How long before Disney’s new cruise ships turn a profit?

[WDWKOOK]

DISNEY CRUISE LINE, FEATURED, JASON GARCIA, NEWS — BY JASON GARCIA ON APRIL 9, 2010 AT 10:55 AM

So how long before the Walt Disney Co. begins reaping rewards from the two new cruise ships it is building?

Apparently, not long at all, according to one analyst’s projections. Alan Gould of Soleil Securities writes in a research report issued this week that he expects Disney Cruise Line’s new ships will begin turning a profit during Disney’s 2011 fiscal year, which begins in October.

That’s because the first of the two 1,250-room ships, the Disney Dream, will start sailing out of Port Canaveral in January and so will spend most of the fiscal year earning money for the company. That, he said, should offset continued construction spending on the second ship, the Disney Fantasy.

Disney is believed to be spending somewhere in the neighborhood of $1.5 billion to build the two ships.

Gould projects that two ships will generate between $100 million and $150 million in profit for Disney during the 2012 fiscal year, the first full year sailing for the Dream and the first partial year for the Fantasy, and between $200 million and $300 million of profit the following year.

 

[Cheshire Figment]

However, a cruise ship falls into the IRS Category of Section 1245 Property, which requires depreciation over a 40 year period. Therefore the cost of about M$750 each is not written off at once, but only M$18.75 of the cost is written off each year. You will see the ships capitalized and depreciated on the balance sheets.

Mike (CPA Retired)

 

[skiingfast]

I'm not sure I believe this. Because at an investment of 1,500 million, and annual income expected at 200-300 we'll call it 250 million it seems that it will take 6 years to pay for the ships. Not only this but they are improving Castaway Cay, which is part of the cruise line. They aren't improving it to make it better but to raise the capacity for the much larger crowds that the Dream and Fantasy will bring.

I also wonder if they need to expand their terminal at Cape Canaveral. The terminal the Carnival uses has 5 or 6 planks while DCL has two. I don't know if the Carnival terminal is set up like that for boarding bigger ships at a higher rate or to accomodate different styles of ships. Which DCL will have.

Plus there is extra expenses for marketing their new ships and new itineraries.

I'm guessing that the revenue will increase proportionally to the increase in passenger days. Not that the writer of the article is dumb. I'm just saying while it is revenue, most people will call the money that goes in a register profit.

 

[doconeill]

I'm not sure how the depreciation fits in to the calculations - I am not an accountant, although I did study some in college - do they basically charge 1/40th of the capital cost of construction as a liability per year? IF that's the case, then it seems they could turn a "profit" on the sheets easily...Disney can easily fill those ships off the bat and not have to build up to it and heavily advertise, discount, etc.

But it does seem like the only way they could possibly call it a profit in anything short of 6-7 years.

 

[mm4mm]

The allowable amount of depreciation is expensed each year, and the book value of the ship goes down by the same amount. So yes, they will show a profit rather quickly.

 

[KYMickey]

Not only this but they are improving Castaway Cay, which is part of the cruise line. They aren't improving it to make it better but to raise the capacity for the much larger crowds that the Dream and Fantasy will bring.

I also wonder if they need to expand their terminal at Cape Canaveral. The terminal the Carnival uses has 5 or 6 planks while DCL has two. I don't know if the Carnival terminal is set up like that for boarding bigger ships at a higher rate or to accomodate different styles of ships. Which DCL will have.

Plus there is extra expenses for marketing their new ships and new itineraries.

The improvements at Castaway Cay were relatively low cost (about $10,000,000 if memory serves me) so that is a small amount in the overall scope of things.

All the upgrades to the terminal and surrounding area (parking garage, etc) is being paid for by the community To keep give me their so it's not coming out of disney's pocket.

The marketing if anything is probably less costly per passenger than with the old ships because the excitement been generated through the media is selling the ships.

All of this combined with the fact that Disney can only write off a small percentage of the ships cost means they will turn a profit very quickly.

 

[skiingfast]

All the upgrades to the terminal and surrounding area (parking garage, etc) is being paid for by the community To keep give me their so it's not coming out of disney's pocket.

The marketing if anything is probably less costly per passenger than with the old ships because the excitement been generated through the media is selling the ships.

All of this combined with the fact that Disney can only write off a small percentage of the ships cost means they will turn a profit very quickly.

So Disney doesn't pay for the terminal expenses of the terminal they exclusively use? I don't think the community benifits so much. With a quick survey of posts on DISboards they are far more questions about taking shuttles from MCO or WDW that hotels in Cape Canaveral.

Real quick if they only invest 18.75M per year and gernerate income of 250M. That is a return on investment of almost 1700% why do people invest in Royal Dutch Shell or Merck when you can just build cruise ships?

 

[KYMickey]

So Disney doesn't pay for the terminal expenses of the terminal they exclusively use? I don't think the community benifits so much. With a quick survey of posts on DISboards they are far more questions about taking shuttles from MCO or WDW that hotels in Cape Canaveral.

Disney pays a fee to use the terminal and I'm sure it will be higher after the expansion. However since they do not own the shore facilities they do not invest in expansions of them, that is all done by the owner of the facilities.

Real quick if they only invest 18.75M per year and gernerate income of 250M. That is a return on investment of almost 1700% why do people invest in Royal Dutch Shell or Merck when you can just build cruise ships?

If paying for the ship was the only expense you would be correct. However there are many many other expenses. As mentioned above there are fees payable to Port Canaveral for use of the facilities and there are similar fees for every other place they call upon. There also huge expenses for fuel, staffing, food, maintenance, etc. On top of that there is the cost of maintaining Castaway Cay and miscellaneous expenses such as marketing. I'm not sure what the bottom line profit margin is but I'm quite sure it's nowhere near as exorbitant and you're speculating.

 

[skiingfast]

If paying for the ship was the only expense you would be correct. However there are many many other expenses. As mentioned above there are fees payable to Port Canaveral for use of the facilities and there are similar fees for every other place they call upon. There also huge expenses for fuel, staffing, food, maintenance, etc. On top of that there is the cost of maintaining Castaway Cay and miscellaneous expenses such as marketing. I'm not sure what the bottom line profit margin is but I'm quite sure it's nowhere near as exorbitant and you're speculating.

Oh! well then then turning a profit on their 1.5B expenditure as stated before wasn't correct. Who would of guest that there 1/40 writeoff was the limit of their costs. There's operating costs too? Wow!

I was refering the whole time to Return on investment. That is the cost of new capital assets versus the increased income it generates.

The ship still needs to be paid for. The 1/40 of the cost is depreciation which is a loss written of the earnings. EBITDA look it up it may give you some direction. They either need to borrow and pay interest to pay for the ship or pay strait out of pocket.