tailor vacations accordingly. It all adds up to stronger customer lifetime value.

Your next question comes from Kevin Kopelman with TD Cowen.

I had a question on North American customers and higher airfares. Have you seen any consumer behavior change reacting to the higher airfares in North America for your North America itineraries? How do you see consumers' ability to manage higher airfares as the year goes on?

Kevin, we've seen a slight impact when airfares go up—there is some moderation. The great thing is we have a phenomenal global infrastructure. For example, with European itineraries, when airfares spike, we tend to see an increase in European customers booking and a slight decrease in North American customers, which moderates as the situation calms down. Our global sales and marketing presence has been effective at managing fluctuations in air costs.

I would add that North American consumers appear very strong in terms of balance sheets and propensity to vacation. What can create some short-term impact is friction in the travel experience—long lines at airports can influence close-in business. We saw some of that but also saw drivable markets lift up. Overall, consumer demand for vacations remains robust.

Your next question comes from Andrew Didora with Bank of America.

Two quick questions on costs. First, how do you think of rolling in new hedges in this high fuel environment? Second, on unit costs, you continue to do a nice job. At what level of capacity growth would we start to see more inflationary type net cruise cost excluding fuel growth in the 2% to 3% range?

On fuel, as I mentioned, we saw higher fuel costs. We manage our hedging program and are hedged roughly 60% for this year. We are hedged a little less than 50% at pre-conflict prices for next year and about 25% for 2028. We continue to methodically add hedges to manage volatility over time. We feel good about where we are and will continue to add hedges where it makes sense. On costs, we subscribe to our formula: moderate capacity growth, moderate yield growth and strong cost control. We want to maintain a spread between yield growth and cost growth while delivering the best vacation experiences. We won't touch the guest experience; instead, we find efficiencies through technology and supply chain improvements. Those tools help us achieve sustained benefits to costs.

Andrew, our business is growing; we're adding one or two ships every year for the foreseeable future. The combination of technology and scaling means there will always be opportunities to find efficiencies. When introducing new destinations there can be some headwinds, but we view these as part of the scaling challenge and responsibility to embrace growth efficiently.

Your next question comes from Sharon Zackfia with William Blair.

Following up on costs: Are you making any itinerary changes because of higher fuel either currently or looking out to 2027 and 2028? Also, net cruise costs are coming in a bit lower. Is there anything you've pulled back on this year in terms of initiatives or spend that we should think of as deferred to 2027, or is this just harvesting efficiencies?

When we talk about guest experience, itineraries are a key part of it. The answer is absolutely not—we have not modified itineraries because of higher fuel costs. We always look for energy efficiency investments and better utilization of technology, but that's not impacting the guest experience. On the question of deferring spend, the answer is no. What we're doing is finding sustained ways to operate more efficiently while ensuring the guest experience remains intact. These improvements are not temporary deferrals; they are lasting efficiencies.

Your next question comes from Vince Ciepiel with Cleveland Research.

Could you comment on how new hardware—Star, Xcel contribution, Paradise Island, RBC Santorini—might be contributing to yield growth overall versus like-for-like impact? And on a regional basis, you mentioned Europe is doing well—can we assume Europe yields will grow this year or what does the guide assume?

On Europe, it will do very well this year; it is just less well than we had anticipated a few months ago. What's driving yield is all of the above: like-for-like improvements, new hardware such as Star and Legend ramping, and new destinations like Paradise Island and Santorini. We ramp destinations thoughtfully to maintain guest experience. All of these elements are contributing to yield growth. The Mediterranean doing a bit less well than expected is a one-time effect; the West Coast of Mexico hiccup is also generally a one-time situation that provides tailwinds into 2027.

That concludes our Q&A session. I will now turn the conference back over to Naftali Holtz for closing remarks.

We thank you all for your participation and interest in the company. Blake will be available for any follow-ups. We wish you all a great day.

This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.