Ccl Rcl Jpm Upgrade

North America Equity Research 16 December 2009

Cruise Industry CCL, CCL US

Upgrade to: Overweight Previous: Neutral $33.88

Price Target: $43.00

Assuming Coverage: Catching the Trade Winds of a Recovery; Upgrading CCL and RCL to Overweight

RCL, RCL US Upgrade to: Overweight Previous: Neutral $25.93

Price Target: $34.00

Cruise Lines

Kevin MilotaAC

(1-212) 622-0987 [email protected]

Joseph Greff (1-212) 622-0548 [email protected]

Daniel Yoon (1-212) 622-1205 [email protected]

J.P. Morgan Securities Inc.

See page 54 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

We are assuming lead coverage, updating our estimates, and upgrading our ratings on CCL and RCL to Overweight from Neutral. We believe both CCL and RCL will continue to perform well through 2010 as cruise fundamentals begin to recover, with an improvement in consumer confidence as the sluggish macroeconomic environment begins to right itself. Both CCL and RCL have been strong performers since February 29, 2009, as the recession came to a head (when they hit trough valuation/stock levels); CCL is up 73% and RCL is up 332% versus the 51% return of the S&P 500. We believe the lion’s share of the stock performance to date has been driven by the recovery in 2010E EPS. Moving forward in 2010, we think given the recovery in ROICs at CCL and RCL, investors will begin to refocus their sights on multiple expansion, which to a large extent has not been the emphasis to date. Both CCL and RCL have historically had significant second-derivative moves, as the stocks have tended to outperform when net yield acceleration occurred on a year-over-year basis (i.e., a positive swing rather than positive growth in net yields). We anticipate the second-derivative change in net yields will turn positive in 2010 (even though we only assume single-digit net yield increases for RCL and CCL, this is less negative than in 2009). Currently, CCL and RCL are trading below long-term average forward P/E multiples of 16.4x and 14.8x, respectively.

• Some may ask whether we like either CCL or RCL more. The quick answer is that we like both, and think CCL and RCL will work in tandem in 2010. Since 1993, the correlation coefficient for stock price performance between CCL and RCL has been 0.87, as investors have believed a recovery in the overall operating environment would benefit both industry participants. While we often point to the overall revitalization of demand (and thereby pricing) in the industry, we think that both CCL and RCL have unique investment facets that should be of interest to large-cap investors (particularly CCL) and SMid-cap investors (particularly RCL).

• We are upgrading CCL to Overweight (from Neutral) and are establishing a YE10 price target of $43. We are positive on the stock as we believe that: 1) recovering net yields and extended booking windows will drive EBITDA and EPS growth in 2010 and 2011; 2) increasing ticket prices should highlight operating leverage and increase flow-through during the recovery; 3) the company should see continued success with its cost-containment efforts; and 4) we view free cash flow as underappreciated and see potential dividend reinstatement in 2010.

• We are upgrading RCL to Overweight (from Neutral) and are establishing a YE10 price target of $34. We are positive on the stock as we believe that: 1) RCL’s booking patterns and net yield performance will be stronger in FY10 (largely due to its higher-yielding new capacity); 2) its stock has historically been a strong second-derivative performer as fundamentals improve; 3) its substantial operating leverage (given its smaller scale) should incrementally benefit EBITDA flow-through and EPS growth; and 4) its new capacity likely will bear fruit and contribute to strong net yield performance.

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Kevin Milota (1-212) 622-0987 [email protected]

• We think CCL and RCL are attractively valued versus each company’s respective long-term trading ranges coming out of this downturn. Currently, CCL and RCL are trading at 11.9x and 10.7x our 2011 EPS estimates, versus long-term average forward P/E multiples of 16.4x and 14.8x, respectively. In the two years following the reemergence of positive net yields (2004 and 2005), CCL traded at 17.2x and 18.9x forward-year EPS estimates, while RCL traded at and 14.6x and 15.5x.

• Looking at historical results (since ’99 for RCL and ’03 for CCL), we have found a high positive correlation between cruise net yields and domestic lodging RevPAR on a quarterly basis (0.82 correlation coefficient, and 0.67 R2). We find this strong correlation encouraging for net yield performance as we look to 2010 as the recovery year for lodging RevPAR. In particular, transient lodging demand has been up +7.3% in 4Q09 (vs. +5.0% in 3Q09, and +1.1% in 2Q09), which in part has been driven by the leisure traveler, which bodes well for increased cruise demand.

• The next catalyst for the group will be this Friday, December 18th, as CCL is set to announce 4Q09 earnings. In the release CCL will provide its first take on formal guidance for 2010, in which it will provide net yield, net cruise cost, and fuel guidance (price per metric ton and consumption). We believe CCL will indicate that it continues to see the booking window elongate and pricing on its itineraries strengthen. We believe that positive commentary coming out of CCL’s call on Friday would benefit RCL as well, as the company’s net yields and ticket pricing appear to be very strong on its recently launched Oasis of the Seas, and its newer Solstice and Freedom class ships.

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Table of Contents

Carnival Corp. ...........................................................................4 Key Investment Points .................................................................................................4 Investment Risks..........................................................................................................6 4Q09 and 2010 Earnings Estimates ...........................................................................11 Forward Demand Commentary..................................................................................11 Company Guidance....................................................................................................12 Valuation & Price Target Summary...........................................................................14

Royal Caribbean Cruises Ltd. ...............................................22 Key Investment Points ...............................................................................................22 Investment Risks........................................................................................................24 4Q09 and 2010 Earnings Outlook..............................................................................26 Forward Demand Commentary..................................................................................26 Company Guidance....................................................................................................28 Valuation & Price Target Summary...........................................................................29

Cruise Industry Summary......................................................37 Cruise Industry Stock Drivers ...............................................43

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Carnival Corp. Company Data Price ($) 33.88Date Of Price 15 Dec 0952-week Range ($) 34.95 -

16.80Mkt Cap ($ bn) 27.41Fiscal Year End NovShares O/S (mn) 809Price Target ($) 43.00Price Target End Date

31 Dec 10

Carnival Corporation (CCL;CCL US) 2008A 2009E

(Old)2009E

(New)2010E

(Old)2010E

(New)2011E

EPS Reported ($) Q1 (Feb) 0.30 0.33A 0.33A 0.15 Q2 (May) 0.48 0.31A 0.33A 0.28 Q3 (Aug) 1.65 1.37A 1.33A 1.51 Q4 (Nov) 0.47 0.20A 0.20A 0.39 FY 2.90 2.21A 2.19A 2.25 2.33 2.84Bloomberg EPS FY ($) 2.83 2.19A 2.32 2.71Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

Key Investment Points Recovering net yields and extended booking windows should be positive growth drivers in FY2010 We believe elongating booking windows (~30 days) and an accelerating booking pace at present will stem the tide of negative net yield results exhibited in the cruise industry since 4Q08. We are currently forecasting a 2009 net yield decline of 14.1% year-over-year. We expect the aforementioned positives to generate higher rates (100% flow-through) and subsequently higher revenues, which will in turn drive positive net yields year-over-year. We forecast year-over-year growth of +3.2% in 2010 net yields. We believe this will be a distinct positive for Carnival shares as our research indicates that Carnival shares have outperformed the S&P 500 by roughly 340 bps in years when net yields turned from negative to positive. As of 3Q09, Carnival’s forward bookings through the 2Q10 increased 19% year-over-year for the nine-month period. After adjusting for new capacity coming online in 2010, which is up 7.7% year-over-year, management noted that the shortfall in the bookings is modest. With that said, we believe the extended booking windows will allow Carnival to fill the remaining capacity with more profitable, higher-rated business, as the longer lead times will reduce Carnival’s reliance on drastic discounting for close-in bookings. Our channel checks indicate that 2010 has begun to stabilize and should continue to improve given the extended windows, which should drive premium year-over-year rates. We believe Carnival’s ability to increase rates for 2010 will result from the continued strengthening of customer demand, which should eventually begin to re-establish the consumer psyche of booking further out and wean the consumer off the heavy discounting/promotional activity that has characterized 2009.

Carnival to benefit from strong operating leverage and flow-through in a recovering environment In the cruise industry, ships always leave port with 100% or higher occupancy—therefore, passenger ticket prices are critical. Given our view that recovering net yields and extended booking windows will drive passenger ticket prices higher, we estimate passenger ticket per passenger cruise day will expand to ~$157 in 2010 (+3.0%), and ~$162 in 2011 (+3.0%), versus a decline of -15.2% in 2009. Note that we expect average ticket price growth despite our forecasts of 7.7% growth and 5.1%

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growth in available lower berth days in 2010 and 2011, respectively. Given the reliance on rates, for which every incremental dollar above the breakeven rate generates 100% flow-through to EBITDA, we believe CCL will be able to drop 22% and 56% of incremental net revenue to the EBITDA line in 2010 and 2011, respectively. While not necessarily inspiring, we note that elevated fuel costs per ALBD, with expected growth of +37% year-over-year in 2010, erode much of the operating leverage. That said, if we exclude fuel costs, flow-through improves to 59% and 64% in 2010 and 2011, respectively.

Keen eye on cost containment should set the stage for EBITDA and EPS growth We believe Carnival will remain vigilant in maintaining its net cruise costs per ALBD. We project net cruise costs per ALBD (excluding fuel) will increase +0.4% in both 2010 and 2011, in line with management’s cost containment goal of managing net cruise cost per ALBD (excluding fuel) within a range of flat to half the rate of inflation. Much of the heavy lifting was done in 2009 as the company successfully used its substantial economies of scale to negotiate price with many of its vendors, and aggressively worked to reduce its fuel expense (through more fuel-efficient capacity and aggressively managing its fuel consumption through proactive itinerary-related efforts). While we note that much of the upside from these initiatives should continue to be overshadowed by increases in fuel prices, we are comfortable that our 2010 estimates take into account growth in fuel costs sufficiently healthy to allow for potential EPS upside should the cost of fuel temper (presently modeled at $475 per metric ton). Net-net, our sense is that the cost-containment efforts could translate to meaningful bottom-line growth should one of two things occur, neither of which is currently incorporated in our model: 1) a meaningful upswing in demand or 2) a slowdown in the escalation of fuel prices.

Improving fundamentals and reduced capital investments related to new builds make CCL a solid FCF story We project EBITDA growth of 15% and 12% in 2011 and 2012, respectively. Furthermore, we project total capital expenditures to step down from $3.7 billion in 2010 to $2.7 billion and $2.4 billion in 2011 and 2012, respectively. At present, we anticipate Carnival using the $841 million and $1.66 billion in net free cash flow in 2011 and 2012 to pay down debt, which we expect to peak in 2Q10 at $11.7 billion. Management has stated its intention to operate within the “edicts” laid down by Moody’s Investors Service; thus, management remains dedicated to maintaining its investment grade credit rating (A3/negative outlook at Moody’s and BBB+/Negative Outlook at S&P). With that said, given Carnival’s free cash flow profile in 2011, we believe it is very likely that Carnival could reinstate its dividend in 2010. In evaluating when it will reinstate the quarterly dividend, the Board intends to assess: 1) the company’s liquidity position; 2) current operating conditions/tone of business; and 3) the potential impact on the A3 credit rating. Given reasonable net debt-to-trailing twelve month EBITDA sub-3.0x at present, CCL appears well positioned to reinstate the dividend, in our view. We currently project the reinstatement of a $0.30 annual dividend beginning in 2010. This level represents an estimated payout ratio of ~13%, well below the company’s long-term average of 28%. We believe this should be a positive catalyst for the stock. We also expect that this dividend level would keep CCL solidly within its Moody’s A3 credit rating which requires: 1) EBIT/ Interest of more than 5x (we project a 2Q10 trough of 5.2x) and 2) retained cash flow/net debt of at least 25%. After assuming dividend distributions of ~$236 million per year in 2010, 2011, and 2012, we estimate CCL will still generate FCF of $841 million and $1.663 billion in 2011 and 2012, respectively, which could be used for:

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1) a substantial increase in the common dividend; 2) share buybacks (although we think this is a less likely use of cash); and 3) future shipbuilding orders (CCL’s goal is to add 2-3 new ships per year). We estimate free cash flow yields in 2011 and 2012 of 3.2% and 6.2%, respectively, and note that free cash flow yields should be positive in 2011 for the first time since 2005.

Compelling valuation versus long-term average We establish a calendar year-end 2010 price target of $43 (replaces prior calendar year-end 2009 price target of $22), which assumes Carnival can trade at 15x our 2011 EPS estimate. Our target multiple is below the forward-year P/E multiple at which Carnival traded as the industry emerged from the negative net yield environment in 2003, and is roughly 1.4x below its long-term average forward-year multiple of 16.4x. In the two years following the turn to positive yields (2004 and 2005), Carnival traded at 17.2x and 18.9x forward-year EPS estimates. Given Carnival’s improving fundamentals and ROICs with value spreads set to recover in 2010 through 2012, we think this valuation multiple is reasonable. At current levels, Carnival trades at 14.6x, 11.9x, and 10.2x our 2010, 2011, and 2012 EPS estimates, respectively. Since 1993, shares have traded at an average forward-year P/E multiple of 16.4x, with a high of 30.3x (in January 1999) and a low of 6.8x (in January 2009).

Next catalyst for the group—Carnival’s earnings announcement on December 18th Carnival is set to announce 4Q09 earnings on December 18th. In the release Carnival will provide its first take on formal guidance for 2010, in which it will provide net yield, net cruise cost, and fuel guidance (price per metric ton and consumption).

Investment Risks Potential downside risks to our rating and price target include: 1) investor sentiment towards consumer discretionary stocks could erode further and valuation multiples contract; 2) fuel costs, which accounted for 23.3% of operating expenses in 2008, could escalate more meaningfully than we are currently forecasting; 3) overcapacity in the cruise industry stemming from new competitive supply could negatively affect pricing should demand not outstrip supply growth; 4) risks associated with one large shareholder group controlling ~38% of the outstanding stock; 5) regulatory and generic investment risks such as a weakening economy or unfavorable legislative changes both domestically or internationally.

Fuel-price volatility As Carnival does not hedge, it is directly affected by swings in fuel prices. Rising IFO-380 costs increase Carnival’s operating expense. While the company has made strides to reduce its level of consumption through technological innovations, as well a higher proportion of new, more fuel-efficient ships in its fleet, its operations remain highly susceptible to fuel price volatility. In addition, higher crude prices have a perceived negative effect on the spending patterns of lower-income leisure travelers, and vice versa. We estimate a 10% change in the fuel cost per metric ton affects our 2010 EPS estimate for Carnival by approximately $0.20.

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Economic and event risks We believe that demand for cruises will remain affected by the attitudes of leisure travelers. A sluggish recovery in the U.S. or global economy likely would cause leisure travelers to reconsider their discretionary travel budgets, which we believe would result in decreased demand. Key risks facing all leisure and travel-related companies include terrorism, geopolitical, and weather-related uncertainties which could severely curtail travel volume and leisure spending levels. Cruise lines are vulnerable to such scenarios as decreased demand could lead to continued price discounting, which would affect overall profitability. In addition, the negative headlines associated with events, such as ship equipment issues and cancellations, and H1N1 outbreaks on board, could potentially have a negative impact on the public’s perception of the cruise industry. Since the cruise industry is dependent on first-time cruisers, we believe negative press could persuade potential cruise passengers to consider alternative vacation options.

Company Description Carnival Corp. (CCL) is the largest cruise company in the world, operating 93 ships with 180,442 berths under eleven brands. Its portfolio of contemporary, premium, and luxury brands consists of Carnival Cruise Lines, Holland America Line, Princess Cruises, and Seabourn Cruise Line in North America; P&O Cruises, Cunard Line, and Ocean Village in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; Iberocruceros in Spain; and P&O Cruises in Australia.

In April 2003 Carnival Corp. and Carnival plc (formerly P&O Princess Cruises plc) completed a dual-listed company transaction that combined the businesses of both companies and called for the shares of Carnival Corp. and Carnival plc to trade on the NYSE and FTSE, respectively, under the ticker CCL. Carnival Corp. and Carnival plc are public companies with separate stock listings and shareholders. Carnival Corp. is incorporated in Panama, Carnival plc in England and Wales.

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Figure 1: Carnival Corp. & Plc – Ships/Berths by Brand $ in millions

Ship EnteredCurrent Fleet Service Berths Primary Area of Operation Age of ShipCONTEMPORARY Carnival Cruise LinesCarnival Dream 2009 3,652 North America 0Carnival Splendour 2008 2,998 North America 1Carnival Freedom 2007 2,966 North America 2Carnival Liberty 2005 2,966 North America 4Carnival Valor 2004 2,966 North America 5Carnival Miracle 2004 2,118 North America 5Carnival Glory 2003 2,966 North America 6Carnival Conquest 2002 2,966 North America 7Carnival Legend 2002 2,118 North America 7Carnival Pride 2001 2,118 North America 8Carnival Spirit 2001 2,120 North America 8Carnival Victory 2000 2,750 North America 9Carnival Triumph 1999 2,750 North America 10Paradise 1998 2,048 North America 11Elation 1998 2,048 North America 11Carnival Destiny 1996 2,634 North America 13Inspiration 1996 2,050 North America 13Imagination 1995 2,050 North America 14Fascination 1994 2,050 North America 15Sensation 1993 2,050 North America 16Ecstasy 1991 2,050 North America 18Fantasy 1990 2,054 North America 19Holiday 1985 1,450 North America 24

23 55,938 10CostaCosta Pacifica 2009 2,990 Europe 0Costa Luminosa 2009 2,260 Europe 0Costa Serena 2007 2,978 Europe 2Costa Concordia 2006 2,978 Europe 3Costa Magica 2004 2,702 Europe 5Costa Fortuna 2003 2,702 Europe 6Costa Mediterranea 2003 2,114 Europe 6Costa Atlantica 2000 2,114 Europe 9Costa Victoria 1996 1,928 Europe 13Costa Romantica 1993 1,344 Europe 16Costa Allegra 1992 784 Europe 17Costa Classica 1991 1,302 Europe 18Costa Marina 1990 762 Europe 19Costa Europa 1986 1,488 Europe 23

14 28,446 10Ocean VillageOcean Village Two 1990 1708 United Kingdom 19Ocean Village 1989 1,578 United Kingdom 20

2 3,286 20P&O CruisesVentura 2008 3,078 United Kingdom 1Arcadia 2005 2,016 United Kingdom 4Oceana 2000 2,016 United Kingdom 9Aurora 2000 1,870 United Kingdom 9Oriana 1995 1,818 United Kingdom 14Artemis(3) 1984 1,200 United Kingdom 25

6 11,998 10P&O Cruises AustraliaPacific Dawn 1991 1,596 Australia and New Zealand 18Pacific Sun 1986 1,480 Australia and New Zealand 23

2 3,076 21IberoGrand Voyager 2000 832 Southern Europe 9Grand Voyager 1999 1,244 Southern Europe 10Queen Mary 2 1987 1,494 Southern Europe 22

3 3,570 14AIDAAIDAluna 2009 2,050 Germany 0AIDAbella 2008 2,050 Germany 1AIDAdiva 2007 2,050 Germany 2ADIAaura 2003 1,266 Germany 6AIDAvita 2002 1,266 Germany 7AIDAcara 1996 1,180 Germany 13

6 9,862 5 Source: J.P. Morgan estimates.

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Figure 2: Carnival Corp. & Plc – Ships/Berths by Brand (Continued) $ in millions

Ship EnteredCurrent Fleet Service Berths Primary Area of Operation Age of ShipPREMIUMPrincessRuby Princess 2008 3,080 North America 1Emerald Princess 2007 3,082 North America 2Crown Princess 2006 3,080 North America 3Sapphire Princess 2004 2,678 North America 5Caribbean Princess 2004 3,100 North America 5Diamond Princess 2004 2,678 North America 5Island Princess 2003 1,974 North America 6Coral Princess 2002 1,974 North America 7Star Princess 2002 2,598 North America 7Royal Princess 2001 710 North America 8Golden Princess 2001 2,598 North America 8Tahitian Princess 2000 676 North America 9Pacific Princess 1999 676 North America 10Sea Princess 1998 2,016 North America 11Grand Princess 1998 2,592 North America 11Dawn Princess 1997 1,998 North America 12Sun Princess 1995 2,022 North America 14

17 37,532 7Holland America LineEurodam 2008 2,104 North America 1Noordam 2006 1,918 North America 3Westerdam 2004 1,916 North America 5Oosterdam 2003 1,848 North America 6Zuiderdam 2002 1,916 North America 7Zaandam 2000 1,432 North America 9Amsterdam 2000 1,380 North America 9Volendam 1999 1,432 North America 10Rotterdam 1997 1,316 North America 12Veendam 1996 1,258 North America 13Ryndam 1994 1,260 North America 15Maasdam 1993 1,258 North America 16Statendam 1993 1,258 North America 16Prinsendam 1988 792 North America 21

14 21,088 10CunardQueen Victoria 2007 1,980 North America 2Queen Mary 2 2003 2,592 North America and United Kingdom 6

2 4,572 4LUXURYSeabournSeabourn Odyssey 2009 450 North America 0Seabourn Legend 1992 208 North America 17Seabourn Spirit 1989 208 North America 20Seabourn Pride 1988 208 North America 21

4 1,074 15

Total Ships Total Berths Average Fleet Age93 180,442 11

Source: J.P. Morgan estimates.

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Figure 3: Carnival Corp. & Plc – New Ship Orderbook $ in millions

Expected Estimated Total Cost Price PerNew Builds Service Date Berths Gross Tons Euros Sterling USD Berth (USD)Carnival Cruise LinesCarnival Magic 5/11 3,652 130,000 €565 $225,876Unnamed Spring '12 3,690 130,000 $738 $200,000Total 2 7,342 260,000 €565 $738 $425,876Average $212,938

Holland America LineNieuw Amsterdam 7/10 2,106 86,000 €425 $294,634Total 1 2,106 86,000 $425 $294,634Average $294,634

SeabournSeabourn Sojourn 6/10 450 32,000 $250 $555,556Newbuild 6/11 450 32,000 $250 $555,556Total 2 900 64,000 $500 $1,111,111Average $555,556

AIDAAIDAblu 2/10 2,174 71,000 €350 $235,051Newbuild 4/11 2,174 71,000 €380 $255,198Newbuild 6/12 2,174 71,000 €385 $258,556Total 3 6,522 213,000 €1,115 $748,804Average $249,601

CostaCosta Deliziosa 2/10 2,260 92,700 €420 $271,327Newbuild 7/11 3,012 €510 $247,211Newbuild 5/12 3,012 €510 $247,211Total 3 8,284 92,700 €1,440 $765,750Average $255,250

P&O CruisesAzura 4/10 3,098 116,000 €535 $252,130Total 1 3,098 116,000 €535 $252,130Average $252,130

CunardQueen Elizabeth 10/10 2,092 92,000 $700 $334,608Total 1 2,092 92,000 $700 $334,608Average $334,608

Total 13 30,344 923,700 €4,080 $1,938

Total Newbuild Investment (USD) $7,895 Source: J.P. Morgan estimates.

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4Q09 and 2010 Earnings Estimates 4Q09 Our 4Q09 recurring EPS estimate is $0.20, -58% from the recurring 2008 level, and in line with consensus. We forecast a net yield decline of -10.9%. On the cost side, we forecast a decrease in net cruise cost (per available lower-berth day) of -4.2% with fuel cost per metric ton of $465. We forecast net revenues of $2.543 billion (down 4.1%) and operating income of $245 million (down 45.6%).

Full-year 2010 Our full-year 2010 recurring EPS estimate is $2.33, up ~6.5% from the recurring full-year 2009 level, and $0.01 above consensus. We expect net yield growth of 3.2%. On the cost side, we forecast an increase in net cruise cost (per available lower-berth day) of 4.9% with fuel cost per metric ton of $475. We forecast net revenues of $11.59 billion (up 11.2%) and operating income of $2.26 billion (up 7.4%).

Forward Demand Commentary As of 3Q09, Carnival noted that bookings for the next three quarters (through 2Q10) were running +19% on a year-over-year basis. After adjusting for projected capacity increases, Carnival was moderately behind last year’s booking levels, though management noted that the booking window continues to lengthen. Regarding price, on an overall basis, Carnival has seen prices stabilize, and for certain itineraries where it has seen the booking window lengthen, it has been able to increase rates. Carnival’s ability to meaningfully increase rates for 2010 is contingent on the continued strengthening of customer demand, which should eventually begin to re-establish the consumer psyche of booking further out and wean the consumer off the heavy discounting/promotional activity that has characterized 2009. With that said, Carnival should be successful in closing the remaining capacity-adjusted occupancy gap that remains as it moves through 1Q10.

For 1Q10, given that Carnival is almost fully booked (as ships typically are close to 95% booked one quarter in advance) with business that was sold at lower price levels (on a constant-dollar basis), it will be difficult for the company to increase pricing on the close-in bookings to a level that would offset the weak rates booked earlier in 2009; thus, the company expects 1Q10 net yields to decline on a year-over-year basis. However, given the relative weakness of the U.S. dollar to the Euro/GBP, we expect net yields to be flat to modestly up in the 1Q10 on a current-dollar basis. If booking volumes continue at current levels, Carnival believes that, on a quarterly basis for 2010, it should start to see a positive effect on local-currency yields and a gradual year-over-year improvement in net yields.

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Company Guidance Figure 4: Carnival Corp. & Plc – Company Guidance $ in millions

4Q09 1Q10 2Q10 2010 2011 2012Capacity Growth incl. Iberocruceros 7.7% 9.9% 9.0% 7.7% 5.1% 4.7%Net Yield Growth (Current $) -9% to -11%Net Yield Growth (Constant $) -11% to -13%Net Cruise Costs/ALBD Growth (Current $) -2% to -4%Net Cruise Costs/ALBD Growth (Constant $) -4% to -6%

Net Cruise Costs/ALBD Growth (Ex Fuel)Depreciation & AmortizationInterest Expense, NetTax RateEarnings per Share $0.16-0.20Other ItemsFuel Consumption (MM Metric Tons) 830Fuel Price ($ per Metric Ton) $465 Fuel Impact (10% Change) FY09; $116 million or $0.15

Euro to USD $1.46Sterling to USD $1.67Currency Impact (10% Change) FY09; $140 million or $0.17

Qualitative CommentsNorthern American BrandsCapacity Growth 5.7% 5.3% 4.0%Bookings Flat Moderately ↓, however stronger booking

patters over the last several monthsModerately ↓

Pricing ↓ in mid-teens range, though very little inventory ↓ Currently but ↑ Compared to End of 1Q09 ↓ Currently but ↑ Compared to End of 2Q09

Yields ↓ Moderately ↓ Moderately ↓Commentary for North American BrandsCaribbean Cruises Pricing Moderately ↓ Pricing Moderately ↓

Capacity Share 45.0% 62.0% 57.0%Mexican Rivera Cruises Pricing Significantly ↓ Pricing Significantly ↓

Capacity Share 10% (out of Southern California) 11.0% 10.0%Long/Exotic Cruises Pricing Significantly ↓ Pricing ↓

Capacity Share Under 10%Alaskan Cruises Pricing Significantly ↓, Early Booking Trends Still Not

Positive Due To Head TaxCapacity Share Under 10%

Europe Cruises Pricing Moderately ↓Capacity Share 10.0%

European BrandsCapacity Growth 9.6% 15.0% 15.2%

Bookings Flat Moderately ↓ Moderately ↓Pricing ↓ in local currency, very little inventory ↓ Currently but ↑ Compared to End of 1Q09 ↓ Currently but ↑ Compared to End of 2Q09

Yields ↓ Moderately ↓ in local currency, Flat to ↑ in current dollar

Moderately ↓

Commentary for European BrandsEurope Cruises Pricing Moderately ↓ Pricing Holding Well

Capacity Share 78.0% 29.0% 57.0%Transatlantic Pricing Significantly ↓

Capacity Share 11.0% 10.0%South America Cruises Pricing Significantly ↓

Capacity Share 11.0% Under 10%Asia Cruises Pricing Moderately ↓

Capacity Share 11.0% Under 10% Source: J.P. Morgan estimates.

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Figure 5: CCL EPS Sensitivity to Changes in Net Yields and Fuel Prices $ in millions

4Q09 FY09 1Q10E FY10E FY11E FY12EFuel Price / Metric Ton $465 $365 $475 $475 $485 $485Consumption (Metric Tons in 000s) 0.83 3.19 0.81 3.37 3.46 3.55Fuel Expense 386 1,164 386 1,599 1,680 1,723

Sensitivity to Change in Price of Fuel:Percentage Change 10% 10% 10% 10% 10% 10%Fuel Price / Metric Ton $512 $402 $523 $523 $534 $534Fuel Expense 425 1,281 424 1,759 1,848 1,895Increase (Decrease) to Fuel Expense 39 116 39 160 168 172Shares Outstanding 809 806 809 809 809 809Per Share Impact $0.05 $0.14 $0.05 $0.20 $0.21 $0.21

CCL Guidance (as of 3Q09) JPM Estimates

4Q09 FY09 1Q10E FY10E FY11E FY12EAvailable Lower Berth Days (ALBD) 16.1 62.1 15.9 66.9 70.3 73.6Capacity Growth 7.7% 5.4% 9.9% 7.7% 5.1% 4.7%Net Cruise Revenue 2,570 10,442 2,481 11,591 12,575 13,462Net Yield $160.03 $168.10 $155.79 $173.25 $178.83 $182.85

% Change (1) -10.0% -14.0%

Sensitivity to Change in Net Yield:Percentage Change 1% 1% 1% 1% 1% 1%Net Yield $161.64 $169.78 $157.35 $174.98 $180.62 $184.68Net Cruise Revenue 2,595 10,547 2,506 11,707 12,700 13,597Increase (Decrease) to Fuel Expense 26 104 25 116 126 135Shares Outstanding 809 806 809 809 809 809Per Share Impact $0.03 $0.13 $0.03 $0.14 $0.16 $0.17

JPM EstimatesCCL Guidance (as of 3Q09)

(1) Midpoint of CCL’s Net Yield Guidance Range.

Source: Bloomberg, Company reports, and J.P. Morgan estimates.

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Valuation & Price Target Summary Our calendar year-end 2010 price target of $43 assumes CCL can trade at 15x our 2011 EPS estimate. Our target multiple reflects of the multiple of forward-year EPS at which CCL traded as the industry emerged from the negative net yield environment in 2003, and is roughly 1.4x below its long-term average multiple of 16.4x. In the two years following the turn to positive yields (2004 and 2005), Carnival traded at 17.2x and 18.9x forward-year EPS estimates. Given Carnival’s improving fundamentals and ROICs, with value spreads set to recover in 2010 through 2012, we think this valuation multiple is reasonable.

At current levels, Carnival trades at 14.6x, 11.9x, and 10.2x our 2010, 2011, and 2012 EPS estimates, respectively. Since 1993, shares have traded at an average forward-year P/E multiple of 16.4x, with a high of 30.3x (in January 1999) and a low of 6.8x (in January 2009).

Figure 6: YE10 Price Target $ in millions

2011E EPS $2.84x Target Multiple 15.0x= YE10 Price Target $43

Current Price 33.88Appreciation Potential 26%


Figure 7: CCL EPS Sensitivity Grid and Price Target Sensitivity Analysis $ in millions

2011 Net Yield (YoY % Change) 2011 Net Yield (YoY % Change)-1.0% pt. -0.5% pt. +0.5% pt. +1.0% pt. -1.0% pt. -0.5% pt. +0.5% pt. +1.0% pt.

2.2% 2.7% 3.2% 3.7% 4.2% 2.2% 2.7% 3.2% 3.7% 4.2%

-10% $428 $2.89 $2.97 $3.05 $3.13 $3.20 -10% $428 $43 $45 $46 $47 $48

-5% $451 $2.79 $2.87 $2.94 $3.02 $3.10 -5% $451 $42 $43 $44 $45 $46

$485 $2.68 $2.76 $2.84 $2.92 $3.00 ### $485 $40 $41 $43 $44 $45

5% $499 $2.58 $2.66 $2.74 $2.81 $2.89 5% $499 $39 $40 $41 $42 $43

10% $523 $2.48 $2.55 $2.63 $2.71 $2.79 10% $523 $37 $38 $39 $41 $42

TARGET PRICE SENSITIVITY

2011

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Note: Assumes a 15x target multiple.


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Risk/Reward Analysis Our risk/reward analysis derives a matrix of year-end 2011 per share valuations for Carnival with a range of EPS estimates and a range of valuation multiples. The base case represents our 2011 EPS estimate, while the upside/downside cases represent positive and negative variances (in 5% increments) from our estimate. The valuation range considers our fair value estimate and current/historical trading multiples.

Figure 8: Carnival Corp. & Plc – Risk/Reward Analysis $ in millions

Estimated 2011 EPS RangeDownside Case J.P. Morgan Estimate Upside Case

2011E EPS $2.41 $2.56 $2.70 $2.84 $2.98 $3.12 $3.27% change from J.P. Morgan estimate -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Price Range Based on Estimated 2009 EPS Range5.9x $14.31 $15.16 $16.00 $16.84 $17.68 $18.52 $19.37

-58% -55% -53% -50% -48% -45% -43%

7.9x $19.14 $20.27 $21.39 $22.52 $23.65 $24.77 $25.90-44% -40% -37% -34% -30% -27% -24%

9.9x $23.97 $25.38 $26.79 $28.20 $29.61 $31.02 $32.43-29% -25% -21% -17% -13% -8% -4%

Current 1-Yr Forward P/E Multiple 11.9x $28.80 $30.49 $32.19 $34 $35.57 $37.27 $38.96% change from current price -15% -10% -5% 0% 5% 10% 15%

13.9x $33.63 $35.60 $37.58 $39.56 $41.54 $43.52 $45.49-1% 5% 11% 17% 23% 28% 34%

15.9x $38.45 $40.72 $42.98 $45.24 $47.50 $49.76 $52.0314% 20% 27% 34% 40% 47% 54%

17.9x $43.28 $45.83 $48.37 $50.92 $53.47 $56.01 $58.5628% 35% 43% 50% 58% 65% 73%

Note:Represents current share price.

Historical ValuationAverage: 15.1xPeak: 30.3xTrough: 6.8x

Current Forward Valuation2011: 11.9x

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Forward P/E Multiples Average


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Discounted Cash Flow Our discounted cash flow (DCF) valuation projects five years (2009-13) of unleveraged free cash flow, based on what we would characterize as reasonable growth assumptions. We then discount these cash flows using the company’s weighted average cost of capital (WACC). Our terminal value is based on a multiple of 12.5x (our projection of a normalized trading multiple for CCL in year six) applied to our 2013 EBITDA estimate, which we then discount back to the present. Our analysis yields a base-case year-end 2010 share price of $43 with a valuation range of $37-$50.

Figure 9: Carnival Corp. & Plc – Discounted Cash Flow Valuation ($ in millions, except per share data) $ in millions

CAGR2009E 2010E 2011E 2012E 2013E 2009 - 2013

Earnings Before Interest & Taxes (EBIT) $2,105 $2,261 $2,689 $3,072 $3,379 13%Less: Taxes 9 25 30 34 38 Tax Rate 0.4% 1.1% 1.1% 1.1% 1.1%Less: Investment & Other Capex 3,400 3,700 2,700 2,400 2,400Plus: Depreciation & Amortization 1,314 1,409 1,529 1,645 1,645 = Unlevered Free Cash Flow $10 ($55) $1,489 $2,283 $2,587 300%Terminal Value Multiple 12.5xTerminal Value 62,806PV Discount Factor at WACC 0.931 0.846 0.769 0.699 0.636 0.636PV of FCF 9 -46 1145 1596 1644 39,923Capital Value $44,272Less: 3Q09 Net Debt 9,138= Equity Value $35,134Diluted Shares Outstanding 809.0= Equity Value per Share $43Current Price $33.88Appreciation Potential 28%

WACC Inputs: Enterprise Value/Capital Structure:Capital % Cost Total Capital Total %Debt 27.0% 3.9% 1.0% Debt 10,114 27.0%Equity (Cost Approx. by CAPM) 73.0% 12.3% 9.0% Market Cap 27,409 73.0%WACC 2.5% 10.0% Total Cap 37,523 100.0%

CAPM: 12.3%=Rf + Beta *(Rm-Rf)Risk Free Rate, Rf 3.4%Expected Market Return, Rm 10.00%Beta 1.35

Sensitivity Analysis: WACC

9.0% 10.0% 11.0%11.5x 41.71 39.50 37.40

12.5x 45.83 43.45 41.19

13.5x 49.96 47.40 44.97Te

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ROIC Analysis We believe that return on invested capital (ROIC), which measures the un-leveraged cash returns generated per dollar invested in the company, is the most accurate gauge of a company’s ability to create value. ROIC measures the cash-on-cash returns generated by a company, independent of its financing and accounting strategies. While other performance measures such as return on equity, EBITDA returns, and project returns can prove useful and serve as proxies for value creation, ROIC, while more difficult to calculate, is the most effective, in our view. While the aforementioned statistics can be skewed by leverage, stock buybacks, and/or accounting strategies, ROIC is relatively immune to these manipulations.

ROIC enables investors to determine how efficiently management runs its assets independent of how it chooses to finance them. For investors, it provides the opportunity to look through various financial strategies and accounting procedures and identify the real economic return a company’s management can generate. When evaluating a company’s weighted average cost of capital (WACC), which represents the minimum rate of return (adjusted for risk) that a company must earn to create value for both shareholders and creditors, the spread between ROIC and WACC represents the company’s true economic profit.

Moreover, positive changes in ROIC tend to effectively highlight economically efficient growth prospects (as opposed to growth achieved through expensive acquisitions or mediocre expansions). As ROIC improves, one can reasonably assume that the company is either more efficiently utilizing its existing asset base and/or investing in new high-return projects. We project that Carnival’s return on invested capital and value spreads will consistently improve between 2010 and 2012, which bodes well for potential multiple expansion.

Figure 10: Carnival Corp. & Plc – Historical and Projected ROICs, 2003-12E $ in millions

11.7% 13.0% 12.5% 12.1% 11.0% 9.9% 12.0% 11.2%8.5% 9.6%

14.6%

10.6% 10.5% 10.2% 9.8% 10.0% 10.0%11.8%

12.6%

9.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012ECCL ROIC CCL WACC

Source: Company reports and J.P. Morgan estimates.

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Figure 11: Carnival Corp. & Plc – ROIC and Value Spread Trends, 2003-12E $ in millions

2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012ERecurring EBIT $1,416 $2,172 $2,639 $2,613 $2,725 $2,729 $2,105 $2,261 $2,689 $3,072Tax Rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%After-Tax EBIT 1,381 2,118 2,573 2,548 2,657 2,661 2,052 2,205 2,622 2,995Plus: Depreciation & Amortization $660 $811 $902 $988 $1,101 $1,249 $1,314 $1,409 $1,529 $355Less: Other Capex $233 $370 $503 $511 $597 $908 $665 $746 $682 $186= Net Operating Profit After Tax (NOPAT) $1,808 $2,559 $2,972 $3,025 $3,161 $3,002 $2,702 $2,869 $3,470 $3,164

Total Assets 24491 27636 28432 30552 34181 33400- Current Liabilities 3315 5034 5192 5415 7260 5781Invested Capital $21,176 $22,602 $23,240 $25,137 $26,921 $27,619 $28,565 $29,265 $28,424 $27,845

CCL ROIC 8.5% 11.7% 13.0% 12.5% 12.1% 11.0% 9.6% 9.9% 12.0% 11.2%

CCL WACC 11.8% 12.6% 14.6% 10.6% 10.5% 10.2% 9.9% 9.8% 10.0% 10.0%

ROIC - WACC -3.2% -0.9% -1.6% 1.9% 1.7% 0.8% -0.3% 0.1% 2.0% 1.2%

Risk Free Rate, Rf 4.4% 4.2% 4.4% 4.7% 3.9% 2.4% 3.3% 3.3% 3.3% 3.3%Expected Market Return, Rm 12.0% 12.0% 12.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%Beta 1.20 1.23 1.52 1.31 1.29 1.36 1.35 1.35 1.35 1.35Market Cap 30,155 49,043 45,610 41,006 36,838 19,845 26,414 26,414 26,414 26,414Total Debt 5,946 6,495 5,894 6,451 7,456 8,477 9,749 10,449 9,608 10,262% Equity of Capital Structure 84% 88% 89% 86% 83% 70% 73% 72% 73% 72%% Debt of Capital Structure 16% 12% 11% 14% 17% 30% 27% 28% 27% 28%Cost of Debt, After Tax 3.0% 3.5% 4.4% 3.9% 4.0% 4.3% 3.5% 3.3% 3.6% 4.0%WACC 11.8% 12.6% 14.6% 10.6% 10.5% 10.2% 9.9% 9.8% 10.0% 10.0% Source: Company reports and J.P. Morgan estimates.

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Figure 12: Carnival Corp. & Plc – EPS Model $ in millions EARNINGS MODEL 2006 2007 2008E 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012EQuarter Ended 11/30/06 11/30/07 11/30/08 02/28/09 05/31/09 08/31/09 11/30/09 11/30/09 02/28/10 05/31/10 08/31/10 11/30/10 11/30/10 11/30/11 11/30/12RevenuesPassenger Ticket 8,903 9,792 11,210 2,219 2,242 3,105 2,421 9,987 2,465 2,532 3,446 2,703 11,146 12,145 13,031

yoy % change 6.0% 10.0% 14.5% -9.0% -13.4% -15.1% -4.1% -10.9% 11.1% 12.9% 11.0% 11.6% 11.6% 9.0% 7.3%Onboard & Other 2,514 2,846 3,044 634 673 825 736 2,868 703 753 907 814 3,176 3,393 3,605

yoy % change 7.5% 13.2% 7.0% -9.7% -9.4% -4.5% 0.2% -5.8% 10.8% 11.8% 9.9% 10.6% 10.7% 6.9% 6.2%Gross Cruise Revenues 11,417 12,638 14,254 2,853 2,915 3,930 3,157 12,855 3,168 3,284 4,353 3,517 14,321 15,539 16,636

yoy % change 6.3% 10.7% 12.8% -9.1% -12.5% -13.1% -3.2% -9.8% 11.0% 12.7% 10.8% 11.4% 11.4% 8.5% 7.1%Other (Tour) 422 395 392 11 33 209 39 292 11 33 211 39 295 295 295

yoy % change 18.2% -6.4% -0.8% -8.3% -29.8% -28.4% -4.0% -25.4% 0.0% 0.5% 1.0% 0.0% 0.8% 0.0% 0.0%Total Revenues 11,839 13,033 14,646 2,864 2,948 4,139 3,197 13,148 3,179 3,317 4,564 3,556 14,616 15,833 16,931

yoy % change 6.7% 10.1% 12.4% -9.1% -12.7% -14.0% -3.2% -10.2% 11.0% 12.5% 10.3% 11.2% 11.2% 8.3% 6.9%

Less: Commissions, Transportation & Other 1,749 1,941 2,232 514 440 515 493 1,962 571 497 596 550 2,214 2,412 2,588yoy % change 6.3% 11.0% 15.0% -7.9% -16.2% -22.0% 0.8% -12.1% 11.1% 12.9% 15.7% 11.6% 12.8% 9.0% 7.3%

Less: Onboard & Other 453 495 501 104 110 131 121 466 115 123 144 134 516 552 586yoy % change 10.0% 9.3% 1.2% -16.8% -9.1% -2.2% 0.2% -6.9% 10.8% 11.8% 9.9% 10.6% 10.7% 6.9% 6.2%

Net Cruise Revenues 9,215 10,202 11,521 2,235 2,365 3,284 2,543 10,427 2,481 2,664 3,613 2,832 11,591 12,575 13,462yoy % change 6.2% 10.7% 12.9% -9.0% -11.9% -11.9% -4.1% -9.5% 11.0% 12.7% 10.0% 11.4% 11.2% 8.5% 7.1%

ExpensesPayroll & Related 1,158 1,336 1,470 352 366 387 392 1,497 391 403 414 420 1,628 1,729 1,828

yoy % change 3.2% 15.4% 10.0% -2.2% 0.3% 1.6% 7.7% 1.8% 11.0% 10.1% 7.1% 7.3% 8.8% 6.2% 5.7%Food 644 747 856 198 203 223 220 844 218 222 237 234 911 957 1,002

yoy % change 5.1% 16.0% 14.6% -4.3% -3.3% -3.5% 5.5% -1.5% 10.2% 9.3% 6.3% 6.5% 8.0% 5.1% 4.7%Fuel 932 1,096 1,774 208 243 327 386 1,164 386 405 398 410 1,599 1,680 1,723

yoy % change 31.8% 17.6% 61.9% -46.9% -42.8% -38.2% -9.8% -34.4% 85.4% 66.8% 21.7% 6.3% 37.4% 5.1% 2.5%% of Gross Cruise Revenues 8.2% 8.7% 12.4% 7.3% 8.3% 8.3% 12.2% 9.1% 12.2% 12.3% 9.1% 11.7% 11.2% 10.8% 10.4%

Other Ship Operating 1,541 1,717 1,913 458 488 498 538 1,982 505 533 528 573 2,139 2,259 2,377yoy % change 5.2% 11.4% 11.4% 0.9% 4.1% -1.4% 10.9% 3.6% 10.2% 9.3% 6.0% 6.5% 7.9% 5.6% 5.2%

Selling & Administrative (Cruise) 1,405 1,547 1,594 384 386 372 405 1,547 422 421 394 430 1,668 1,753 1,835yoy % change 9.0% 10.1% 3.0% -7.9% -7.2% 2.2% 2.1% -2.9% 9.9% 9.0% 6.0% 6.2% 7.8% 5.1% 4.7%

Net Cruise Costs 5,680 6,443 7,607 1,600 1,686 1,807 1,941 7,034 1,921 1,984 1,971 2,068 7,944 8,378 8,765yoy % change 9.3% 13.4% 18.1% -12.6% -10.6% -10.1% 3.1% -7.5% 20.1% 17.7% 9.1% 6.5% 12.9% 5.5% 4.6%

Other (Tour) 314 296 293 16 35 145 36 232 16 35 146 36 233 233 233yoy % change 23.6% -5.7% -1.0% -11.1% -20.5% -25.3% -4.0% -21.0% 0.0% 0.5% 1.0% 0.0% 0.7% 0.0% 0.0%

Selling & Administrative (Tour) 42 32 35 8 7 9 11 35 9 8 10 12 38 40 41yoy % change -8.7% -23.8% 9.4% 0.0% -22.2% 12.5% 10.6% 0.2% 9.9% 9.0% 6.0% 6.2% 7.6% 5.1% 4.7%

EBITDA 3,601 3,826 3,978 622 670 1,532 595 3,419 546 671 1,697 757 3,671 4,219 4,717Depreciation & Amortization 988 1,101 1,249 311 317 336 350 1,314 346 352 355 356 1,409 1,529 1,645

yoy % change 9.5% 11.4% 13.4% 3.3% 1.6% 4.0% 12.0% 5.2% 11.4% 11.2% 5.6% 1.5% 7.2% 8.5% 7.6%Operating Income (EBIT) 2,613 2,725 2,729 311 353 1,196 245 2,105 200 318 1,342 401 2,261 2,689 3,072

yoy % change -1.0% 4.3% 0.1% -0.3% -26.8% -19.5% -45.6% -22.9% -35.7% -9.9% 12.2% 63.9% 7.4% 18.9% 14.2%Margin 22.1% 20.9% 18.6% 10.9% 12.0% 28.9% 7.7% 16.0% 6.3% 9.6% 29.4% 11.3% 15.5% 17.0% 18.1%yoy bps change -1.7% -1.2% -2.3% 1.0% -2.3% -2.0% -6.0% -2.6% -4.6% -2.4% 0.5% 3.6% -0.5% 1.5% 1.2%

Interest Expense, Net (287) (300) (379) (92) (88) (91) (90) (361) (89) (93) (94) (93) (369) (378) (358)Other Income (Expense), Net (8) (1) 27 19 5 (8) 16 0Income Before Income Taxes (EBT) 2,318 2,424 2,377 238 270 1,097 155 1,760 111 225 1,248 308 1,892 2,311 2,714Income Tax Benefit (Expense), Net (39) (16) (47) 22 (6) (24) 0 (8) 10 (5) (27) 1 (21) (26) (30)

Tax Rate 1.7% 0.7% 2.0% -9.2% 2.2% 2.2% -0.3% 0.4% -9.2% 2.2% 2.2% -0.3% 1.1% 1.1% 1.1%Net Income 2,279 2,408 2,330 260 264 1,073 155 1,752 121 220 1,221 309 1,871 2,286 2,684Convertible Interest 33 30 28 3 3 3 3 12 3 3 3 3 12 12 12Net Income (for Diluted Earnings per Share) 2,312 2,438 2,358 263 267 1,076 158 1,764 124 223 1,224 312 1,883 2,298 2,696Reported Diluted Earnings per Share 2.77 2.94 2.90 0.33 0.33 1.33 0.20 2.19 0.15 0.28 1.51 0.39 2.33 2.84 3.33

yoy % change 2.6% 6.4% -1.5% 9.5% -31.5% -19.2% -58.3% -24.6% -53.1% -16.9% 13.7% 97.3% 6.5% 22.0% 17.3%Nonrecurring Items (per Share) 0.02 0.00Recurring Diluted Earnings per Share 2.79 2.94 2.90 0.33 0.33 1.33 0.20 2.19 0.15 0.28 1.51 0.39 2.33 2.84 3.33

yoy % change 2.0% 5.3% -1.5% 9.5% -31.5% -19.2% -58.3% -24.6% -53.1% -16.9% 13.7% 97.3% 6.5% 22.0% 17.3%Common Shares Outstanding - Basic 801 793 786 787 787 787 787 787 787 787 787 787 787 787 787Common Shares Outstanding - Diluted 836 828 813 803 804 809 809 806 809 809 809 809 809 809 809Dividend per Share 1.03 1.38 1.60 0.40 0.40 0.075 0.075 0.075 0.075 0.30 0.30 0.30 Source: Company reports and J.P. Morgan estimates.

Figure 13: Carnival Corp. & Plc – Capacity-Adjusted Statistics $ in millions CAPACITY ADJUSTED STATISTICS 2006 2007 2008E 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012EQuarter Ended 11/30/06 11/30/07 11/30/08 02/28/09 05/31/09 08/31/09 11/30/09 11/30/09 02/28/10 05/31/10 08/31/10 11/30/10 11/30/10 11/30/11 11/30/12Current $Gross Yield = Gross Cruise Revenue per ALBD (in $) 228.59 233.46 241.83 196.86 190.15 241.97 196.64 206.94 198.88 196.55 252.83 206.23 214.06 220.98 225.97

yoy % change 1.7% 2.1% 3.6% -11.2% -17.3% -17.6% -10.1% -14.4% 1.0% 3.4% 4.5% 4.9% 3.4% 3.2% 2.3%Net Yield = Net Cruise Revenue per ALBD (in $) 184.50 188.46 195.46 154.22 154.27 202.19 158.40 167.86 155.79 159.46 209.87 166.11 173.25 178.83 182.85

yoy % change 1.5% 2.1% 3.7% -11.1% -16.8% -16.5% -10.9% -14.1% 1.0% 3.4% 3.8% 4.9% 3.2% 3.2% 2.3%

Net Cruise Costs per ALBD (in $) 113.72 119.02 129.06 110.40 109.98 111.26 120.88 113.23 120.62 118.74 114.51 121.25 118.74 119.14 119.05yoy % change 4.5% 4.7% 8.4% -14.6% -15.5% -14.8% -4.2% -12.3% 9.3% 8.0% 2.9% 0.3% 4.9% 0.3% -0.1%

Net Cruise Costs (excl. Fuel) per ALBD (in $) 95.06 98.78 98.96 96.05 94.13 91.12 96.84 94.49 96.41 94.48 91.40 97.20 94.84 95.24 95.65yoy % change 1.1% 3.9% 0.2% -5.4% -6.6% -5.3% -0.7% -4.5% 0.4% 0.4% 0.3% 0.4% 0.4% 0.4% 0.4%


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Figure 14: Carnival Corp. & Plc – Free Cash Flow and Balance Sheet Model $ in millions FREE CASH FLOW MODEL 2006 2007 2008E 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012ENet Income 2,279 2,408 2,330 260 264 1,073 155 1,752 121 220 1,221 309 1,871 2,286 2,684Add: Depreciation & Amortization 988 1,101 1,249 311 317 336 350 1,314 346 352 355 356 1,409 1,529 1,645Less: Capitalized Interest Expense (37) (52) (53) (9) (10) (9) (9) (37) (11) (11) (11) (11) (44) (38) (30)Less: Dividends (803) (1,050) (1,261) (314) (314) (59) (59) (59) (59) (236) (236) (236)Less: Investment Capex (Incl. New Ships) (1,969) (2,716) (2,445) 0 (1,626) (292) (818) (2,735) 0 (1,620) (740) (595) (2,954) (2,018) (1,111)Less: Other Capex (511) (597) (908) (306) (24) (154) (180) (665) (186) (186) (186) (186) (746) (682) (1,289)Gross Free Cash Flow (53) (905) (1,088) (58) (1,079) 954 (501) (684) 211 (1,303) 579 (187) (699) 841 1,663Less: Acquisitions/Other 0 0 0Add: Share Issuances (Repurchases) (841) (415) (82)Add (Less): Other 375 86 386 (157) 193 (298) (262)Net Free Cash Flow (519) (1,234) (784) (215) (886) 656 (501) (946) 211 (1,303) 579 (187) (699) 841 1,663Beginning Long-Term Debt 7,352 7,847 8,852 9,343 9,515 10,279 10,114 9,343 10,615 10,404 11,707 11,128 10,615 11,315 10,474New Net Long-Term Debt 495 1,005 491 172 764 (165) 501 1,272 (211) 1,303 (579) 187 699 (841) (1,663)Ending Long-Term Debt 7,847 8,852 9,343 9,515 10,279 10,114 10,615 10,615 10,404 11,707 11,128 11,315 11,315 10,474 8,812Less: Cash & Cash Equivalents 1,163 943 650 607 485 976 976 976 976 976 976 976 976 976 976Net Debt 6,684 7,909 8,693 8,908 9,794 9,138 9,639 9,639 9,428 10,731 10,152 10,339 10,339 9,498 7,836Change in Net Debt 519 1,225 784 215 886 (656) 501 946 (211) 1,303 (579) 187 699 (841) (1,663)

Balance Sheet Items:Cash & Cash Equivalents 1,163 943 650 607 485 976 976 976 976 976 976 976 976 976 976Total Long-Term Debt 7,847 8,852 9,343 9,515 10,279 10,114 10,615 10,615 10,404 11,707 11,128 11,315 11,315 10,474 8,812Equity 18,210 19,963 19,098 19,154 20,385 21,560 21,715 21,715 21,777 21,939 23,100 23,350 23,350 25,400 27,847

Book Value per Share 21.78 24.11 23.48 23.85 25.35 26.65 26.84 26.93 26.92 27.12 28.55 28.86 28.86 31.40 34.42ROAE 13% 13% 12% 9% 8% 9% 10%Leverage Ratios:Long-Term Debt/Total Capital 30.1% 30.7% 32.9% 33.2% 33.5% 31.9% 32.8% 32.8% 32.3% 34.8% 32.5% 32.6% 32.6% 29.2% 24.0%Net Debt/Total Capital 26.8% 28.4% 31.3% 31.7% 32.5% 29.8% 30.7% 30.7% 30.2% 32.8% 30.5% 30.7% 30.7% 27.2% 22.0%EBITDA/Interest 11.5x 10.4x 8.0x 9.7x 8.8x 8.8x 9.1x 9.1x 9.0x 8.8x 9.2x 9.5x 9.5x 10.9x 12.9xNet Debt/EBITDA (TTM) 1.9x 2.1x 2.2x 2.2x 2.5x 2.5x 2.8x 2.8x 2.8x 3.2x 2.9x 2.8x 2.8x 2.3x 1.7xLong-Term Debt/EBITDA (TTM) 2.2x 2.3x 2.3x 2.4x 2.7x 2.8x 3.1x 3.1x 3.1x 3.5x 3.2x 3.1x 3.1x 2.5x 1.9xEBIT/Interest 8.4x 7.4x 5.5x 6.6x 5.9x 5.7x 5.6x 5.6x 5.4x 5.2x 5.5x 5.9x 5.9x 7.0x 8.4x Source: Company reports and J.P. Morgan estimates.

Figure 15: Carnival Corp. & Plc – Revenue Drivers $ in millions REVENUE DRIVERS 2006 2007 2008E 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012EQuarter Ended 11/30/06 11/30/07 11/30/08 02/28/09 05/31/09 08/31/09 11/30/09 11/30/09 02/28/10 05/31/10 08/31/10 11/30/10 11/30/10 11/30/11 11/30/12Cruise Operating StatisticsAvailable Lower Berth Days (ALBD) 49.9 54.1 58.9 14.5 15.3 16.2 16.1 62.1 15.9 16.7 17.2 17.1 66.9 70.3 73.6

yoy % change 4.6% 8.4% 8.9% 2.3% 5.9% 5.5% 7.7% 5.4% 9.9% 9.0% 6.0% 6.2% 7.7% 5.1% 4.7%Occupancy 106.0% 105.5% 105.7% 103.9% 103.3% 111.4% 102.6% 105.3% 104.5% 103.9% 112.2% 103.2% 105.9% 106.7% 107.2%

yoy change (bps) 0.4% -0.5% 0.1% -0.4% -1.5% 0.5% 0.0% -0.4% 0.6% 0.6% 0.8% 0.6% 0.6% 0.8% 0.5%Passenger Cruise Days (PCD) 53.0 57.2 62.3 15.1 15.8 18.1 16.5 65.5 16.6 17.4 19.3 17.6 70.9 75.0 78.9

yoy % change 5.0% 7.9% 9.0% 1.9% 4.3% 6.0% 7.7% 5.1% 10.5% 9.6% 6.7% 6.8% 8.3% 5.8% 5.2%

Cruise RevenuesPassenger Ticket 8,903 9,792 11,210 2,219 2,242 3,105 2,421 9,987 2,465 2,532 3,446 2,703 11,146 12,145 13,031

yoy % change 6.0% 10.0% 14.5% -9.0% -13.4% -15.1% -4.1% -10.9% 11.1% 12.9% 11.0% 11.6% 11.6% 9.0% 7.3%Passenger Ticket per PCD (in $) 168.1 171.3 179.9 147.4 141.6 171.6 147.0 152.6 148.1 145.8 178.5 153.6 157.2 161.9 165.1yoy % change 0.9% 1.9% 5.0% -10.7% -17.0% -19.9% -11.0% -15.2% 0.5% 3.0% 4.0% 4.5% 3.0% 3.0% 2.0%

Onboard & Other 2,514 2,846 3,044 634 673 825 736 2,868 703 753 907 814 3,176 3,393 3,605yoy % change 7.5% 13.2% 7.0% -9.7% -9.4% -4.5% 0.2% -5.8% 10.8% 11.8% 9.9% 10.6% 10.7% 6.9% 6.2%Onboard & Other per PCD (in $) 47.5 49.8 48.9 42.1 42.5 45.6 44.7 43.8 42.2 43.3 47.0 46.3 44.8 45.2 45.7yoy % change 2.4% 4.9% -1.9% -11.4% -13.2% -9.9% -7.0% -10.3% 0.3% 2.0% 3.0% 3.5% 2.2% 1.0% 1.0%

Gross Cruise Revenues 11,417 12,638 14,254 2,853 2,915 3,930 3,157 12,855 3,168 3,284 4,353 3,517 14,321 15,539 16,636yoy % change 6.3% 10.7% 12.8% -9.1% -12.5% -13.1% -3.2% -9.8% 11.0% 12.7% 10.8% 11.4% 11.4% 8.5% 7.1%

Other (Tour) 422 395 392 11 33 209 39 292 11 33 211 39 295 295 295yoy % change 18.2% -6.4% -0.8% -8.3% -29.8% -28.4% -4.0% -25.4% 0.0% 0.5% 1.0% 0.0% 0.8% 0.0% 0.0%

Total Revenues 11,839 13,033 14,646 2,864 2,948 4,139 3,197 13,148 3,179 3,317 4,564 3,556 14,616 15,833 16,931yoy % change 6.7% 10.1% 12.4% -9.1% -12.7% -14.0% -3.2% -10.2% 11.0% 12.5% 10.3% 11.2% 11.2% 8.3% 6.9%

Less: Commissions, Transportation & Other 1,749 1,941 2,232 514 440 515 493 1,962 571 497 596 550 2,214 2,412 2,588yoy % change 6.3% 11.0% 15.0% -7.9% -16.2% -22.0% 0.8% -12.1% 11.1% 12.9% 15.7% 11.6% 12.8% 9.0% 7.3%% of Passenger Ticket Revenues 19.6% 19.8% 19.9% 23.2% 19.6% 16.6% 20.4% 19.6% 23.2% 19.6% 17.3% 20.4% 19.9% 19.9% 19.9%

Less: Onboard & Other 453 495 501 104 110 131 121 466 115 123 144 134 516 552 586yoy % change 10.0% 9.3% 1.2% -16.8% -9.1% -2.2% 0.2% -6.9% 10.8% 11.8% 9.9% 10.6% 10.7% 6.9% 6.2%% of Onboard & Other Revenues 18.0% 17.4% 16.5% 16.4% 16.3% 15.9% 16.5% 16.3% 16.4% 16.3% 15.9% 16.5% 16.3% 16.3% 16.3%

Net Cruise Revenues 9,215 10,202 11,521 2,235 2,365 3,284 2,543 10,427 2,481 2,664 3,613 2,832 11,591 12,575 13,462yoy % change 6.2% 10.7% 12.9% -9.0% -11.9% -11.9% -4.1% -9.5% 11.0% 12.7% 10.0% 11.4% 11.2% 8.5% 7.1%

Gross Yield = Gross Cruise Revenue per ALBD (in $) 228.59 233.46 241.83 196.86 190.15 241.97 196.64 206.94 198.88 196.55 252.83 206.23 214.06 220.98 225.97yoy % change 1.7% 2.1% 3.6% -11.2% -17.3% -17.6% -10.1% -14.4% 1.0% 3.4% 4.5% 4.9% 3.4% 3.2% 2.3%

Net Yield = Net Cruise Revenue per ALBD (in $) 184.50 188.46 195.46 154.22 154.27 202.19 158.40 167.86 155.79 159.46 209.87 166.11 173.25 178.83 182.85yoy % change 1.5% 2.1% 3.7% -11.1% -16.8% -16.5% -10.9% -14.1% 1.0% 3.4% 3.8% 4.9% 3.2% 3.2% 2.3%


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Figure 16: Carnival Corp. & Plc – Expense Drivers $ in millions EXPENSE DRIVERS 2006 2007 2008E 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012EQuarter Ended 11/30/06 11/30/07 11/30/08 02/28/09 05/31/09 08/31/09 11/30/09 11/30/09 02/28/10 05/31/10 08/31/10 11/30/10 11/30/10 11/30/11 11/30/12Cruise ExpensesPayroll & Related 1,158 1,336 1,470 352 366 387 392 1,497 391 403 414 420 1,628 1,729 1,828

yoy % change 3.2% 15.4% 10.0% -2.2% 0.3% 1.6% 7.7% 1.8% 11.0% 10.1% 7.1% 7.3% 8.8% 6.2% 5.7%Payroll & Related per ALBD (in $) 23.2 24.7 24.9 24.3 23.9 23.8 24.4 24.1 24.5 24.1 24.1 24.7 24.3 24.6 24.8yoy % change -1.3% 6.4% 1.1% -4.5% -5.3% -3.7% 0.0% -3.4% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Food 644 747 856 198 203 223 220 844 218 222 237 234 911 957 1,002yoy % change 5.1% 16.0% 14.6% -4.3% -3.3% -3.5% 5.5% -1.5% 10.2% 9.3% 6.3% 6.5% 8.0% 5.1% 4.7%Food per ALBD (in $) 12.9 13.8 14.5 13.7 13.2 13.7 13.7 13.6 13.7 13.3 13.8 13.7 13.6 13.6 13.6yoy % change 0.4% 7.0% 5.2% -6.5% -8.7% -8.5% -2.0% -6.5% 0.3% 0.3% 0.3% 0.3% 0.2% 0.0% 0.0%

Fuel 932 1,096 1,774 208 243 327 386 1,164 386 405 398 410 1,599 1,680 1,723yoy % change 31.8% 17.6% 61.9% -46.9% -42.8% -38.2% -9.8% -34.4% 85.4% 66.8% 21.7% 6.3% 37.4% 5.1% 2.5%Fuel per ALBD (in $) 18.7 20.2 30.1 14.4 15.9 20.1 24.0 18.7 24.2 24.3 23.1 24.0 23.9 23.9 23.4yoy % change 26.0% 8.5% 48.7% -48.2% -46.0% -41.4% -16.3% -37.7% 68.7% 53.1% 14.8% 0.1% 27.6% 0.0% -2.1%Fuel Consumption (Metric Tons) 2.79 3.04 3.18 0.75 0.80 0.81 0.83 3.19 0.81 0.85 0.84 0.86 3.37 3.46 3.55yoy % change 2.4% 8.9% 4.6% -4.1% -0.4% 1.6% 4.3% 0.4% 7.7% 6.8% 3.8% 4.0% 5.5% 5.1% 4.7%Fuel Price ($ per Metric Ton) 334 361 558 276 304 405 465 363 475 475 475 475 475 485 485yoy % change 29.0% 8.0% 54.7% -44.7% -42.6% -39.2% -13.6% -35.1% 72.1% 56.3% 17.3% 2.2% 31.0% 2.1% 0.0%

Other Ship Operating 1,541 1,717 1,913 458 488 498 538 1,982 505 533 528 573 2,139 2,259 2,377yoy % change 5.2% 11.4% 11.4% 0.9% 4.1% -1.4% 10.9% 3.6% 10.2% 9.3% 6.0% 6.5% 7.9% 5.6% 5.2%Other Ship Operating per ALBD (in $) 30.9 31.7 32.5 31.6 31.8 30.7 33.5 31.9 31.7 31.9 30.7 33.6 32.0 32.1 32.3yoy % change 0.6% 2.8% 2.3% -1.4% -1.7% -6.5% 3.0% -1.7% 0.3% 0.3% 0.0% 0.3% 0.2% 0.5% 0.5%

Selling & Administrative (Cruise) 1,405 1,547 1,594 384 386 372 405 1,547 422 421 394 430 1,668 1,753 1,835yoy % change 9.0% 10.1% 3.0% -7.9% -7.2% 2.2% 2.1% -2.9% 9.9% 9.0% 6.0% 6.2% 7.8% 5.1% 4.7%% Selling & Administrative (Total) 97.1% 98.0% 97.9% 98.0% 98.2% 97.6% 97.3% 97.8% 98.0% 98.2% 97.6% 97.3% 97.8% 97.8% 97.8%Selling & Administrative (Total) 1,447 1,579 1,629 392 393 381 416 1,582 431 428 404 442 1,705 1,792 1,876yoy % change 8.4% 9.1% 3.2% -7.8% -7.5% 2.4% 2.3% -2.9% 9.9% 9.0% 6.0% 6.2% 7.8% 5.1% 4.7%Selling & Administrative (Total) per ALBD (in $) 29.0 29.2 27.6 27.0 25.6 23.5 25.9 25.5 27.0 25.6 23.5 25.9 25.5 25.5 25.5yoy % change 3.6% 0.7% -5.3% -9.9% -12.7% -2.9% -5.0% -7.8% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%

Net Cruise Costs 5,680 6,443 7,607 1,600 1,686 1,807 1,941 7,034 1,921 1,984 1,971 2,068 7,944 8,378 8,765yoy % change 9.3% 13.4% 18.1% -12.6% -10.6% -10.1% 3.1% -7.5% 20.1% 17.7% 9.1% 6.5% 12.9% 5.5% 4.6%

Net Cruise Costs per ALBD (in $) 113.72 119.02 129.06 110.40 109.98 111.26 120.88 113.23 120.62 118.74 114.51 121.25 118.74 119.14 119.05yoy % change 4.5% 4.7% 8.4% -14.6% -15.5% -14.8% -4.2% -12.3% 9.3% 8.0% 2.9% 0.3% 4.9% 0.3% -0.1%

Net Cruise Costs (excl. Fuel) per ALBD (in $) 95.06 98.78 98.96 96.05 94.13 91.12 96.84 94.49 96.41 94.48 91.40 97.20 94.84 95.24 95.65yoy % change 1.1% 3.9% 0.2% -5.4% -6.6% -5.3% -0.7% -4.5% 0.4% 0.4% 0.3% 0.4% 0.4% 0.4% 0.4%

Other ExpensesOther (Tour) 314 296 293 16 35 145 36 232 16 35 146 36 233 233 233

yoy % change 23.6% -5.7% -1.0% -11.1% -20.5% -25.3% -4.0% -21.0% 0.0% 0.5% 1.0% 0.0% 0.7% 0.0% 0.0%% Other (Tour) Revenues 74.4% 74.9% 74.7% 145.5% 106.1% 69.4% 90.2% 79.2% 145.5% 106.1% 69.4% 90.2% 79.1% 79.1% 79.1%

Selling & Administrative (Tour) 42 32 35 8 7 9 11 35 9 8 10 12 38 40 41yoy % change -8.7% -23.8% 9.4% 0.0% -22.2% 12.5% 10.6% 0.2% 9.9% 9.0% 6.0% 6.2% 7.6% 5.1% 4.7%


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Royal Caribbean Cruises Ltd. Company Data Price ($) 25.93Date Of Price 15 Dec 0952-week Range ($) 26.24 - 5.40Mkt Cap ($ bn) 5.55Fiscal Year End DecShares O/S (mn) 214Price Target ($) 34.00Price Target End Date 31 Dec 10

Royal Caribbean Cruises (RCL;RCL US) 2008A 2009E

(Old)2009E

(New)2010E

(Old)2010E

(New)2011E

EPS Reported ($) Q1 (Mar) 0.35 (0.35) (0.17)A (0.04) Q2 (Jun) 0.40 (0.05) (0.16)A 0.01 Q3 (Sep) 1.92 1.49 1.07A 1.44 Q4 (Dec) 0.01 (0.02) (0.05)A 0.15 FY 2.68 1.07 0.69A 1.18 1.56 2.43Bloomberg EPS FY ($) 2.71 0.71A 1.46 2.11Source: Company data, Bloomberg, J.P. Morgan estimates. 'Bloomberg' above denotes Bloomberg consensus estimates.

Key Investment Points Royal Caribbean’s booking patterns and net yields in FY10 should be incrementally stronger than in FY09 We believe that in 2010 Royal Caribbean’s net yields and occupancy levels will stem the tide of negative results experienced in 2009. Key to this is the continued success of Royal Caribbean’s Oasis of the Seas and its Solstice class vessels which at this point have been instrumental in driving ticket price increases for 2010 bookings. We believe that, to date, the Oasis of the Seas is pricing at ~40-50% premium to older vessels in the Royal Caribbean fleet, and Solstice has been able to demand premium pricing as well. These newer vessels should drive the lion’s share of estimated net yield improvement of ~200bps in 2010. Pricing on 1Q10 bookings is trending above 2008 levels, though we point out that much of that pricing power is being driven by the newer Solstice class hardware and the Oasis of the Seas, which are heavily booked for 1Q10 (and account for ~13% of Royal Caribbean’s total berths). Excluding Royal’s newer Solstice class vessels and the Oasis of the Seas, pricing is below 2008 levels. Net-net, we believe that Royal will achieve higher net yields in 1Q10 (+2.1%) than it did in 1Q09 (-14.5%), and that net yields will get sequentially stronger as 2010 unfolds. We estimate net yield growth of +3.5% in 2010. As Royal Caribbean turned to 1Q10, the pace of forward bookings turned positive in August 2009 and has continued through early November 2009. Forward bookings on a cumulative basis continue to remain slightly behind the year-ago level; however, we believe the steeper acceleration in bookings that Royal Caribbean has experienced since August 2009 should allow the company to fill the booking gap by year-end 2009. We believe the extended booking windows will allow Royal Caribbean to fill the remaining capacity with more profitable, higher-rated business, as longer lead times should reduce the risk of drastic, last-minute discounting of large room blocks.

Cruise stocks historically have been strong-second derivative performers Like its chief cruise competitor Carnival, Royal Caribbean has historically outperformed the S&P 500 in the year following periods of net yield declines on a year-over-year basis. In periods when net yields accelerated on a year-over-year basis (i.e., a positive swing rather than positive growth in net yields), Royal Caribbean has outperformed the S&P 500, posting average returns of +12.8% versus +3.0%, respectively. We anticipate this relationship will continue through 2010 as Royal Caribbean’s net yields benefit from the introduction of the Oasis of the Seas (and the

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pricing premium that it commands over the company’s older fleet) and the continued success of the Solstice class vessels. Royal Caribbean has historically outperformed the S&P 500 by a spread of +980bps, versus +340bps for Carnival. We believe this is due to Royal Caribbean’s substantial operating leverage, which helps its EBITDA and EPS rebound at a faster pace given its smaller scale (it is approximately one-third the size of Carnival); we think this is fully recognized by investors.

Royal Caribbean’s operating leverage should help drive substantial EBITDA and EPS growth in 2010 Royal Caribbean possesses greater operating leverage; therefore, our estimated net yield increase of +3.5% in 2010 should have a greater proportional impact on EPS. We believe that Royal Caribbean’s stock will react at an accelerated pace (to the upside or downside, depending on the operating environment) vis-à-vis Carnival’s. For 2010, we believe solid ticket price advances (primarily stemming from the solid performance of its Oasis of the Seas and Solstice class vessels) and an extension of the booking window will help to drive net yields higher. We estimate passenger ticket per passenger cruise day will increase to ~$153 in 2010 (+3.5%), and ~$157 in 2011 (+3.0%), compared to a decline of -13.9% in 2009. Given the cruise liners’ reliance on rates, for which every incremental dollar above the breakeven rate generates 100% flow-through to EBITDA, we believe Royal Caribbean will be able to drop 40.8% and 40.2% of incremental net revenue to the EBITDA line in 2010 and 2011, respectively. While not necessarily inspiring, we note that elevated fuel costs, up an estimated +10.8% year-over-year in 2010, should erode much of the company’s operating leverage. That said, if we exclude fuel costs, flow-through improves to 50.3% and 47.6% in 2010 and 2011, respectively. Given Royal Caribbean’s smaller size and scale versus Carnival, it is a less efficient operator. Carnival is over three times larger than Royal Caribbean, and therefore Royal does not derive the same economies of scale as does Carnival. As a result of this disparity, Royal has historically generated lower operating margins.

Royal Caribbean’s new hardware to substantially contribute to 2010 net yield performance We believe Royal Caribbean’s innovative brand strategy has enabled it to: 1) consistently increase the number of first-time and repeat cruisers; 2) partly weather soft demand periods by making ships the destination; and 3) drive higher yields, through higher ticket prices and onboard spending relative to its older ships. The company’s brand strategy has been to build larger “destination” ships with a superior mix of amenities, which is evident with its brand new Oasis of the Seas. We believe first-time and repeat cruise passengers favor more modern and advanced ships, in terms of design, innovation, and enhanced amenities. In addition, we believe that its order book of four ships between 2010 and 2012 (the Allure of the Seas, and three additional Solstice class vessels) will continue to bolster yield performance as newer vessels command premium prices. Given Royal’s significant expenses to build these newer-generation ships, it needs to achieve higher pricing relative to the industry to generate similar returns, all else being equal.

Compelling valuation versus long-term average At current levels, RCL trades at 14.8x, 10.7x, and 8.6x our 2010, 2011, and 2012 EPS estimates, respectively. Since 1993, shares have traded at an average forward-year P/E multiple of 14.8x, with a high of 58.4x (in January 2008) and a low of 4.4x (in February 2009). We establish a calendar year-end 2010 price target of $34 (replaces prior calendar year-end 2009 price target of $9), which assumes RCL can

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trade at 14x our 2011 EPS estimate. Our target multiple is 0.8x below the company’s average forward-year P/E multiple over the long term. We believe using such a multiple is reasonable given the earnings contribution from its new hardware and significant operating leverage to a cycle of increases in industry net yields. In the two years following the turn to positive yields (2004 and 2005), Royal traded at 14.6x and 15.5x forward-year EPS estimates. The target multiple we apply to our 2011 EPS estimate for Royal is one turn below our valuation multiple for Carnival due to Royal’s higher financial leverage and lower historical multiples in a recovery.

Investment Risks Potential downside risks to our rating and price target include: 1) investor sentiment towards consumer discretionary stocks could erode further and valuation multiples contract; 2) fuel costs, which accounted for 20.5% of operating expenses in 2008, could escalate more meaningfully than we are currently forecasting; 3) overcapacity in the cruise industry stemming from new competitive supply could negatively affect pricing should demand not outstrip supply growth; 4) risks associated with two large shareholder groups controlling ~36% of the outstanding stock; and 5) regulatory and generic investment risks such as a weakening economy or unfavorable legislative changes both domestically or internationally.

Fuel-price volatility Unlike Carnival, Royal Caribbean has historically hedged ~50% of its forward-year fuel consumption needs. More recently, Royal Caribbean has been more aggressive with its hedging efforts for future periods; the company is presently 50% hedged in 2010, 45% hedged in 2011, and 5% hedged in 2012. While Royal is partly insulated from volatile bunker price moves to the upside, Royal is still susceptible to increased operating expense for the unhedged portion of its consumption. Conversely, in a decreasing bunker fuel environment, the hedged component of forward bunker consumption could be more expensive than at-the-market bunker spot levels, and thereby weigh on earnings. While the company has made strides in reducing its level of consumption through technological innovations, as well a higher proportion of new, more fuel-efficient ships in its fleet, its operations remain highly susceptible to fuel price volatility. In addition, higher crude prices have a perceived negative effect on the spending patterns of lower-income leisure travelers, and vice versa. We estimate a 10% change in the fuel cost per metric ton would affect our 2010 EPS estimate for Royal by approximately $0.16.

Economic and event risks We believe that demand for cruises will remain affected by the attitudes of leisure travelers. A sluggish recovery in the U.S. or global economy would cause leisure travelers to reconsider their discretionary travel budgets, which we believe would result in decreased demand. Key risks facing all leisure and travel-related companies include terrorism, geopolitical, and weather-related uncertainties that could severely curtail travel volume and leisure spending levels. Cruise lines are vulnerable to such scenarios as decreased demand could lead to continued price discounting, which would affect overall profitability. In addition, the negative headlines associated with events, such as ship equipment issues and cancellations, and H1N1 outbreaks on board, could potentially have a negative impact on the public’s perception of the cruise industry. Since the cruise industry is dependent on first-time cruisers, we

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believe negative press could persuade potential cruise passengers to consider alternative vacation options.

Company Description Royal Caribbean International was founded in 1968. The current parent corporation, Royal Caribbean Cruises Ltd., was incorporated on July 23, 1985, in the Republic of Liberia under the Business Corporation Act of Liberia.

Royal Caribbean is the world’s second-largest cruise company, operating 39 ships with ~85,900 berths. RCL operates under the Royal Caribbean International, Celebrity Cruises, Azamara Cruises, Pullmantur, and CDF Croisieres de France brands.

Figure 17: Royal Caribbean Cruises Ltd. – Ships/Berths by Brand $ in millions Current Fleet Enterer Service Berths Primary Area of Operation Age of Fleet % of Brand Berths % of Total BerthsRoyal Caribbean InternationalOasis of the Seas 2009 5,400 Eastern Caribbean 0 9.5% 6.3%Independence of the Seas 2008 3,600 Europe, Eastern/Western Caribbean 1 6.4% 4.2%Liberty of the Seas 2007 3,600 Eastern/Western Caribbean 2 6.4% 4.2%Freedom of the Seas 2006 3,600 Eastern/Western Caribbean 3 6.4% 4.2%Jewel of the Seas 2004 2,100 Caribbean, Panama Canal, Canada/New England, Europe 5 3.7% 2.4%Mariner of the Seas 2003 3,100 South America, Mexican Riviera 6 5.5% 3.6%Serenade of the Seas 2003 2,100 Alaska, Southern Caribbean, Panama Canal 6 3.7% 2.4%Navigator of the Seas 2002 3,100 Western Caribbean, Europe 7 5.5% 3.6%Brilliance of the Seas 2002 2,100 Europe 7 3.7% 2.4%Adventure of the Seas 2001 3,100 Southern Caribbean 8 5.5% 3.6%Radiance of the Seas 2001 2,100 South America, Mexican Riviera, Alaska 8 3.7% 2.4%Explorer of the Seas 2000 3,100 Eastern/Southern Caribbean, Bermuda, Canada/New England 9 5.5% 3.6%Voyager of the Seas 1999 3,100 Western Caribbean, Europe 10 5.5% 3.6%Vision of the Seas 1998 2,000 Southern Caribbean, Europe, Brazil 11 3.5% 2.3%Enchantment of the Seas 1997 2,250 Western/Southern Caribbean 12 4.0% 2.6%Rhapsody of the Seas 1997 2,000 Australia/NZ, Canada 12 3.5% 2.3%Grandeur of the Seas 1996 1,950 Eastern/Western Caribbean, Bermuda, Canada/New England 13 3.4% 2.3%Splendour of the Seas 1996 1,800 Europe, Brazil 13 3.2% 2.1%Legend of the Seas 1995 1,800 Asia, Europe 14 3.2% 2.1%Majesty of the Seas 1992 2,350 Bahamas 17 4.1% 2.7%Monarch of the Seas 1991 2,400 Bahamas 18 4.2% 2.8%

21 56,650 9 100.0% 65.9%CelebrityEquinox 2009 2,850 Europe, Caribbean 0 14.7% 3.3%Solstice 2008 2,850 Europe, Eastern Caribbean 1 14.7% 3.3%Constellation 2002 2,050 Caribbean, Europe, Canada/New England, Panama Canal 7 10.5% 2.4%Summit 2001 2,050 Europe, Southern Caribbean 8 10.5% 2.4%Infinity 2001 2,050 Alaska, Panama Canal, South America 8 10.5% 2.4%Millennium 2000 2,050 Southern Caribbean, Panama Canal, Hawaii, Alaska, Australia/NZ 9 10.5% 2.4%Mercury 1997 1,850 Alaska, Pacific Northwest, Panama Canal, Hawaii, Bahamas, Eastern Caribbean 12 9.5% 2.2%Galaxy 1996 1,850 Southern Caribbean 13 9.5% 2.2%Century 1995 1,750 Western Caribbean, Bahamas, Europe 14 9.0% 2.0%Celebrity Xpedition 2004 100 Galapagos Islands 5 0.5% 0.1%

10 19,450 8 100.0% 22.6%PullmanturOcean Dream 2008 1,000 Southern Caribbean, Bermuda 1 13.1% 1.2%Zenith 1992 1,400 Western Europe, Baltic 17 18.3% 1.6%Empress 1990 1,600 Eastern Mediterranean 19 20.9% 1.9%Sovereign 1988 2,300 Western Mediterranean 21 30.1% 2.7%Pacific Dream 1990 1,350 Mexico 19 17.6% 1.6%

5 7,650 15 100.0% 8.9%Azamara CruisesAzamara Quest 2006 700 Europe, Caribbean, Panama Canal 3 50.0% 0.8%Azamara Journey 2004 700 Europe, Asia 5 50.0% 0.8%

2 1,400 4 100.0% 1.6%CDF Croisieres FranceBleu de France 2005 750 Mediterranean, Caribbean 4 100.0% 0.9%

1 750 4 100.0% 0.9%Total 39 85,900 9 Source: J.P. Morgan estimates.

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Figure 18: Royal Caribbean Cruises Ltd. – New Ship Orderbook $ in millions

Expected Contract Price Price New Builds Delivery Berths Gross Tons ($MM) Per Berth (USD)Royal Caribbean InternationalAllure of the Seas 12/12/2010 5,400 220,000 $1,242 $230,000

5,400 220,000 $1,242 $230,000

CelebrityCelebrity Eclipse 4/26/2010 2,850 118,000 $700 $245,614Solstice Class Unnamed 3Q11 2,850 118,000 $798 $280,000Solstice Class Unnamed 4Q12 2,850 118,000 $798 $280,000

8,550 354,000 $2,296 $268,538

Total 13,950 574,000 $3,538 Source: J.P. Morgan estimates.

4Q09 and 2010 Earnings Outlook 4Q09 Our 4Q09 recurring EPS estimate of ($0.05) is in line with consensus. We forecast a net yield decline of -7.4%. On the cost side, we forecast a decrease in net cruise costs (per available passenger cruise day) of -10.0% with fuel cost per metric ton of $489. We forecast net revenues of $1.082 billion (down 0.6%) and operating income of $74.1 million (up 16.6%).

Full-year 2010 Our full-year 2010 recurring EPS estimate of $1.56 (up 125.9% from the full-year 2009 level) is $0.10 above consensus. We forecast net yield growth of 3.5%. On the cost side, we forecast an increase in net cruise costs (per available passenger cruise day) of 0.4% with fuel cost per metric ton of $488. We forecast net revenues of $5.08 billion (up 15.5%) and operating income of $688.7 billion (up 43%). Royal has not yet provided formal 2010 guidance.

Forward Demand Commentary On RCL’s 3Q09 earnings call, management commented that 4Q09 forward booking patterns have improved since June, when the booking pace turned positive, with year-over-year changes in price hitting the black in October. However, we note that September/October 2008 was an extremely tough period following the collapse of Lehman Brothers, so the improvement is largely due to easier comparisons.

For 1Q10, the bookings pace turned positive (compared to the same time last year) in August and continued through October. On a 1Q10 cumulative basis, Royal Caribbean is slightly behind the year-ago level, but given the steep acceleration in bookings from August onwards, the company expects to be more booked (versus the same period in ’08) relatively soon. Prices for 1Q10 are trending above 2008 levels (mostly driven by the Oasis of the Seas and Solstice class vessels which are heavily booked in 1Q10). Excluding the newly launched Oasis of Seas and Solstice class vessels (which will account for ~50% of Royal’s fleet in 2010), pricing for 1Q10 is

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largely trending below 2008 levels. While Royal Caribbean did not provide formal net yield guidance for 1Q10, it believes that it should achieve better net yields in 1Q10 than it did in 1Q09.

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Company Guidance Figure 19: Royal Caribbean Cruises Ltd. – Company Guidance $ in millions

2009E 2009E 2009E 4Q09E 2010E 2011E 2012EAs of 4/23/09 As of 7/29/09 As of 11/3/09 As of 11/3/09 As of 11/3/09 As of 11/3/09 As of 11/3/09

Capacity Growth +5.9% +5.2% +5.1% +7.5% +11.6% +8.8% +2.7%

Net Yields ~ -12% to -13% ~ -14% ~ -14% ~ -7% to -8%Net Cruise Costs per APCD ~ -10% to -12% ~ -10% ~ -10% ~ -10%Net Cruise Costs per APCD, excl. Fuel ~ -6% to -8% ~ -6% to -7% ~ -6% to -7% ~ -7% to -8%Depreciation & Amortization $560-565 $565-570 $565-570 $150

Interest Expense, Net of Capitalized Interest $295-300 $310 $305 $80Earnings per Share ~$1.35 $0.70 - $0.80 ~$0.70 ~($0.05)Other ItemsFuel

Fuel Consumption (Metric Tons) 1,240 1,220 1,220 323Fuel Expenses $574 $591 $591 $158Fuel Price (Current $ per Metric Ton) $463 $484 $484 $489Fuel Consumption Hedged 48% 50% 50% 40% 50% 50% 10%

Investment & Other Capex $2,100 $2,100 $2,100 $2,200 $1,000 $1,000 Source: Company reports and J.P. Morgan estimates.

Figure 20: Royal Caribbean Cruises Ltd. EPS Sensitivity to Changes in Net Yields and Fuel Prices $ in millions

4Q09 1Q10E FY10E FY11E FY12EFuel Price / Metric Ton, net of hedges $489 $488 $488 $491 $515

JPM Estimated Unhedged Fuel Price / Metric Ton $471 $518 $518 $518 $518JPM Estimated Hedged Fuel Price / Metric Ton $516 $459 $459 $459 $459

Total Consumption (Metric Tons in 000s) 0.323 0.32 1.35 1.44 1.44Unhedged Consumption (Metric Tons in 000s) 0.194 0.161 0.676 0.790 1.368Hedged Consumption (Metric Tons in 000s) 0.129 0.161 0.676 0.646 0.072

Percent Hedged (forward consumption) 40% 50% 50% 45% 5%Fuel Expense 158 157 660 706 741

Sensitivity to Change in Price of Fuel:Percentage Change (Impacting Unhedged Consumption) 10% 10% 10% 10% 10%Fuel Price / Metric Ton for Unhedged Amount $518 $570 $570 $570 $570Fuel Expense 167 165 695 747 812Increase (Decrease) to Fuel Expense 9 8 35 41 71Shares Outstanding 216 216 216 216 216Per Share Impact $0.04 $0.04 $0.16 $0.19 $0.33

RCL Guidance (as of 3Q09) JPM Estimates

4Q09 FY09 1Q10E FY10E FY11E FY12EAvailable Passenger Cruise Days (APCD) 7.3 27.9 7.5 31.1 33.9 34.8Capacity Growth 7.5% 5.4% 9.5% 11.6% 8.8% 2.7%Net Revenue 1,082 4,426 1,125 5,082 5,699 5,997Net Yield $147.47 $158.65 $150.58 $163.25 $168.25 $172.40

% Change (1) -7.5% -14.0%

Sensitivity to Change in Net Yield:Percentage Change 1% 1% 1% 1% 1% 1%Net Yield $148.95 $160.23 $152.09 $164.89 $169.93 $174.12Net Cruise Revenue 1,092 4,470 1,136 5,133 5,756 6,057Increase (Decrease) to Fuel Expense 10 44 11 51 57 60Shares Outstanding 216 215 216 216 216 216Per Share Impact $0.05 $0.21 $0.05 $0.24 $0.26 $0.28

RCL Guidance (as of 3Q09) JPM Estimates

(1) Midpoint of RCL’s Net Yield Guidance Range.


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Valuation & Price Target Summary Our calendar year-end 2010 price target of $34 assumes RCL can trade at 14x our 2011 EPS estimate. Our target multiple is 0.8x below the stock’s long-term multiple of forward-year EPS. We believe using a multiple below the long-term average is reasonable given the earnings contribution from the company’s new hardware and significant operating leverage to an upturn in industry net yields. In the two years following the turn to positive yields (2004 and 2005), Royal traded at 14.6x and 15.5x forward-year EPS estimates. The target multiple we apply to our 2011 EPS estimate for Royal is one turn below our valuation multiple for Carnival due to Royal’s higher financial leverage and lower historical multiples in a recovery.

At current levels, RCL trades at 14.8x, 10.7x, and 8.6x our 2010, 2011, and 2012 EPS estimates, respectively. Since 1993, shares have traded at an average forward-year P/E multiple of 14.8x, with a high of 58.4x (in January 2008) and a low of 4.4x (in February 2009).

Figure 21: YE10 Price Target $ in millions

2011E EPS $2.43x Assumed Multiple 14.0x= YE 2010 Price Target $34

Current Price 25.93Potential Return 31.0%


Figure 22: Royal Caribbean Cruises Ltd. EPS Sensitivity Grid and Price Target Sensitivity Analysis $ in millions

2011 Net Yield (YoY % Change) 2011 Net Yield (YoY % Change)-1.0% pt. -0.5% pt. +0.5% pt. +1.0% pt. -1.0% pt. -0.5% pt. +0.5% pt. +1.0% pt.

2.1% 2.6% 3.1% 3.6% 4.1% 2.1% 2.6% 3.1% 3.6% 4.1%

-10% $442 $2.35 $2.48 $2.62 $2.75 $2.88 -10% $442 $33 $35 $37 $38 $40

-5% $467 $2.26 $2.39 $2.52 $2.65 $2.79 -5% $467 $32 $33 $35 $37 $39

$491 $2.16 $2.29 $2.43 $2.56 $2.69 $491 $30 $32 $34 $36 $38

5% $516 $2.07 $2.20 $2.33 $2.46 $2.60 5% $516 $29 $31 $33 $35 $36

10% $541 $1.97 $2.11 $2.24 $2.37 $2.50 10% $541 $28 $29 $31 $33 $35

PRICE TARGET SENSITIVITY

2011

Fue

l Pric

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on)

2011

Fue

l Pric

e ($/T

on)

Note: Assumes a 14x target multiple.


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Risk/Reward Analysis Our risk/reward analysis derives a matrix of year-end 2011 per share valuations for Royal Caribbean from a range of EPS estimates and a range of valuation multiples. The base case represents our 2011 EPS estimate, while the upside/downside cases represent positive and negative variances (in 5% increments) from our estimate. The valuation range considers our fair value estimate and current/historical trading multiples.

Figure 23: Royal Caribbean Cruises Ltd. – Risk/Reward Analysis $ in millions

Estimated 2011 EPS RangeDownside Case J.P. Morgan Estimate Upside Case

2011E EPS $2.06 $2.18 $2.31 $2.43 $2.55 $2.67 $2.79% change from J.P. Morgan estimate -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

4.7x $9.66 $10.23 $10.80 $11.37 $11.94 $12.50 $13.07-63% -61% -58% -56% -54% -52% -50%

6.7x $13.79 $14.60 $15.41 $16.22 $17.03 $17.84 $18.65-47% -44% -41% -37% -34% -31% -28%

8.7x $17.91 $18.97 $20.02 $21.08 $22.13 $23.18 $24.24-31% -27% -23% -19% -15% -11% -7%

Current 1-Yr Forward P/E Multiple 10.7x $22.04 $23.34 $24.63 $26 $27.23 $28.52 $29.82% change from current price -15% -10% -5% 0% 5% 10% 15%

12.7x $26.17 $27.71 $29.25 $30.78 $32.32 $33.86 $35.401% 7% 13% 19% 25% 31% 37%

14.7x $30.29 $32.07 $33.86 $35.64 $37.42 $39.20 $40.9817% 24% 31% 37% 44% 51% 58%

16.7x $34.42 $36.44 $38.47 $40.49 $42.52 $44.54 $46.5733% 41% 48% 56% 64% 72% 80%

Historical ValuationAverage: 14.8xPeak: 58.4xTrough: 3.9x

Current Forward Valuation2011: 10.7x

Multip

le Co

ntrac

tion

Multip

le Ex

pans

ion

0.0x

10.0x

20.0x

30.0x

40.0x

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12/30

/1993

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/1994

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/1995

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/1996

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/1997

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/1998

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Forward P/E Multiples LT Average


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Discounted Cash Flow Our discounted cash flow (DCF) valuation projects five years (2009-13) of unleveraged free cash flow, based on what we would characterize as reasonable growth assumptions. We then discount these cash flows using the company’s weighted average cost of capital (WACC). Our terminal value is based on a multiple of 13.0x (our projection of a normalized trading multiple for RCL in year six) applied to our 2013 EBITDA estimate, which we then discount back to the present. Our analysis yields a base-case year-end 2010 share price of $35 with a valuation range of $27-$44.

Figure 24: Royal Caribbean Cruises Ltd. – Discounted Cash Flow Valuation ($ in millions, except per share data) $ in millions

CAGR2009E 2010E 2011E 2012E 2013E 2009 - 2013

Earnings Before Interest & Taxes (EBIT) $480 $689 $886 $1,001 $1,028 21%Less: Taxes 12 17 22 25 26 Tax Rate 2.5% 2.5% 2.5% 2.5% 2.5%Less: Investment & Other Capex 2,100 2,200 1,000 1,000 1,000Plus: Depreciation & Amortization 569 639 689 706 740= Unlevered Free Cash Flow ($1,063) ($889) $554 $682 $742 Terminal Value Multiple 13.0xTerminal Value 22,974PV Discount Factor at WACC 0.934 0.852 0.778 0.710 0.648 0.648PV of FCF -992 -758 431 484 480 14,884Capital Value $14,529Less: 3Q09 Net Debt 7,010= Equity Value $7,519Diluted Shares Outstanding 216= Equity Value per Share $35

Current Price $25.93Appreciation Potential 34%

WACC Inputs: Enterprise Value/Capital Structure:Capital % Cost Total Capital Total %Debt 56.6% 4.1% 2.3% Debt 7,296 56.6%Equity (Cost Approx. by CAPM) 43.4% 16.8% 7.3% Market Cap 5,592 43.4%WACC 2.5% 9.6% Total Cap 12,888 100.0%

CAPM: 16.8%=Rf + Beta *(Rm-Rf)Risk Free Rate, Rf 3.3%Expected Market Return, Rm 10.00%Beta 2.02

Sensitivity Analysis: WACC

8.6% 9.6% 10.6%12.0x 32.45 29.48 26.66

13.0x 37.99 34.78 31.74

14.0x 43.53 40.08 36.82Te

rmin

al Va

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Multi

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ROIC Analysis We believe that return on invested capital (ROIC), which measures the un-leveraged cash returns generated per dollar invested in the company, is the most accurate gauge of a company’s ability to create value. ROIC measures the cash-on-cash returns generated by a company, independent of its financing and accounting strategies. While other performance measures such as return on equity, EBITDA returns, and project returns can prove useful and serve as proxies for value creation, ROIC, while more difficult to calculate, is the most effective, in our view. While the aforementioned statistics can be skewed by leverage, stock buybacks, and/or accounting strategies, ROIC is relatively immune to these manipulations.

ROIC enables investors to determine how efficiently management runs its assets independent of how it chooses to finance them. For investors, it provides the opportunity to look through various financial strategies and accounting procedures and identify the real economic return a company’s management can generate. When evaluating a company’s weighted average cost of capital (WACC), which represents the minimum rate of return (adjusted for risk) that a company must earn to create value for both shareholders and creditors, the spread between ROIC and WACC represents the company’s true economic profit.

Moreover, positive changes in ROIC tend to effectively highlight economically efficient growth prospects (as opposed to growth achieved through expensive acquisitions or mediocre expansions). As ROIC improves, one can reasonably assume that the company is either more efficiently utilizing its existing asset base and/or investing in new high-return projects. We project that Royal Caribbean’s return on invested capital will remain below its weighted average cost of capital between 2009 and 2012. The company has committed to improving its ROICs and should make progress on that endeavor starting in 2010 as fundamentals and cash flow generation improve, it continues to vigilantly manage its costs, and as its capital investment/new build program begins to slow.

Figure 25: Royal Caribbean Cruises Ltd. – Historical and Projected ROICs, 2003-12E $ in millions

7.9%10.3%

12.1%10.0%

8.4%

2.0% 2.6%4.4%

7.8% 8.5%

11.8% 12.0%

14.1%

8.9% 8.9% 8.5%9.3% 9.0% 8.9% 9.0%

0%

2%

4%

6%

8%

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2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E

RCL ROIC RCL WACC


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Figure 26: Royal Caribbean Cruises Ltd. – ROIC and Value Spread Trends, 2003-12E $ in millions

2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012ERecurring EBIT $526 $754 $872 $858 $901 $832 $480 $689 $886 $1,001Tax Rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%After-Tax EBIT 513 735 850 837 879 811 468 671 864 976Plus: Depreciation & Amortization $363 $394 $402 $422 $483 $520 $569 $639 $689 $706Less: Other Capex $103 $126 $107 $220 $350 $1,061 $656 $646 $362 $362= Net Operating Profit After Tax (NOPAT) $773 $1,003 $1,145 $1,039 $1,012 $271 $381 $664 $1,192 $1,320

Total Assets 11,323 11,964 11,256 13,393 14,982 16,463- Current Liabilities 1,505 2,274 1,989 1,872 2,339 2,674Invested Capital $9,818 $9,691 $9,267 $11,521 $12,643 $13,789 $15,007 $15,028 $15,596 $15,294

RCL ROIC 7.9% 10.3% 12.1% 10.0% 8.4% 2.0% 2.6% 4.4% 7.8% 8.5%

RCL WACC 11.8% 12.0% 14.1% 8.9% 8.9% 8.5% 9.3% 9.0% 8.9% 9.0%

ROIC - WACC -4.0% -1.7% -2.0% 1.1% -0.5% -6.4% -6.7% -4.6% -1.1% -0.5%

Risk Free Rate, Rf 4.4% 4.2% 4.4% 4.7% 3.9% 2.4% 3.3% 3.3% 3.3% 3.3%Expected Market Return, Rm 12.0% 12.0% 12.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%Beta 1.81 1.45 1.74 1.11 1.12 1.87 2.02 2.02 2.02 2.02Market Cap 6,803 10,924 9,479 8,752 9,092 2,945 5,592 5,592 5,592 5,592Total Debt 5,836 5,732 4,155 5,411 5,698 7,011 8,113 8,134 8,702 8,399% Equity of Capital Structure 54% 66% 70% 62% 61% 30% 41% 41% 39% 40%% Debt of Capital Structure 46% 34% 30% 38% 39% 70% 59% 59% 61% 60%Cost of Debt, After Tax 4.5% 5.3% 6.0% 6.2% 6.0% 5.0% 4.2% 3.7% 3.8% 3.9%WACC 11.8% 12.0% 14.1% 8.9% 8.9% 8.5% 9.3% 9.0% 8.9% 9.0% Source: Company reports and J.P. Morgan estimates.

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Figure 27: Royal Caribbean Cruises Ltd. – EPS Model $ in millions EARNINGS MODEL 2006 2007 2008 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012ERevenuesPassenger Ticket 3,838.6 4,427.4 4,730.3 949.3 956.6 1,270.6 1,031.9 4,208.4 1,065.5 1,138.6 1,503.5 1,179.9 4,887.5 5,502.3 5,805.7Onboard & Other 1,390.9 1,721.8 1,802.2 376.3 392.4 492.9 402.3 1,664.0 416.2 460.3 569.3 451.1 1,897.0 2,104.5 2,198.7Total Revenues 5,229.6 6,149.1 6,532.5 1,325.6 1,349.0 1,763.5 1,434.2 5,872.4 1,481.7 1,598.9 2,072.8 1,631.0 6,784.5 7,606.8 8,004.4

yoy % change 6.7% 17.6% 6.2% -7.2% -14.8% -14.5% -1.5% -10.1% 11.8% 18.5% 17.5% 13.7% 15.5% 12.1% 5.2%

Less: Commissions, Transportation & Other 917.9 1,124.0 1,192.3 235.8 232.6 304.0 257.9 1,030.3 264.7 276.8 359.7 294.9 1,196.1 1,346.6 1,420.8Less: Onboard & Other 331.2 405.6 458.4 83.2 112.5 152.6 94.4 442.8 92.0 132.0 176.2 105.9 506.2 561.5 586.7Net Revenues 3,980.4 4,619.5 4,881.8 1,006.5 1,003.9 1,307.0 1,081.9 4,399.3 1,124.9 1,190.1 1,536.9 1,230.2 5,082.2 5,698.7 5,996.9

yoy % change 6.5% 16.1% 5.7% -7.9% -15.0% -14.0% -0.6% -9.9% 11.8% 18.5% 17.6% 13.7% 15.5% 12.1% 5.2%ExpensesPayroll & Related 501.9 584.1 657.7 168.7 165.5 171.2 178.0 683.3 187.5 193.1 195.8 197.6 774.1 854.8 891.1

yoy % change -1.7% 16.4% 12.6% 9.4% 1.3% 0.5% 4.8% 3.9% 11.1% 16.7% 14.4% 11.0% 13.3% 10.4% 4.2%Food 278.6 323.0 342.6 85.4 80.9 88.4 88.4 343.1 94.0 93.5 100.1 97.2 384.8 425.0 440.8

yoy % change 2.9% 15.9% 6.1% 2.9% -1.4% -2.3% 1.5% 0.2% 10.0% 15.6% 13.3% 9.9% 12.2% 10.4% 3.7%Fuel 480.2 546.0 722.0 154.9 136.5 146.3 157.9 595.6 156.8 163.4 171.3 168.6 660.1 706.0 741.4

yoy % change 30.5% 13.7% 32.2% -2.1% -21.7% -29.4% -13.3% -17.5% 1.2% 19.7% 17.1% 6.8% 10.8% 6.9% 5.0%Other Operating 739.8 998.9 1,030.6 224.2 237.5 253.7 258.4 973.9 248.0 273.1 285.9 285.6 1,092.6 1,206.6 1,251.6

yoy % change 9.2% 35.0% 3.2% -2.6% -11.8% -3.9% -3.3% -5.5% 10.6% 15.0% 12.7% 10.5% 12.2% 10.4% 3.7%Marketing, Selling & Administrative 699.9 783.0 776.5 189.2 190.6 196.6 177.9 754.2 207.1 219.2 221.6 194.6 842.4 930.3 965.0

yoy % change 10.2% 11.9% -0.8% -7.7% -3.0% 2.9% -3.3% -2.9% 9.5% 15.0% 12.7% 9.4% 11.7% 10.4% 3.7%Net Cruise Costs 2,700.3 3,235.1 3,529.5 822.4 811.0 856.1 860.6 3,350.2 893.5 942.4 974.7 943.6 3,754.1 4,122.7 4,290.0

yoy % change 9.7% 19.8% 9.1% -1.0% -8.4% -7.2% -3.3% -5.1% 8.6% 16.2% 13.8% 9.6% 12.1% 9.8% 4.1%EBITDA 1,280.1 1,384.4 1,352.3 184.1 193.0 450.9 221.2 1,049.2 231.5 247.8 562.2 286.6 1,328.1 1,575.9 1,707.0Depreciation & Amortization 421.6 483.1 520.4 139.9 137.9 144.0 147.1 568.9 155.5 159.0 161.0 164.0 639.4 689.5 706.4

yoy % change 4.9% 14.6% 7.7% 12.4% 8.4% 6.9% 9.8% 9.3% 11.2% 15.3% 11.8% 11.5% 12.4% 7.8% 2.5%Operating Income (EBIT) 858.4 901.3 832.0 44.3 55.1 306.8 74.1 480.3 76.0 88.8 401.3 122.6 688.7 886.5 1,000.6

yoy % change -1.5% 5.0% -7.7% -67.8% -67.4% -33.6% 16.6% -42.3% 71.7% 61.2% 30.8% 65.5% 43.4% 28.7% 12.9%Margin 16.4% 14.7% 12.7% 3.3% 4.1% 17.4% 5.2% 8.2% 5.1% 5.6% 19.4% 7.5% 10.2% 11.7% 12.5%yoy bps change -1.4% -1.8% -1.9% -6.3% -6.6% -5.0% 0.8% -4.6% 1.8% 1.5% 2.0% 2.4% 2.0% 1.5% 0.8%

Interest Expense, Net (252.6) (313.8) (313.2) (77.7) (67.2) (71.7) (79.4) (296.0) (83.0) (85.0) (86.0) (88.0) (342.0) (352.0) (348.0)Other Income (Expense) 28.1 15.8 54.9 (2.8) (23.0) (4.8) (4.5) (35.0) (1.0) (2.0) (5.0) (3.0) (11.0) (11.0) (2.0)Net Income (for Diluted Earnings per Share) 651.0 603.4 573.7 (36.2) (35.1) 230.4 (9.8) 149.3 (8.0) 1.8 310.3 31.6 335.7 523.5 650.6Reported Diluted Earnings per Share 2.97 2.82 2.68 (0.17) (0.16) 1.07 (0.05) 0.69 (0.04) 0.01 1.44 0.15 1.56 2.43 3.02Nonrecurring Items (per Share) (0.16) 0.00 0.00Recurring Diluted Earnings per Share 2.81 2.82 2.68 (0.17) (0.16) 1.07 (0.05) 0.69 (0.04) 0.01 1.44 0.15 1.56 2.43 3.02

yoy % change -1.2% 0.2% -4.9% -148.1% -141.5% -44.5% -756.2% -74.3% -78.1% -105.0% 34.7% -423.2% 125.9% 55.9% 24.3%Common Shares Outstanding - Basic 210.7 212.8 213.5 213.7 213.8 213.8 213.8 213.8 213.8 213.8 213.8 213.8 213.8 213.8 213.8Common Shares Outstanding - Diluted 221.5 214.2 214.2 213.7 213.8 215.7 215.7 214.7 215.7 215.7 215.7 215.7 215.7 215.7 215.7 Source: Company reports and J.P. Morgan estimates.

Figure 28: Royal Caribbean Cruises Ltd. – Capacity-Adjusted Statistics $ in millions CAPACITY ADJUSTED STATISTICS 2006 2007 2008 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012E

All-in year-over-year Capacity Growth 3.0% 12.3% 5.2% 7.7% 3.5% 3.1% 7.5% 5.4% 9.5% 15.0% 12.7% 9.4% 11.6% 8.8% 2.7%

Net Yield = Net Revenue per APCD (in $) 177.76 183.64 184.47 147.54 152.46 182.60 147.56 157.70 150.58 157.16 190.53 153.38 163.25 168.25 172.40yoy % change 3.4% 3.3% 0.5% -14.5% -17.9% -16.5% -7.4% -14.5% 2.1% 3.1% 4.3% 3.9% 3.5% 3.1% 2.5%

Net Cruise Costs per APCD (in $) 120.59 128.60 133.37 120.55 123.15 119.61 117.38 120.09 119.60 124.44 120.83 117.64 120.59 121.72 123.33yoy % change 6.4% 6.6% 3.7% -8.1% -11.5% -10.0% -10.0% -10.0% -0.8% 1.0% 1.0% 0.2% 0.4% 0.9% 1.3%

Net Cruise Costs (Excl. Fuel) per APCD (in $) 99.15 106.90 106.09 97.85 102.42 99.18 95.84 98.74 98.61 102.86 99.60 96.62 99.39 100.88 102.01yoy % change 2.9% 7.8% -0.8% -7.9% -8.4% -3.8% -7.6% -6.9% 0.8% 0.4% 0.4% 0.8% 0.7% 1.5% 1.1%


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Figure 29: Royal Caribbean Cruises Ltd. – Free Cash Flow and Balance Sheet Model $ in millions FREE CASH FLOW MODEL 2006 2007 2008 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012ENet Income 634 603 574 (36) (35) 230 (10) 149 (8) 2 310 32 336 523 651Add: Depreciation & Amortization 422 483 520 140 138 144 147 569 155 159 161 164 639 689 706Less: Capitalized Interest Expense (28) (28) (44) (10) (20) (11) (7) (48) (7) (7) (7) (7) (28) (28) (28)Less: Dividends (124) (98) (128) 0 0 0 0 0 0 0 0 0 0 0 0Less: Investment Capex (Incl. New Ships) (861) (967) (1,163) (513) (932) (1,444) (560) (994) (1,554) (638) (638)Less: Other Capex (220) (350) (1,061) (219) (104) (317) (15) (656) (162) (162) (162) (162) (646) (362) (362)Gross Free Cash Flow (177) (357) (1,302) (126) (22) (466) (817) (1,430) (21) (568) 303 (967) (1,253) 185 329Less: Acquisitions/Other (653) 0 51 291 291 0Add: Share Issuances (Repurchases) (165) 0 0Add (Less): Other (282) 195 105 (68) 74 (85) (79) 0Net Free Cash Flow (1,277) (162) (1,146) 97 52 (551) (817) (1,219) (21) (568) 303 (967) (1,253) 185 329Beginning Long-Term Debt 4,155 5,411 5,698 7,011 6,967 6,769 7,296 7,011 8,113 8,134 8,702 8,399 8,113 9,366 9,180New Net Long-Term Debt 1,257 287 1,313 (44) (199) 527 817 1,101 21 568 (303) 967 1,253 (185) (329)Ending Long-Term Debt 5,411 5,698 7,011 6,967 6,769 7,296 8,113 8,113 8,134 8,702 8,399 9,366 9,366 9,180 8,851Less: Cash & Cash Equivalents 105 231 403 456 310 286 286 286 286 286 286 286 286 286 286Net Debt 5,306 5,467 6,609 6,511 6,459 7,010 7,827 7,827 7,848 8,416 8,113 9,080 9,080 8,894 8,565Change in Net Debt 1,277 161 1,141 (97) (52) 551 817 1,218 21 568 (303) 967 1,253 (185) (329)

Balance Sheet Items:Cash & Cash Equivalents 105 231 403 456 310 286 286 286 286 286 286 286 286 286 286Total Long-Term Debt 5,411 5,698 7,011 6,967 6,769 7,296 8,113 8,113 8,134 8,702 8,399 9,366 9,366 9,180 8,851Equity 6,092 6,757 6,806 6,750 7,047 7,444 7,434 6,955 6,947 6,949 7,259 7,291 7,291 7,814 8,465

Book Value per Share 27.50 31.54 31.78 31.59 32.97 34.51 34.47 32.39 32.21 32.22 33.66 33.81 33.81 36.23 39.25ROAE 11% 9% 8% 2% 5% 7% 8%Leverage Ratios:Long-Term Debt/Total Capital 47.0% 45.7% 50.7% 50.8% 49.0% 49.5% 52.2% 53.8% 53.9% 55.6% 53.6% 56.2% 56.2% 54.0% 51.1%Net Debt/Total Capital 46.6% 44.7% 49.3% 49.1% 47.8% 48.5% 51.3% 52.9% 53.0% 54.8% 52.8% 55.5% 55.5% 53.2% 50.3%EBITDA/Interest 4.8x 4.1x 4.3x 3.9x 3.7x 3.3x 3.5x 3.5x 3.6x 3.6x 3.8x 3.9x 3.9x 4.5x 4.9xLong-Term Debt/EBITDA (TTM) 4.2x 4.1x 5.2x 5.5x 5.8x 7.1x 7.7x 7.7x 7.4x 7.6x 6.7x 7.1x 7.1x 5.8x 5.2x Source: Company reports and J.P. Morgan estimates.

Figure 30: Royal Caribbean Cruises Ltd. – Revenue Drivers $ in millions REVENUE DRIVERS 2006 2007 2008 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012E

Operating StatisticsAvailable Passenger Cruise Days (APCD) 22.4 25.2 26.5 6.8 6.6 7.2 7.3 27.9 7.5 7.6 8.1 8.0 31.1 33.9 34.8

yoy % change 3.0% 12.3% 5.2% 7.7% 3.5% 3.1% 7.5% 5.4% 9.5% 15.0% 12.7% 9.4% 11.6% 8.8% 2.7%Occupancy 106.5% 105.7% 104.5% 101.2% 102.3% 105.4% 100.7% 102.4% 101.7% 102.8% 105.9% 101.2% 102.9% 103.4% 104.2%

bp change -0.1% -0.8% -1.2% -3.2% -1.7% -2.4% -1.0% -2.1% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.8%Passenger Cruise Days (PCD) 23.8 26.6 27.7 6.9 6.7 7.5 7.4 28.6 7.6 7.8 8.5 8.1 32.0 35.0 36.2

yoy % change 2.9% 11.5% 4.0% 4.4% 1.8% 0.8% 6.4% 3.3% 10.0% 15.6% 13.2% 9.9% 12.2% 9.3% 3.4%

RevenuesPassenger Ticket 3,838.6 4,427.4 4,730.3 949.3 956.6 1,270.6 1,031.9 4,208.4 1,065.5 1,138.6 1,503.5 1,179.9 4,887.5 5,502.3 5,805.7

yoy % change 6.3% 15.3% 6.8% -8.5% -16.1% -15.2% -2.1% -11.0% 12.2% 19.0% 18.3% 14.3% 16.1% 12.6% 5.5%Passenger Ticket per PCD (in $) 161.0 166.5 171.0 137.5 142.0 168.4 139.8 147.3 140.2 146.3 176.0 145.4 152.5 157.1 160.2yoy % change 3.4% 3.4% 2.7% -12.4% -17.6% -15.8% -8.0% -13.9% 2.0% 3.0% 4.5% 4.0% 3.5% 3.0% 2.0%

Onboard & Other 1,390.9 1,721.8 1,802.2 376.3 392.4 492.9 402.3 1,664.0 416.2 460.3 569.3 451.1 1,897.0 2,104.5 2,198.7yoy % change 7.5% 23.8% 4.7% -3.8% -11.6% -12.8% 0.0% -7.7% 10.6% 17.3% 15.5% 12.1% 14.0% 10.9% 4.5%Onboard & Other per PCD (in $) 58.3 64.7 65.2 54.5 58.3 65.3 54.5 58.2 54.8 59.1 66.6 55.6 59.2 60.1 60.7yoy % change 4.5% 11.0% 0.7% -7.9% -13.1% -13.5% -6.0% -10.6% 0.5% 1.5% 2.0% 2.0% 1.6% 1.5% 1.0%

Total Revenues 5,229.6 6,149.1 6,532.5 1,325.6 1,349.0 1,763.5 1,434.2 5,872.4 1,481.7 1,598.9 2,072.8 1,631.0 6,784.5 7,606.8 8,004.4yoy % change 6.7% 17.6% 6.2% -7.2% -14.8% -14.5% -1.5% -10.1% 11.8% 18.5% 17.5% 13.7% 15.5% 12.1% 5.2%

Less: Commissions, Transportation & Other 917.9 1,124.0 1,192.3 235.8 232.6 304.0 257.9 1,030.3 264.7 276.8 359.7 294.9 1,196.1 1,346.6 1,420.8yoy % change 6.9% 22.5% 6.1% -8.6% -18.3% -19.1% -5.9% -13.6% 12.2% 19.0% 18.3% 14.3% 16.1% 12.6% 5.5%% of Passenger Ticket Revenues 23.9% 25.4% 25.2% 24.8% 24.3% 23.9% 25.0% 24.5% 24.8% 24.3% 23.9% 25.0% 24.5% 24.5% 24.5%

Less: Onboard & Other 331.2 405.6 458.4 83.2 112.5 152.6 94.4 442.8 92.0 132.0 176.2 105.9 506.2 561.5 586.7yoy % change 7.3% 22.5% 13.0% 6.0% -4.1% -9.3% 0.0% -3.4% 10.6% 17.3% 15.5% 12.1% 14.3% 10.9% 4.5%% of Onboard & Other Revenues 23.8% 23.6% 25.4% 22.1% 28.7% 31.0% 23.5% 26.6% 22.1% 28.7% 31.0% 23.5% 26.7% 26.7% 26.7%

Net Revenues 3,980.4 4,619.5 4,881.8 1,006.5 1,003.9 1,307.0 1,081.9 4,399.3 1,124.9 1,190.1 1,536.9 1,230.2 5,082.2 5,698.7 5,996.9yoy % change 6.5% 16.1% 5.7% -7.9% -15.0% -14.0% -0.6% -9.9% 11.8% 18.5% 17.6% 13.7% 15.5% 12.1% 5.2%

Net Yield = Net Revenue per APCD (in $) 177.76 183.64 184.47 147.54 152.46 182.60 147.56 157.70 150.58 157.16 190.53 153.38 163.25 168.25 172.40yoy % change 3.4% 3.3% 0.5% -14.5% -17.9% -16.5% -7.4% -14.5% 2.1% 3.1% 4.3% 3.9% 3.5% 3.1% 2.5%


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Figure 31: Royal Caribbean Cruises Ltd. – Expense Drivers $ in millions EXPENSE DRIVERS 2006 2007 2008 1Q09 2Q09 3Q09 4Q09E 2009E 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012EPayroll & Related 501.9 584.1 657.7 168.7 165.5 171.2 178.0 683.3 187.5 193.1 195.8 197.6 774.1 854.8 891.1

yoy % change -1.7% 16.4% 12.6% 9.4% 1.3% 0.5% 4.8% 3.9% 11.1% 16.7% 14.4% 11.0% 13.3% 10.4% 4.2%Payroll & Related per APCD (in $) 22.4 23.2 24.9 24.7 25.1 23.9 24.3 24.5 25.1 25.5 24.3 24.6 24.9 25.2 25.6yoy % change -4.6% 3.6% 7.0% 1.5% -2.1% -2.5% -2.5% -1.4% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Food 278.6 323.0 342.6 85.4 80.9 88.4 88.4 343.1 94.0 93.5 100.1 97.2 384.8 425.0 440.8yoy % change 2.9% 15.9% 6.1% 2.9% -1.4% -2.3% 1.5% 0.2% 10.0% 15.6% 13.3% 9.9% 12.2% 10.4% 3.7%Food per APCD (in $) 12.4 12.8 12.9 12.5 12.3 12.3 12.1 12.3 12.6 12.3 12.4 12.1 12.4 12.5 12.7yoy % change -0.1% 3.2% 0.8% -4.5% -4.8% -5.2% -5.5% -5.0% 0.5% 0.5% 0.5% 0.5% 0.5% 1.5% 1.0%

Fuel 480.2 546.0 722.0 154.9 136.5 146.3 157.9 595.6 156.8 163.4 171.3 168.6 660.1 706.0 741.4yoy % change 30.5% 13.7% 32.2% -2.1% -21.7% -29.4% -13.3% -17.5% 1.2% 19.7% 17.1% 6.8% 10.8% 6.9% 5.0%As % of Net Cruise Costs 17.8% 16.9% 20.5% 18.8% 16.8% 17.1% 18.4% 17.8% 17.5% 17.3% 17.6% 17.9% 17.6% 17.1% 17.3%As % of Net Cruise Revenue 12.1% 11.8% 14.8% 15.4% 13.6% 11.2% 14.6% 13.5% 13.9% 13.7% 11.1% 13.7% 13.0% 12.4% 12.4%Fuel per APCD (in $) 21.4 21.7 27.3 22.7 20.7 20.4 21.5 21.3 21.0 21.6 21.2 21.0 21.2 20.8 21.3yoy % change 26.7% 1.2% 25.7% -9.2% -24.3% -31.5% -19.3% -21.8% -7.5% 4.1% 3.9% -2.4% -0.7% -1.7% 2.3%Fuel Consumption (Metric Tons) 1.1 1.2 1.20 0.3 0.3 0.3 0.3 1.24 0.3 0.3 0.4 0.3 1.35 1.44 1.44yoy % change 9.4% 5.9% 0.5% 12.2% 0.5% 1.7% -4.6% 3.6% 7.0% 12.5% 10.2% 6.9% 9.1% 6.3% 0.2%Fuel Price ($ per Metric Ton) 429 461 604 516 459 460 489 481 488 488 488 488 488 491 515yoy % change 19.6% 7.5% 31.0% -12.8% -22.1% -31.2% -13.5% -20.3% -5.4% 6.4% 6.2% -0.1% 1.5% 0.6% 4.8%

Other Operating 739.8 998.9 1,030.6 224.2 237.5 253.7 258.4 973.9 248.0 273.1 285.9 285.6 1,092.6 1,206.6 1,251.6yoy % change 9.2% 35.0% 3.2% -2.6% -11.8% -3.9% -3.3% -5.5% 10.6% 15.0% 12.7% 10.5% 12.2% 10.4% 3.7%Other Operating per APCD (in $) 33.0 39.7 38.9 32.9 36.1 35.4 35.2 34.9 33.2 36.1 35.4 35.6 35.1 35.6 36.0yoy % change 5.9% 20.2% -1.9% -9.6% -14.8% -6.7% -10.0% -10.4% 1.0% 0.0% 0.0% 1.0% 0.5% 1.5% 1.0%

Marketing, Selling & Administrative 699.9 783.0 776.5 189.2 190.6 196.6 177.9 754.2 207.1 219.2 221.6 194.6 842.4 930.3 965.0yoy % change 10.2% 11.9% -0.8% -7.7% -3.0% 2.9% -3.3% -2.9% 9.5% 15.0% 12.7% 9.4% 11.7% 10.4% 3.7%Marketing, Selling & Admin. per APCD 31.3 31.1 29.3 27.7 28.9 27.5 24.3 27.0 27.7 28.9 27.5 24.3 27.1 27.5 27.7yoy % change 6.9% -0.4% -5.7% -14.3% -6.3% -0.2% -10.0% -7.9% 0.0% 0.0% 0.0% 0.0% 0.1% 1.5% 1.0%

Net Cruise Costs 2,700.3 3,235.1 3,529.5 822.4 811.0 856.1 860.6 3,350.2 893.5 942.4 974.7 943.6 3,754.1 4,122.7 4,290.0yoy % change 9.7% 19.8% 9.1% -1.0% -8.4% -7.2% -3.3% -5.1% 8.6% 16.2% 13.8% 9.6% 12.1% 9.8% 4.1%

Net Cruise Costs per APCD (in $) 120.59 128.60 133.37 120.55 123.15 119.61 117.38 120.09 119.60 124.44 120.83 117.64 120.59 121.72 123.33yoy % change 6.4% 6.6% 3.7% -8.1% -11.5% -10.0% -10.0% -10.0% -0.8% 1.0% 1.0% 0.2% 0.4% 0.9% 1.3%

Net Cruise Costs (excl. Fuel) per APCD (in $) 99.15 106.90 106.09 97.85 102.42 99.18 95.84 98.74 98.61 102.86 99.60 96.62 99.39 100.88 102.01yoy % change 2.9% 7.8% -0.8% -7.9% -8.4% -3.8% -7.6% -6.9% 0.8% 0.4% 0.4% 0.8% 0.7% 1.5% 1.1%


37



Cruise Industry Summary The cruise industry has been one of the fastest-growing segments of the global vacation market, with worldwide passengers expanding at a compound annual rate of approximately 7.2% between 1990 and 2008 (North America passenger CAGR of 7.2% from 1981 to 2008, and International passenger CAGR of 13.9% from 1990 to 2008). The global cruise industry carried ~16.8m passengers in 2008, comprising ~10.5 passengers from North America (63% of the total market), ~4.6m passengers from Europe (28%), and ~1.5m passengers from the United Kingdom (9%). The cruise market is positioned for continued growth as the market is modestly penetrated—only 19.9% of Americans have gone on a cruise, with international penetration substantially lower. We continue to believe that Europe holds significant growth potential. In addition, cruise companies are looking to redeploy older capacity to Asia, the South Pacific, Australia, New Zealand, and South America, to expand the global cruise market and provide future catalysts for earnings growth.

Figure 32: Annual Passenger Growth Actual ‘000s

North America % Chg. Foreign % Chg. Worldwide % Chg.1980 1.431 -- -- -- -- --1981 1.453 1.5% -- -- -- --1982 1.471 1.2% -- -- -- --1983 1.755 19.3% -- -- -- --1984 1.859 5.9% -- -- -- --1985 2.152 15.8% -- -- -- --1986 2.624 21.9% -- -- -- --1987 2.898 10.4% -- -- -- --1988 3.175 9.6% -- -- -- --1989 3.286 3.5% -- -- -- --1990 3.496 6.4% 0.278 -- 3.774 --1991 3.834 9.7% 0.334 20.1% 4.168 10.4%1992 4.023 4.9% 0.362 8.4% 4.385 5.2%1993 4.318 7.3% 0.41 13.3% 4.728 7.8%1994 4.314 -0.1% 0.486 18.5% 4.8 1.5%1995 4.223 -2.1% 0.498 2.5% 4.721 -1.6%1996 4.477 6.0% 0.493 -1.0% 4.97 5.3%1997 4.864 8.6% 0.516 4.7% 5.38 8.2%1998 5.243 7.8% 0.625 21.1% 5.868 9.1%1999 5.69 8.5% 0.647 3.5% 6.337 8.0%2000 6.546 15.0% 0.668 3.2% 7.214 13.8%2001 6.637 1.4% 0.862 29.0% 7.499 4.0%2002 7.472 12.6% 1.176 36.4% 8.648 15.3%2003 7.99 6.9% 1.536 30.6% 9.526 10.2%2004 8.87 11.0% 1.59 3.5% 10.46 9.8%2005 9.671 9.0% 1.509 -5.1% 11.18 6.9%2006 10.078 4.2% 1.928 27.8% 12.006 7.4%2007 10.247 1.7% 2.316 20.1% 12.563 4.6%2008 10.093 -1.5% 2.912 25.7% 13.005 3.5%

CAGR (1980-2008) 7.2% 7.4% 13.9% 14.6% 7.1% 7.2% Source: CLIA and J.P. Morgan estimates.

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Figure 33: North American and International Supply By Berths

Lower Berths % Chg. Capacity Utilization Lower Berths % Chg.1980 -- 19801981 41,073 19811982 47,266 15.1% 19821983 47,834 1.2% 19831984 52,392 9.5% 19841985 56,771 8.4% 19851986 60,446 6.5% 19861987 66,810 10.5% 19871988 72,268 8.2% 19881989 72,369 0.1% 19891990 83,533 15.4% 19901991 86,631 3.7% 19911992 97,539 12.6% 19921993 103,988 6.6% 19931994 103,296 -0.7% 19941995 105,161 1.8% 19951996 110,230 4.8% 19961997 118,013 7.1% 19971998 138,373 17.3% 19981999 148,750 7.5% 19992000 166,201 11.7% 20002001 175,855 5.8% 20012002 197,553 12.3% 98.6% 20022003 212,004 7.3% 103.3% 2003 60,0002004 225,714 6.5% 103.3% 2004 58,000 -3.3%2005 231,091 2.4% 103.3% 2005 66,000 13.8%2006 248,774 7.7% 103.9% 2006 72,000 9.1%2007 267,145 7.4% 105.7% 2007 81,000 12.5%2008 280,093 4.8% 104.2% 2008 91,000 12.3%

CAGR (1981-2008) 7.4% 7.5% 103.2% CAGR (2003-2008) 8.7% 8.9%CAGR (2009E-2013E) 3.8% 4.0% --

North American Supply International Supply

Source: CLIA and J.P. Morgan estimates.

Major Players The cruise industry is essentially a duopoly, with the two largest global companies—Carnival and Royal Caribbean—controlling approximately 75% of worldwide capacity and ~85% of North American capacity in 2009 (approximately 372,000 berths, assuming double occupancy per cabin). The other company of note is NCL Corporation (Norwegian Cruise Lines), which controls ~6% of worldwide capacity and ~9% of North American capacity. The remainder of the industry generally consists of regional cruise companies and/or vertically integrated tour operators.

Figure 34: Worldwide Market Share By Berths

RCL, 26.0%

CCL, 48.6%

NCL, 6.3%

Other, 19.0%


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Cruise Segments The typical cruise passenger is 50 years old on average, with above-average income ($109,000 per household), married (86%), with a college education (69%), and the majority of cruisers are employed (62%) versus the 17% who are retired. The typical cruiser sailed an average of 6.6 days with his/her spouse (75%) and spent approximately $1,880 per person for their cruise, including air and all onboard expenses. Cruise company brands can be broadly segmented into contemporary, premium, and luxury. However, there generally is significant overlap and competition among the product offerings.

• Contemporary. The contemporary cruise lines (Carnival Cruise Lines, Royal Caribbean International, and Norwegian Cruise Lines) target a range of ages and incomes, and generally market to first-time cruisers and families. On average, a contemporary cruise is seven days or less. Typically, contemporary cruises are on large- to mega-sized ships offering modern amenities and numerous onboard activities.

• Premium. The premium lines (Cunard, Holland America, Princess, and Celebrity) target experienced cruisers who are generally more affluent and older than contemporary cruisers. On average, a premium cruise is seven to 14 days. Typically, premium cruises are more service-oriented and emphasize quality, comfort, style, and more destination-focused itineraries.

• Luxury. The luxury lines (Seabourn) target wealthy, experienced cruisers. On average, a luxury cruise is seven to 14 days. Typically, luxury cruises are on smaller, modern ships offering high-end service, dining, and amenities, and sail on more exotic itineraries to ports inaccessible to bigger ships.

Figure 35: Major Operator Segment Distribution By Berths

Contemporary , 65%

Premium, 34%

Lux ury , 1%

Note: Includes CCL, RCL, and NCL data only.


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Key Markets Cruise companies primarily source passengers and operate in North America and Europe. Other key markets are Asia/South Pacific, including Australia and New Zealand, and South America. Besides North America (19.9% of U.S. population has ever taken a cruise), cruising represents a smaller portion of the overall vacation market in other regions. For example, in the U.K. and Continental Europe, the penetration per capita is three-fifths and one-fifth, respectively, of that in North America. Elsewhere in the world, cruising is at an early stage of development and has far lower penetration rates. Accordingly, these markets have considerable growth potential, in our opinion.

• North America is the largest source market for cruise passengers. Approximately 10.5 million persons took a cruise in 2008. At year-end, North America was served by 122 ships (approximately 211,000 berths). North American capacity is projected to grow 0.9%, 9.4%, 6.4%, and 3.5% in 2009, 2010, 2011, and 2012, respectively.

• Europe is the second-largest source market. Approximately 4.6 million Europeans took a cruise in 2008. Major markets are the U.K. (21% of all European-sourced passengers), Southern Europe (19%), and Germany (13%). However, despite being the largest leisure vacation market in the world, Europe has a much lower penetration rate than North America. At year-end 2008, 117 ships with approximately 130,000 berths were serving Europe. In 2009, 2010, 2011, and 2012, capacity is projected to grow 10.8%, 8.3%, 5.1%, and 4.9%, respectively.

Demand Outlook Carnival demand commentary As of 3Q09, Carnival noted that bookings for the next three quarters (through 2Q10) were running up +19% on a year-over-year basis. After adjusting for projected capacity increases, Carnival was moderately behind last year’s booking levels, though management noted that the booking window continues to lengthen. Regarding price, on an overall basis, Carnival has seen prices stabilize, and for certain itineraries where it has seen the booking window lengthen, it has been able to increase rates. Carnival’s ability to meaningfully increase rates for 2010 is contingent on the continued strengthening of customer demand, which should eventually begin to re-establish the consumer psyche of booking further out and wean the consumer off the heavy discounting/promotional activity that has characterized 2009. With that said, Carnival should be successful in closing the remaining capacity-adjusted occupancy gap that remains as it moves through 1Q10.

For 1Q10, given that Carnival is almost fully booked (as ships typically are close to 95% booked one quarter in advance) with business that was sold at lower price levels (on a constant-dollar basis), it will be difficult for the company to increase pricing on close-in bookings to a level that would offset the weak rates booked earlier in 2009, and the company expects 1Q10 net yields to decline on a year-over-year basis. However, given the relative weakness of the U.S. dollar to the Euro/GBP, we expect net yields to be flat to modestly up in 1Q10 on a current-dollar basis. If booking volumes continue at current levels, Carnival believes that, on a quarterly basis for 2010, it should start to see a positive effect on local-currency yields and a gradual year-over-year improvement in net yields.

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Our checks on Carnival’s new vessel the Dream (3,650 berths or ~2% of supply), show it is driving a low-double-digit premium over pricing for older vessels with similar itineraries in 1Q10 and 2Q10.

Royal Caribbean demand commentary On RCL’s 3Q09 earnings call, management commented that 4Q09 forward booking patterns have improved since June, when the booking pace turned positive, with year-over-year changes in price hitting the black in October. However, we note that September/October 2008 was an extremely tough period following the collapse of Lehman Brothers, so the improvement is largely due to easier comparisons.

For 1Q10, the bookings pace turned positive (compared to the same time last year) in August and continued through October. On a 1Q10 cumulative basis, Royal Caribbean is slightly behind the year-ago level, but given the steep acceleration in bookings since August, the company expects to be more booked (versus the same period in ’08) relatively soon. Prices for 1Q10 are trending above 2008 levels (mostly driven by the Oasis of the Seas and Solstice class vessels which are heavily booked in 1Q10). Excluding the newly launched Oasis of Seas and Solstice class vessels (which will account for ~50% of Royal’s fleet in 2010), pricing for 1Q10 is largely trending below 2008 levels. While Royal Caribbean did not provide formal net yield guidance for 1Q10, it believes that it should achieve better net yields in 1Q10 than it did in 1Q09.

Longer term, we believe demand growth will continue to be supported by favorable demographics, low domestic/international market penetration, high customer satisfaction, and the introduction of innovative onboard facilities/amenities as well as new worldwide itineraries and ports. It is important to note that the key to growth is the industry’s ability to attract first-time cruisers because repeat levels are very high.

Supply Outlook Supply growth is expected to slow from 2009 to 2012, versus the fairly substantial build-out the industry experienced from 2001 through 2009. We estimate worldwide cruise industry supply will grow at an average rate of approximately 5.9% between 2009 and 2012, reaching 425,000 berths by 2012. We believe supply increases will be concentrated in Europe, and to a lesser extent North America.

We project North American supply to grow at an average rate of approximately 5% between 2009 and 2012, reaching approximately 253,000 berths by 2012. Comparatively, the region increased supply by 9% between 2001 and 2008.

We project European supply to grow at an average rate of approximately 7% between 2009 and 2012, reaching approximately 172,000 berths by 2012. Comparatively, the region increased supply by 10% between 2001 and 2008. We believe that the largely under-penetrated nature of the European market is the primary driver of the increased supply, in addition to itineraries priced in Euros/GBP. Given the U.S. dollar’s continued weakness, the return profile of a euro-denominated new build is higher on euro-priced itineraries than on those priced in dollars.

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Figure 36: North American and European Historical/Future Capacity Growth By Berths

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Source: Cruise Industry News, Company reports, and J.P. Morgan.

Key Cruise Industry Terms • Passenger Cruise Days (PCD) = number of passengers carried for the period x

number of days of their respective cruises.

• Available Passenger Cruise Days (APCD) or Available Lower Berth Days (ALBD) = double occupancy per cabin x number of cruise days for the period; a measure of capacity.

• Occupancy = passenger cruise days / APCD or ALBD; > 100% = three or more passengers per cabin.

• Gross Yield = total revenues / APCD or ALBD.

• Wave Season = period between January and March when the cruise industry typically generates approximately 30%-35% of bookings for the year.

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• Net Yield = (total revenues – commissions, transportation & other expenses – onboard & other expenses) / APCD or ALBD. The most relevant measure of pricing performance because it reflects cruise revenues earned, net of the most significant variable costs; used to manage business on a day-to-day basis.

• Gross Cruise Costs = total cruise operating expenses + marketing, selling, and administrative expenses.

• Net Cruise Costs = total cruise operating expenses + marketing, selling, and administrative expenses – commissions, transportation & other expenses – onboard & other expenses. The most relevant measure of cost performance; used to measure the ability to control costs in a manner that positively affects net income.

• Rebating = when travel agents give a portion of their commissions to consumers, thereby lowering the ticket price. The agent’s motivation is to drive higher volumes and market share. The cruise lines believe that rebating by select agents confuses the market and commoditizes the product. Cruise lines want consistent pricing.

• Air/Sea Mix = proportion of passengers who book air travel through the cruise line as part of their cruise package versus passengers who make their own travel arrangements (air or other, if necessary). A change in the air/sea mix affects margins, but not operating income because the airfare collected by cruise lines is booked as an expense to the airlines. However, the higher the air/sea mix, the lower the operating margins, the higher the gross yield, and vice versa.

• Ship Options = reservations with shipyards to build vessels. Options do not cost anything and can be deferred prior to the expiration date in the event that the cruise operator cannot commit capital to construction of a new ship.

Cruise Industry Stock Drivers Cruise line industry stocks are high-beta stocks that historically have traded in wide ranges (for 2009 to date, the beta for CCL was 1.35 and for RCL 2.17). We believe net yields (and net yields expectations) and fuel prices are the two key factors that influence investor sentiment, with each having played a more important role at different points in history. Other factors include changes in measures of consumer confidence (University of Michigan Survey), EPS growth (valuation-to-growth profile is important as these stocks are valued on P/E), and returns on invested capital/value spreads (improving implies higher multiples).

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Figure 37: CCL and RCL Stock Price Trends

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Figure 38: Forward P/E, EV/EBITDA, and EV/Berth Multiples for CCL and RCL

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Net Yields Net yields are the most relevant measure of pricing performance because they reflect cruise revenues net of the most significant variable costs (commissions, transportation, and other expenses, onboard and other expenses) on a capacity-adjusted basis. Our analysis indicates that investors effectively price in what they perceive to be the net yields approximately two quarters in advance. We calculate a correlation coefficient of approximately 0.76 and 0.71 between CCL’s and RCL’s stock prices (with a two-quarter lead) and net yields, respectively.

For 2009, on a current-dollar and constant-dollar basis, Carnival guided for net yields to decline -14% and -10%, respectively, as the effects of the relatively strong dollar in 1Q09 and 2Q09 drove current-dollar net yields lower. In 4Q09, currency is expected to benefit net yields by ~200bps, as current-dollar and constant-dollar net yield guidance calls for declines of -9% to -11%, and -11% to -13%, respectively. We estimate that a change of one percentage point in net yield growth would affect our 2010 EPS estimates by approximately $0.14 per share.

For 2009, Royal Caribbean guided for net yields to decline -14% on a constant-currency basis, or -12% to -13% on a current-dollar basis. In the 4Q09, RCL guided for net yields to decline -7% to -8%. We estimate that a change of one percentage point in net yield growth would affect our 4Q09 EPS estimates by approximately $0.05 per share for Royal Caribbean.

We estimate 2010 net yields will increase 3.5% for Royal Caribbean on capacity increases and pricing that should begin to recover modestly in 2010. We estimate that Royal Caribbean’s net yields will benefit by ~200bps, from the higher-priced itineraries from its newly launched Oasis (Oasis of the Seas) and Solstice class vessels (Equinox), and from its Freedom class vessels (which in total account for 21,900 berths, or 25% of RCL’s total berths). We believe that offsetting these strong results will be cannibalization of demand that we think is all but inevitable when introducing newer vessels; thus, pricing on some of RCL’s older ships should be impacted. We estimate that a change of one percentage point in net yield growth would affect our 2010 EPS estimates by approximately $0.24 per share for Royal Caribbean.

In 2010, we expect Carnival’s net yields to increase 3.0%, as it largely benefits from a modest recovery in the leisure traveler, and begins to regain pricing power on some itineraries. In addition, we believe foreign exchange translation from its European fleet will benefit CCL’s net yields by ~200bps in 2010, as the dollar continues to be weak against the Euro and the British Pound. We estimate that a change of one percentage point in net yield growth would affect our 2010 EPS estimates by approximately $0.14 per share for Carnival.

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Figure 39: Net Yield and CCL Stock Price Trends

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Figure 40: Net Yield and RCL Stock Price Trends

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Net Yields vs. Stock Performance—A Look at History Cruise stocks have historically had large second-derivative moves, meaning that the stocks have tended to outperform when net yield acceleration occurred on a year-over-year basis (i.e., a positive swing rather than positive growth in net yields). We anticipate the second-derivative change in annual net yields to turn positive in 2010 (even though we assume low-single-digit net yield increases for RCL and CCL, this should be less negative than in 2009).

Figure 41: RCL Price Performance in Periods of Net Yield Acceleration/Deceleration (Two-Quarter Lead for Stock/S&P500 Performance) YOY % Change YOY Swing RCL Stock S&P 500 Outperformance/

Year RCL Net Yield in Net Yield in Net Yield % Performance (Indexed) Index Return (Underperformance)

1Q00 $166.43 6.0% 6.0% 12.7% 14.5% -1.8%2Q00 $169.45 2.4% -3.6% -43.2% 2.0% -45.2%3Q00 $187.28 -1.0% -3.4% -33.9% -2.9% -31.0%4Q00 $132.52 -7.0% -6.0% 39.1% -1.2% 40.4%1Q01 $148.12 -11.0% -4.0% 2.8% -8.1% 10.8%2Q01 $154.54 -8.8% 2.2% -12.9% -12.1% -0.7%3Q01 $174.55 -6.8% 2.0% -4.1% 5.5% -9.6%4Q01 $118.34 -10.7% -3.9% -51.5% -15.0% -36.5%1Q02 $137.76 -7.0% 3.7% 51.0% 10.3% 40.7%2Q02 $149.44 -3.3% 3.7% 39.2% -0.1% 39.3%3Q02 $171.58 -1.7% 1.6% -13.5% -13.7% 0.2%4Q02 $130.89 10.6% 12.3% -18.4% -17.6% -0.7%1Q03 $143.66 4.3% -6.3% 4.9% 7.9% -3.0%2Q03 $143.69 -3.8% -8.1% -10.0% -3.6% -6.4%3Q03 $168.56 -1.8% 2.1% 54.1% 14.9% 39.2%4Q03 $130.85 0.0% 1.7% 21.4% 2.2% 19.2%1Q04 $151.22 5.3% 5.3% 23.8% 11.6% 12.1%2Q04 $161.73 12.6% 7.3% 26.8% 1.3% 25.5%3Q04 $190.08 12.8% 0.2% -1.6% 1.3% -2.9%4Q04 $136.56 4.4% -8.4% 0.4% -2.3% 2.7%1Q05 $163.59 8.2% 3.8% 24.9% 8.7% 16.1%2Q05 $171.99 6.3% -1.8% -17.9% -2.6% -15.3%3Q05 $203.18 6.9% 0.6% 8.2% 0.9% 7.3%4Q05 $147.77 8.2% 1.3% -10.7% 3.1% -13.8%1Q06 $166.76 1.9% -6.3% 4.3% 1.6% 2.7%2Q06 $182.23 6.0% 4.0% -6.7% 3.7% -10.5%3Q06 $208.71 2.7% -3.2% -9.0% -1.9% -7.1%4Q06 $152.58 3.3% 0.5% 1.5% 5.2% -3.7%1Q07 $161.11 -3.4% -6.6% 6.6% 6.2% 0.4%2Q07 $183.80 0.9% 4.2% 1.9% 0.2% 1.7%3Q07 $217.26 4.1% 3.2% 1.9% 5.8% -3.9%4Q07 $169.41 11.0% 6.9% -9.2% 1.6% -10.7%1Q08 $172.55 7.1% -3.9% 8.7% -3.8% 12.6%2Q08 $185.72 1.0% -6.1% -22.5% -9.9% -12.6%3Q08 $218.80 0.7% -0.3% -31.7% -3.2% -28.5%4Q08 $159.43 -5.9% -6.6% -7.7% -8.9% 1.2%1Q09 $147.54 -14.5% -8.6% -33.7% -22.6% -11.2%2Q09 $152.46 -17.9% -3.4% -41.7% -11.7% -30.1%3Q09 $179.17 -18.1% -0.2% 69.0% 15.2% 53.8%

4Q09E $147.56 -7.4% 10.7% 77.8% 15.0% 62.9%1Q10E $150.58 2.1% 9.5% -- -- --

Avg. Return When Net Yield Growth Accelerates 12.8% 3.0% 9.8%Avg. Return When Net Yield Growth Decelerates -8.8% -3.4% -5.4% Source: Company reports, Bloomberg, and J.P. Morgan.

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Figure 42: CCL Price Performance in Periods of Net Yield Acceleration/Deceleration (Two-Quarter Lead for Stock/S&P500 Performance) YOY % Change YOY Swing CCL Stock S&P 500 Outperformance/

Year CCL Net Yield in Net Yield in Net Yield % Performance (Indexed) Index Return (Underperformance)

1Q03 $143.86 1.4% 14.6% 7.9% 6.7%2Q03 $138.78 -6.7% -8.1% -18.1% -3.6% -14.5%3Q03 $190.20 -3.4% 3.3% 33.2% 14.9% 18.3%4Q03 $144.73 -4.1% -0.7% 13.0% 2.2% 10.8%1Q04 $149.76 4.9% 9.0% 1.7% 11.6% -9.9%2Q04 $157.10 13.8% 8.9% 26.1% 1.3% 24.8%3Q04 $210.88 10.9% -2.9% -4.0% 1.3% -5.3%4Q04 $159.40 10.1% -0.8% 6.1% -2.3% 8.5%1Q05 $161.14 7.6% -2.5% 17.2% 8.7% 8.5%2Q05 $170.17 8.3% 0.7% 2.6% -2.6% 5.2%3Q05 $224.68 6.5% -1.8% -2.8% 0.9% -3.7%4Q05 $169.17 6.1% -0.4% -7.1% 3.1% -10.2%1Q06 $162.86 1.1% -5.1% 11.0% 1.6% 9.4%2Q06 $172.67 1.5% 0.4% -5.2% 3.7% -8.9%3Q06 $227.02 1.0% -0.4% -22.8% -1.9% -20.9%4Q06 $173.05 2.3% 1.3% 1.9% 5.2% -3.3%1Q07 $163.35 0.3% -2.0% 20.7% 6.2% 14.5%2Q07 $172.86 0.1% -0.2% -5.2% 0.2% -5.4%3Q07 $232.72 2.5% 2.4% 8.6% 5.8% 2.8%4Q07 $181.52 4.9% 2.4% -10.7% 1.6% -12.3%1Q08 $173.50 6.2% 1.3% 0.3% -3.8% 4.1%2Q08 $185.42 7.3% 1.1% -12.8% -9.9% -2.9%3Q08 $242.20 4.1% -3.2% 1.8% -3.2% 5.0%4Q08 $177.82 -2.0% -6.1% -7.5% -8.9% 1.4%1Q09 $154.22 -11.1% -9.1% -43.3% -22.6% -20.8%2Q09 $154.27 -16.8% -5.7% -6.9% -11.7% 4.8%3Q09 $202.19 -16.5% 0.3% 30.1% 15.2% 14.8%

4Q09E $158.40 -10.9% 5.6% 19.3% 15.0% 4.3%1Q10E $155.79 1.0% 11.9% -- -- --

Avg. Return When Net Yield Growth Accelerates 8.4% 5.1% 3.4%Avg. Return When Net Yield Growth Decelerates -3.2% -2.0% -1.2% Source: Company reports, Bloomberg, and J.P. Morgan.

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The Relationship Between Net Yields and Lodging RevPAR We have found that historically net yield performance has been highly correlated to domestic lodging RevPAR performance on a quarterly basis (0.82 correlation coefficient, and 0.67 R2).

While lodging and cruise demand characteristics are different, as cruise demand is ~100% leisure-driven, and lodging demand is more levered to corporate transient/group (~65-70% of rooms demanded) than leisure (~30% of rooms demanded), we think the way the companies have historically managed demand and occupancy in a slowing macro/consumer environment make for similarly weak operating environments for both industries.

In the present lodging downcycle and sluggish macroeconomic environment, lodging companies tended to reduce rates aggressively, in addition to experiencing outsized occupancy declines, leading to negative RevPAR results. Similarly, cruise companies aggressively discounted pricing and increased promotional activity substantially to reach 100%+ occupancy targets, leading to reduced net yields. In either case, the relevant operational metric was impacted by these actions:

Figure 43: Quarterly Cruise Net Yields vs. Lodging RevPAR RCL CCL Total U.S. Luxury Upper Upscale Upscale Midscale w F&B Midscale wo F&B Economy

Net Yield % Change Net Yield % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change1Q99 157.01 0.0% -- -- $47.87 2.5% $156.84 4.2% $93.50 2.3% $65.48 1.6% $38.52 1.1% $36.13 3.5% $22.83 4.0%2Q99 165.48 3.0% -- -- $52.81 1.4% $159.09 3.3% $96.57 1.5% $68.43 0.9% $45.48 0.6% $42.77 1.7% $28.44 2.1%3Q99 189.17 3.0% -- -- $56.02 3.4% $154.05 6.1% $93.62 3.3% $67.99 1.2% $49.48 3.1% $45.81 2.0% $32.11 3.2%4Q99 142.50 3.0% -- -- $46.73 3.4% $161.43 7.4% $90.04 4.3% $60.52 0.5% $37.99 2.4% $35.50 2.1% $23.54 3.0%1Q00 166.43 6.0% -- -- $49.89 4.2% $174.02 11.0% $97.63 4.4% $66.40 1.4% $39.67 3.0% $37.15 2.8% $23.42 2.6%2Q00 169.45 2.4% -- -- $57.09 8.1% $179.12 12.6% $105.90 9.7% $73.38 7.2% $47.95 5.4% $45.10 5.4% $29.57 4.0%3Q00 187.28 -1.0% -- -- $59.51 6.2% $168.41 9.3% $101.29 8.2% $73.05 7.4% $51.40 3.9% $47.92 4.6% $32.75 2.0%4Q00 132.52 -7.0% -- -- $49.39 5.7% $167.90 4.0% $95.04 5.5% $64.55 6.7% $39.04 2.8% $37.33 5.2% $24.30 3.2%1Q01 148.12 -11.0% -- -- $51.74 3.7% $169.75 -2.5% $99.39 1.8% $68.85 3.7% $40.53 2.2% $39.13 5.3% $24.24 3.5%2Q01 154.54 -8.8% -- -- $55.13 -3.4% $164.22 -8.3% $98.73 -6.8% $70.06 -4.5% $46.10 -3.8% $45.20 0.2% $29.01 -1.9%3Q01 174.55 -6.8% -- -- $52.91 -11.1% $132.58 -21.3% $82.15 -18.9% $63.22 -13.5% $46.56 -9.4% $45.74 -4.5% $31.02 -5.3%4Q01 118.34 -10.7% -- -- $41.32 -16.3% $125.22 -25.4% $73.95 -22.2% $52.63 -18.5% $33.09 -15.2% $34.98 -6.3% $22.10 -9.1%1Q02 137.76 -7.0% -- -- $46.31 -10.5% $144.18 -15.1% $85.59 -13.9% $59.06 -14.2% $36.15 -10.8% $37.25 -4.8% $22.57 -6.9%2Q02 149.44 -3.3% -- -- $52.44 -4.9% $149.24 -9.1% $92.36 -6.5% $65.08 -7.1% $43.47 -5.7% $44.59 -1.4% $27.69 -4.6%3Q02 171.58 -1.7% -- -- $53.12 0.4% $130.54 -1.5% $83.63 1.8% $62.88 -0.5% $46.04 -1.1% $46.15 0.9% $30.26 -2.4%4Q02 130.89 10.6% -- -- $43.67 5.7% $134.09 7.1% $80.08 8.3% $55.33 5.1% $34.00 2.7% $35.89 2.6% $22.00 -0.4%1Q03 143.66 4.3% 143.86 1.4% $45.68 -1.4% $138.26 -4.1% $83.22 -2.8% $57.85 -2.0% $35.29 -2.4% $36.57 -1.8% $21.72 -3.7%2Q03 143.69 -3.8% 138.78 -6.7% $50.90 -2.9% $142.64 -4.4% $86.84 -6.0% $62.62 -3.8% $41.90 -3.6% $43.61 -2.2% $26.60 -3.9%3Q03 168.56 -1.8% 190.20 -3.4% $54.54 2.7% $139.77 7.1% $84.30 0.8% $63.89 1.6% $46.81 1.7% $47.21 2.3% $30.37 0.3%4Q03 130.85 0.0% 144.73 -4.1% $45.29 3.7% $142.23 6.1% $80.98 1.1% $56.43 2.0% $35.05 3.1% $37.30 3.9% $22.46 2.1%1Q04 151.22 5.3% 149.76 4.9% $49.20 7.7% $153.37 10.9% $89.17 7.1% $61.95 7.1% $37.08 5.1% $38.92 6.4% $22.54 3.8%2Q04 161.73 12.6% 157.10 13.8% $55.36 8.8% $159.84 12.1% $95.07 9.5% $68.41 9.3% $44.89 7.1% $46.52 6.7% $27.86 4.8%3Q04 190.08 12.8% 210.88 10.9% $58.18 6.7% $150.65 7.8% $90.45 7.3% $69.54 8.8% $49.43 5.6% $50.33 6.6% $31.59 4.0%4Q04 136.56 4.4% 159.40 10.1% $49.19 8.6% $155.88 9.6% $87.77 8.4% $62.11 10.1% $37.43 6.8% $40.87 9.6% $23.90 6.4%1Q05 163.59 8.2% 161.14 7.6% $52.76 7.2% $170.59 11.2% $95.69 7.3% $67.83 9.5% $39.69 7.0% $43.51 11.8% $24.26 7.6%2Q05 171.99 6.3% 170.17 8.3% $60.01 8.4% $176.75 10.6% $105.27 10.7% $75.48 10.3% $48.47 8.0% $51.83 11.4% $29.62 6.3%3Q05 203.18 6.9% 224.68 6.5% $63.13 8.5% $171.27 13.7% $100.20 10.8% $75.96 9.2% $53.60 8.4% $55.61 10.5% $33.70 6.7%4Q05 147.77 8.2% 169.17 6.1% $54.13 10.0% $170.89 9.6% $96.15 9.5% $69.16 11.3% $41.74 11.5% $46.38 13.5% $26.37 10.4%1Q06 166.76 1.9% 162.86 1.1% $58.25 10.4% $189.24 10.9% $104.84 9.6% $75.30 11.0% $43.73 10.2% $49.16 13.0% $26.53 9.3%2Q06 182.23 6.0% 172.67 1.5% $65.25 8.7% $197.81 11.9% $112.62 7.0% $82.63 9.5% $52.33 8.0% $57.08 10.1% $31.71 7.1%3Q06 208.71 2.7% 227.02 1.0% $67.05 6.2% $188.61 10.1% $105.81 5.6% $81.30 7.0% $56.40 5.2% $59.70 7.4% $34.81 3.3%4Q06 152.58 3.3% 173.05 2.3% $57.42 6.1% $194.49 13.8% $102.16 6.3% $72.87 5.4% $42.84 2.6% $49.27 6.2% $26.62 0.9%1Q07 161.11 -3.4% 163.35 0.3% $61.31 5.2% $206.33 9.0% $110.08 5.0% $78.67 4.5% $44.54 1.8% $51.82 5.4% $26.93 1.5%2Q07 183.80 0.9% 172.86 0.1% $68.92 5.6% $212.46 7.4% $119.10 5.7% $86.62 4.8% $54.31 3.8% $60.90 6.7% $32.61 2.8%3Q07 217.26 4.1% 232.72 2.5% $71.24 6.2% $202.00 7.1% $112.70 6.5% $85.49 5.2% $58.80 4.2% $63.52 6.4% $35.84 3.0%4Q07 169.41 11.0% 181.52 4.9% $60.85 6.0% $209.48 7.7% $108.04 5.8% $76.31 4.7% $44.48 3.8% $51.77 5.1% $27.01 1.5%1Q08 172.55 7.1% 173.50 6.2% $62.51 2.0% $207.15 0.4% $111.15 1.0% $79.14 0.6% $44.47 -0.2% $52.78 1.8% $26.50 -1.6%2Q08 185.72 1.0% 185.42 7.3% $69.89 1.4% $209.52 -1.4% $121.07 1.7% $87.54 1.1% $54.13 -0.3% $61.49 1.0% $31.96 -2.0%3Q08 218.80 0.7% 242.20 4.1% $70.51 -1.0% $194.45 -3.7% $111.55 -1.0% $84.36 -1.3% $57.86 -1.6% $62.85 -1.1% $34.63 -3.4%4Q08 159.43 -5.9% 177.82 -2.0% $54.90 -9.8% $173.64 -17.1% $95.99 -11.2% $68.82 -9.8% $40.36 -9.2% $47.61 -8.0% $25.02 -7.4%1Q09 147.54 -14.5% 154.22 -11.1% $51.42 -17.7% $150.79 -27.2% $89.66 -19.3% $64.69 -18.3% $37.56 -15.5% $45.35 -14.1% $23.12 -12.7%2Q09 152.46 -17.9% 154.27 -16.8% $56.24 -19.5% $148.76 -29.0% $94.97 -21.6% $69.35 -20.8% $44.66 -17.5% $51.34 -16.5% $26.80 -16.1%3Q09 179.17 -18.1% 202.19 -16.5% $58.62 -16.9% $147.24 -24.3% $90.97 -18.4% $69.14 -18.0% $48.67 -15.9% $53.10 -15.5% $29.11 -15.9%

RCL CCL RCL CCL RCL CCL RCL CCL RCL CCL RCL CCL RCL CCLCorrelation 0.81 0.83 0.82 0.77 0.81 0.86 0.80 0.85 0.81 0.81 0.76 0.79 0.75 0.79R2 0.66 0.68 0.67 0.60 0.66 0.73 0.63 0.72 0.66 0.66 0.58 0.63 0.57 0.62 Source: Company reports and Smith Travel Research.

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Figure 44: Annual Cruise Net Yields vs. Lodging RevPAR RCL CCL Total U.S. Luxury Upper Upscale Upscale Midscale w F&B Midscale wo F&B Economy

Net Yield % Change Net Yield % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change RevPAR % Change

FY98 159.93 3.6% -- -- 47.99 4.7% 150.02 5.8% 90.83 3.5% 64.85 2.4% 42.13 3.3% 39.21 2.8% 25.97 2.7%FY99 163.29 2.1% -- -- 49.57 3.3% 157.89 5.2% 93.42 2.9% 65.53 1.1% 42.89 1.8% 40.09 2.2% 26.76 3.1%FY00 163.29 0.0% -- -- 50.89 2.7% 172.26 9.1% 99.96 7.0% 69.33 5.8% 44.54 3.9% 41.91 4.5% 27.54 2.9%FY01 148.59 -9.0% -- -- 54.01 6.1% 147.34 -14.5% 88.40 -11.6% 63.50 -8.4% 41.60 -6.6% 41.24 -1.6% 26.60 -3.4%FY02 147.54 -0.7% 160.34 -3.7% 50.25 -7.0% 139.33 -5.4% 85.38 -3.4% 60.56 -4.6% 39.95 -4.0% 40.98 -0.6% 25.65 -3.6%FY03 146.65 -0.6% 155.09 -3.3% 48.91 -2.7% 140.75 1.0% 83.83 -1.8% 60.20 -0.6% 39.80 -0.4% 41.20 0.6% 25.31 -1.3%FY04 160.12 9.2% 170.28 9.8% 49.14 0.5% 154.93 10.1% 90.61 8.1% 65.51 8.8% 42.25 6.2% 44.20 7.3% 26.50 4.7%FY05 171.90 7.4% 181.76 6.7% 53.02 7.9% 172.38 11.3% 99.33 9.6% 72.12 10.1% 45.92 8.7% 49.38 11.7% 28.52 7.6%FY06 177.76 3.4% 184.50 1.5% 57.55 8.5% 192.55 11.7% 106.35 7.1% 78.01 8.2% 48.86 6.4% 53.83 9.0% 29.93 5.0%FY07 183.64 3.3% 188.46 2.1% 62.03 7.8% 207.57 7.8% 112.47 5.7% 81.75 4.8% 50.57 3.5% 57.02 5.9% 30.62 2.3%FY08 184.47 0.5% 195.46 3.7% 65.62 5.8% 195.85 -5.6% 109.85 -2.3% 79.85 -2.3% 49.25 -2.6% 56.15 -1.5% 29.54 -3.5%

RCL CCL RCL CCL RCL CCL RCL CCL RCL CCL RCL CCL RCL CCLCorrelation 0.13 0.52 0.84 0.57 0.89 0.74 0.87 0.73 0.87 0.68 0.76 0.61 0.78 0.66R2 0.02 0.27 0.71 0.33 0.79 0.55 0.75 0.54 0.75 0.47 0.58 0.37 0.61 0.44 Source: Company reports and Smith Travel Research.

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Fuel Prices Cruise companies use a combination of fuel blends with bunker (IFO-380) constituting the majority of Carnival’s and Royal Caribbean’s fuel consumption. In 2009, fuel should account for approximately 11% and 13% of net cruise revenues, and 16% and 18% of net cruise costs, for Carnival and Royal Caribbean, respectively.

Historically, there have periods when there was a high inverse correlation between the price of bunker fuel and stock prices—that relationship of late has greatly dissipated. Between 2005 and 2006, the correlation coefficient between stock prices and the cost of IFO-380 was 0.76 and 0.79 for Carnival and Royal Caribbean, respectively. We note that this high correlation began in 2005 when fuel prices increased significantly. Since that point, the relationship between bunker prices and cruise stocks significantly abated. We believe this will remain the case until the price of bunker significantly outpaces (to the upside or downside) the importance of net yields (ticket prices and onboard revenue). Interestingly, both Carnival and Royal Caribbean stock prices and the price of bunker fuel have moved in tandem in 2008 and 2009 (correlation coefficients of 0.78 and 0.68 for Carnival and Royal Caribbean, respectively), which is largely a result of both bunker and the stocks rebounding from lows in late 2008/early 2009.

In addition, we continue to see added benefits from new, more fuel-efficient capacity and from fuel-conservation initiatives, such as technological innovations and restructuring itineraries. We estimate that a 10% change in fuel cost per metric ton would affect our 2010 EPS estimates by approximately $0.20 per share for Carnival and approximately $0.16 per share for Royal Caribbean.

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Figure 45: Fuel Price and Stock Price Trends

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Carnival Corporation, Royal Caribbean Cruises.

• Client of the Firm: Carnival Corporation is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services. Royal Caribbean Cruises is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related services and non-securities-related services.

• Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Carnival Corporation, Royal Caribbean Cruises.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Carnival Corporation, Royal Caribbean Cruises.

• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Carnival Corporation, Royal Caribbean Cruises. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Carnival Corporation, Royal Caribbean Cruises.

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Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage May 31, 2008 - Jun 02, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

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10-Oct-06 N 48.30 -- 13-Jul-07 OW 46.86 -- 02-Jun-08 N 39.28 -- 18-Dec-08 N 23.47 25.00 24-Mar-09 N 23.31 22.00

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Royal Caribbean Cruises (RCL) Price Chart

N OW N N $9

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage May 31, 2008 - Jun 02, 2008. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

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10-Oct-06 N 39.65 -- 13-Jul-07 OW 40.39 -- 02-Jun-08 N 30.41 -- 29-Jan-09 N 9.06 9.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Kevin Milota: Gaylord Entertainment (GET)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2009

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 39% 46% 15% IB clients* 56% 57% 42% JPMSI Equity Research Coverage 38% 51% 10% IB clients* 76% 72% 56%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

Other Disclosures

J.P. Morgan is the global brand name for J.P. Morgan Securities Inc. (JPMSI) and its non-US affiliates worldwide.

http://www.morganmarkets.com/

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Options related research: If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation’s Characteristics and Risks of Standardized Options, please contact your J.P. Morgan Representative or visit the OCC’s website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf.

Legal Entities Disclosures U.S.: JPMSI is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited is a member of the National Stock Exchange of India Limited and Bombay Stock Exchange Limited and is regulated by the Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 132/01/2009 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan Structured Products B.V. and listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third

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party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised December 7, 2009.

Copyright 2009 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.

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