CARNIVAL CORP - Quarter Report: 2009 May (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended May 31, 2009

OR

For the transition period from                                  to                                 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrants have submitted electronically and posted on its corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

PART I – FINANCIAL INFORMATION

CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in millions, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in millions, except par values)

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)

The accompanying notes are an integral part of these consolidated financial statements.

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CARNIVAL CORPORATION & PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – Basis of Presentation

Carnival Corporation is incorporated in Panama, and Carnival plc is incorporated in England and Wales. Carnival Corporation and Carnival plc operate a dual listed company (“DLC”), whereby the businesses of Carnival Corporation and Carnival plc are combined through a number of contracts and through provisions in Carnival Corporation’s articles of incorporation and by-laws and Carnival plc’s memorandum of association and articles of association. The two companies operate as if they are a single economic enterprise, but each has retained its separate legal identity.

The accompanying consolidated financial statements include the accounts of Carnival Corporation and Carnival plc and their respective subsidiaries. Together with their consolidated subsidiaries they are referred to collectively in these consolidated financial statements and elsewhere in this joint Quarterly Report on Form 10-Q as “Carnival Corporation & plc,” “our,” “us,” and “we.”

The accompanying consolidated balance sheets at May 31, 2009 and 2008, the consolidated statements of operations for the three and six months ended May 31, 2009 and 2008 and the consolidated statements of cash flows for the six months ended May 31, 2009 and 2008 are unaudited and, in the opinion of our management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation. Our interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Carnival Corporation & plc 2008 joint Annual Report on Form 10-K. Our operations are seasonal and results for interim periods are not necessarily indicative of the results for the entire year.

NOTE 2 – Debt

At May 31, 2009, unsecured short-term borrowings consisted of euro and U.S. dollar-denominated bank loans of $138 million and $23 million, respectively, with an aggregate weighted-average interest rate of 1.2%.

In February 2009, we borrowed $200 million under an unsecured term loan, which bears interest at 4.5% and matures in February 2012.

In March 2009, we borrowed $301 million under an unsecured export credit facility, the proceeds of which were used to pay for a portion of AIDAluna’s purchase price. This facility bears interest at EURIBOR plus 18 basis points (“bps”) and is repayable in semi-annual installments through 2021.

In May 2009, we borrowed $486 million under an unsecured export credit facility, the proceeds of which were used to pay for a portion of Costa Pacifica’s purchase price. This facility bears interest at EURIBOR plus 160 bps and is repayable in semi-annual installments through 2019.

In May 2009, we entered into two three-year $100 million bilateral term loans, which were not funded as of May 31, 2009. Each facility bears interest at LIBOR plus 250 bps. We also entered into a two-year $150 million multi-currency bilateral revolver, which has an annual commitment fee of 31 bps.

In June 2009, Costa Crociere S.p.A, one of our Italian subsidiaries, entered into a euro-denominated term loan agreement with the European Investment Bank for $778 million. We anticipate drawing $283 million in each of 2009 and 2010 and the remaining $212 million is expected to be drawn in 2011. Each borrowing will be repayable in semi-annual installments over 15 years from the date of funding.

In June 2009, we borrowed $83 million under an unsecured export credit facility, the proceeds of which were used to pay for a portion of Seabourn Odyssey’s purchase price. This facility bears interest at LIBOR plus 160 bps and is repayable in semi-annual installments through 2017.

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NOTE 3 – Contingencies

Litigation

The Office of the Attorney General of Florida (“Attorney General”) is conducting an investigation to determine whether there is or has been a violation of Florida antitrust laws in connection with the setting by us and other unaffiliated cruise lines of our respective fuel supplements. We are providing our full cooperation to the Attorney General’s office.

In the normal course of our business, various other claims and lawsuits have been filed or are pending against us. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability, net of any insurance recoverables, is typically limited to our self-insurance retention levels. However, the ultimate outcome of these claims and lawsuits which are not covered by insurance cannot be determined at this time.

Contingent Obligations – Lease Out and Lease Back Type (“LILO”) Transactions

At May 31, 2009, Carnival Corporation had estimated contingent obligations totaling $574 million, excluding termination payments as discussed below, to participants in LILO transactions for two of its ships. At the inception of these leases, the aggregate of the net present value of these obligations was paid by Carnival Corporation to a group of major financial institutions, one of which includes American International Group Inc. (“AIG”), who agreed to act as payment undertakers and directly pay these obligations. Accordingly, these contingent obligations are considered extinguished, and neither the funds nor the contingent obligations have been included on our balance sheets.

In the event that Carnival Corporation were to default on its obligations and assuming performance by all other participants, we estimate that we would, as of May 31, 2009, be responsible for a termination payment of approximately $94 million. In 2017 we have the right to exercise options that would terminate these two LILO transactions at no cost to us.

In certain cases, if the credit ratings of the financial institutions who are directly paying the contingent obligations fall below AA-, then Carnival Corporation will be required to replace these financial institutions with other financial institutions whose credit ratings are at least AA or meet other specified credit requirements. In such circumstances we will incur additional costs, although we estimate that they will be immaterial to our financial statements. All of the financial institution payment undertakers subject to this AA- credit rating threshold have credit ratings of AAA. If Carnival Corporation’s credit rating, which is BBB+, falls below BBB, it will be required to provide a standby letter of credit for $65 million, or alternatively provide mortgages for this aggregate amount on these two ships.

In September 2008, the credit ratings of AIG and its subsidiaries involved in one of the above LILO transactions were downgraded from AA- to A-. As a result of this downgrade, AIG pledged collateral to support its obligations as a payment undertaker under the terms of this LILO transaction and, accordingly, AIG is no longer subject to the AA- credit rating threshold discussed above.

Carnival Corporation and AIG were also parties to a third LILO transaction. In September 2008, we replaced AIG as the payment undertaker under this third LILO transaction by purchasing $80 million of U.S. Treasury strip securities with funds substantially all provided by AIG. In February 2009, Carnival and the remaining participants voluntarily unwound this LILO transaction. Accordingly, the $80 million of long-term U.S. Treasury strip securities that we held as collateral for our recorded LILO obligation were released to extinguish this obligation. As a result of the unwinding of this third LILO transaction, we recorded a $15 million nonoperating gain in February 2009, which had originally been deferred at the inception of the LILO transaction and was being amortized over the term of the LILO.

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Contingent Obligations – Indemnifications

Some of the debt agreements that we enter into include indemnification provisions that obligate us to make payments to the counterparty if certain events occur. These contingencies generally relate to changes in taxes and changes in laws that increase lender capital costs and other similar costs. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business. There are no stated or notional amounts included in the indemnification clauses and we are not able to estimate the maximum potential amount of future payments, if any, under these indemnification clauses. We have not been required to make any material payments under such indemnification clauses in the past and, under current circumstances, we do not believe a request for material future indemnification payments is probable.

NOTE 4 – Comprehensive Income

Comprehensive income was as follows (in millions):

NOTE 5 – Segment Information

Our cruise segment includes all our cruise brands, which have been aggregated as a single reportable segment based on the similarity of their economic and other characteristics, including the products and services they provide. Substantially all of our other segment represents the hotel, tour and transportation operations of Holland America Tours and Princess Tours.

Selected segment information for our cruise and other segments was as follows (in millions):

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NOTE 6 – Earnings Per Share

Our basic and diluted earnings per share were computed as follows (in millions, except per share data):

Options to purchase 14.8 million (12.0 million in 2008) shares for both the three and six months ended May 31, 2009 were excluded from our diluted earnings per share computations since the effect of including them was anti-dilutive. In addition, 5.1 million shares of Carnival Corporation that were contingently issuable under the features of its 1.75% convertible notes were also excluded from both the three and six months ended May 31, 2009 diluted earnings per share computations since the effect of including them was also anti-dilutive.

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NOTE 7 – Fair Value Measurements, Derivative Instruments and Hedging Activities

Fair Value Measurements

The estimated fair value and basis of valuation of our financial assets and financial liabilities that are required to be measured at fair value on a recurring basis were as follows (in millions):

In February 2008, the Financial Accounting Standards Board (“FASB”) issued a statement that provided a one year deferral for application of the new fair value measurement principles for nonfinancial assets and liabilities. Accordingly, for nonfinancial assets and liabilities the new fair value measurement principles became effective for us as of December 1, 2008, and may impact the determination of our goodwill, trademarks and other long-lived assets’ fair values, when or if we have to perform impairment reviews.

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Derivative Instruments and Hedging Activities

In March 2008, the FASB issued a statement which requires entities to provide greater transparency in interim and annual financial statements about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. We adopted this new statement effective December 1, 2008.

We utilize derivative and nonderivative financial instruments, such as foreign currency forwards, options and swaps, foreign currency debt obligations and foreign currency cash balances, to manage our exposure to fluctuations in foreign currency exchange rates, and interest rate swaps to manage our interest rate exposure in order to achieve a desired proportion of variable and fixed rate debt. Our policy is to not use any financial instruments for trading or other speculative purposes.

All derivatives are recorded at fair value, and the changes in fair value are immediately included in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative are recognized as a component of AOCI until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. If a derivative or a nonderivative financial instrument is designated as a hedge of our net investment in a foreign subsidiary, then changes in the fair value of the financial instrument are recognized as a component of AOCI to offset a portion of the change in the translated value of the net investment being hedged, until the investment is sold or liquidated. We formally document hedging relationships for all derivative and nonderivative hedges and the underlying hedged items, as well as our risk management objectives and strategies for undertaking the hedge transactions.

We classify the fair value of all our derivative contracts and the fair value of our hedged firm commitments as either current or long-term, which are included in prepaid expenses and other assets and accrued and other liabilities, depending on whether the maturity date of the derivative contract is within or beyond one year from the balance sheet date. The cash flows from derivatives treated as hedges are classified in our Consolidated Statements of Cash Flows in the same category as the item being hedged.

The new FASB statement requires tabular disclosures of the impact that derivatives instruments and hedging activities have on our financial statements. We have not provided these disclosures because the amounts as of and for the three and six months ended May 31, 2009 are not significant. In addition, there are no amounts excluded from the assessment of hedge effectiveness and there are no credit risk related contingent features in our derivative agreements. Finally, the amount of estimated cash flow hedges’ unrealized net gains or losses which are expected to be reclassified to earnings in the next twelve months is not significant.

Foreign Currency Exchange Rate Risk

Operational and Investment Currency Risk

We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating and financing activities, including netting certain exposures to take advantage of any natural offsets and, when considered appropriate, through the use of derivative and nonderivative financial instruments. Our focus is to manage the economic risks faced by our operations, which are the real foreign currency exchange risks that would ultimately be realized by us if we exchanged one currency for another, and not the accounting risks. The financial impacts of these hedging instruments are generally offset by corresponding changes in the underlying exposures being hedged.

We consider our investments in foreign subsidiaries to be denominated in relatively stable currencies and of a long-term nature. We partially address our net investment currency exposures by denominating a portion of our debt, including the effect of foreign

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currency forwards and swaps, in our subsidiaries’ functional currencies (generally the euro or sterling). As of May 31, 2009 and November 30, 2008, we have designated $1.4 billion and $1.6 billion of our euro debt and $358 million and $343 million of our sterling debt and other obligations, respectively, which mature through 2019, as nonderivative hedges of our net investments in foreign subsidiaries. Accordingly, we have included $54 million and $319 million of cumulative foreign currency transaction gains in the cumulative translation adjustment component of AOCI at May 31, 2009 and November 30, 2008, respectively.

Newbuild Currency Risk

The majority of our newbuild capacity on order is for our European brands for which we do not have significant currency risk because all our ships are contracted for in euros, which is the functional currency of these brands. However, our U.S. dollar and sterling functional currency brands have foreign currency exchange rate risks related to our outstanding or possible future commitments under ship construction contracts denominated in euros. These foreign currency commitments are affected by fluctuations in the value of the functional currency as compared to the currency in which the shipbuilding contract is denominated. We use foreign currency contracts and have used nonderivative financial instruments to manage foreign currency exchange rate risk for some of our ship construction contracts.

Our decisions regarding whether or not to hedge a given ship commitment for our North American and UK brands are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility, exchange rate correlation, economic trends and other offsetting risks.

Interest Rate Risks

We manage our exposure to fluctuations in interest rates through our investment and debt portfolio management strategies. These strategies include purchasing high quality short-term investments with variable interest rates, and evaluating our debt portfolio to make periodic adjustments to the mix of variable and fixed rate debt through the use of interest rate swaps and the issuance of new debt.

NOTE 8 – Shareholders’ Equity

In February 2009, we issued 450,000 shares of Carnival Corporation common stock for $10 million of net proceeds, substantially all of which was used to fund the repurchase of 450,000 shares of Carnival plc ordinary shares. In this offering, we issued Carnival Corporation common stock in the U.S., only to the extent we were able to purchase shares of Carnival plc in the UK on at least an equivalent basis, with the remaining proceeds used for general corporate purposes.

NOTE 9 – Acquisition of Minority Interest

In May 2009, we entered into an agreement to purchase the remaining 25% minority interest in Ibero Cruises, our 75% owned Spanish cruise line, for a euro-denominated payment of $33 million. This acquisition is pending approval of the Spanish regulatory authority.

NOTE 10 – Recent Accounting Pronouncement

In May 2008, the FASB issued a staff position that requires the issuer of certain convertible debt instruments that may be settled in cash, or other assets, on conversion to separately account for the debt and equity components in a manner that reflects the issuer’s non-convertible debt borrowing rate. This statement will be adopted by us in the first quarter of fiscal 2010 on a retrospective basis. We believe that the impact of adopting this statement will not have a material effect on previously reported diluted earnings per share, however, our net income will be reduced. We are still in the process of determining the amount of such reductions.

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Cautionary Note Concerning Factors That May Affect Future Results

Some of the statements, estimates or projections contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this joint Quarterly Report on Form 10-Q are “forward-looking statements” that involve risks, uncertainties and assumptions with respect to us, including some statements concerning future results, outlooks, plans, goals and other events which have not yet occurred. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We have tried, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “forecast,” “future,” “intend,” “plan,” “estimate” and similar expressions of future intent or the negative of such terms.

Because forward-looking statements involve risks and uncertainties, there are many factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied in this joint Quarterly Report on Form 10-Q. Forward-looking statements include those statements which may impact, among other things, the forecasting of our earnings per share, net revenue yields, booking levels, pricing, occupancy, operating, financing and/or tax costs, fuel expenses, costs per available lower berth day (“ALBD”), estimates of ship depreciable lives and residual values, liquidity, goodwill and trademark fair values, outlook or business prospects. These factors include, but are not limited to, the following:

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Forward-looking statements should not be relied upon as a prediction of actual results. Subject to any continuing obligations under applicable law or any relevant listing rules, we expressly disclaim any obligation to disseminate, after the date of this joint Quarterly Report on Form 10-Q, any updates or revisions to any such forward-looking statements to reflect any change in expectations or events, conditions or circumstances on which any such statements are based.

Outlook for the Remainder of Fiscal 2009

As of June 18, 2009, we said that we expected our diluted earnings per share for the third quarter and full year of 2009 would be in the range of $1.15 to $1.19 and $2.00 to $2.10, respectively. Our guidance was based on fuel prices per metric ton of $406 and $353 for the third quarter and full year of 2009, respectively. In addition, this guidance was also based on currency exchange rates of $1.39 to the euro and $1.61 to sterling for the third quarter and $1.37 to the euro and $1.54 to sterling for the full year of 2009.

The above forward-looking statements involve risks and uncertainties. Various factors could cause our actual results to differ materially from those expressed above including, but not limited to, economic conditions, foreign currency exchange rates, fuel expenses, weather, regulatory changes, geopolitical and other factors that could impact consumer demand or costs and expenses. You should read the above forward-looking statement together with the discussion of these and other risks under “Cautionary Note Concerning Factors That May Affect Future Results.”

Critical Accounting Estimates

Impairment reviews of our ships and goodwill and trademarks, which have been allocated to our cruise line reporting units, require us to make significant estimates to determine the fair values of these assets or reporting units. The determination of these fair values includes numerous uncertainties.

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Since early November 2008, our stock market capitalization has been lower than our shareholders’ equity or book value for a significant period of time. However, our brands have continued to generate substantial cash flow from their operations, and we expect that they will continue to do so for the remainder of 2009 and in future years. Furthermore, given the relatively small difference between our stock price and our book value per share, we believe that a reasonable potential buyer would offer a control premium for our business franchise that would adequately cover the difference between our trading prices and our book value. Accordingly, we do not believe there have been any events or circumstances that would require us to perform interim goodwill and/or trademark impairment reviews.

However, due to the ongoing uncertainty in market conditions, which may negatively impact the performance of our reporting units, we will continue to monitor and evaluate the carrying values of our goodwill and trademarks. If market and economic conditions or our units’ business performance deteriorates significantly then we would perform interim impairment reviews. Any such impairment reviews could result in recognition of a goodwill and/or trademark impairment charge in 2009 or thereafter. We will be performing our 2009 annual goodwill and trademark impairment reviews as of July 31, 2009.

For a further discussion of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Carnival Corporation & plc’s 2008 joint Annual Report on Form 10-K.

Seasonality and Expected Capacity Growth

Our revenues from the sale of passenger tickets are seasonal. Historically, demand for cruises has been greatest during our third fiscal quarter, which includes the Northern Hemisphere summer months. This higher demand during the third quarter results in higher net revenue yields and, accordingly, the largest share of our net income is earned during this period. The seasonality of our results is increased due to ships being taken out of service for maintenance, which we typically schedule during non-peak demand periods. In addition, substantially all of Holland America Tours’ and Princess Tours’ revenues and net income are generated from May through September in conjunction with the Alaska cruise season.

The year-over-year percentage increase in our ALBD capacity for the third and fourth quarters of 2009 is currently expected to be 5.5% and 7.6%, respectively. Our annual ALBD capacity increase for fiscal 2009, 2010, 2011 and 2012 is currently expected to be 5.4%, 7.2%, 5.8% and 3.9%, respectively. The above percentage increases result primarily from new ships entering service and exclude any other future ship orders, acquisitions, retirements or sales.

Selected Cruise and Other Information

Selected cruise and other information was as follows:

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Three Months Ended May 31, 2009 (“2009”) Compared to the Three Months Ended May 31, 2008 (“2008”)

Revenues

Our total revenues decreased $430 million, or 12.7%, from $3.4 billion in 2008 to $2.9 billion in 2009. This was caused by a $611 million revenue decrease that was primarily due to the adverse impact of the economic downturn on our cruise ticket pricing and onboard and other revenues, as well as a stronger U.S. dollar against the euro and sterling compared to 2008. In addition, the U.S. Centers for Disease Control and Prevention’s (“CDC”) recommendations against non-essential travel to Mexico as a result of the H1N1 flu virus also adversely impacted our revenues because we had to alter several of our cruise ships’ itineraries. This revenue decrease was partially offset by our 5.9% capacity increase in ALBDs (see “Key Performance Non-GAAP Financial Indicators”). Our capacity increased 4.2% for our North American cruise brands and 8.0% for our European cruise brands in 2009 compared to 2008, as we continue to implement our strategy of expanding in the European cruise marketplace.

Onboard and other revenues included concessionaire revenues of $199 million in 2009 and $220 million in 2008. Onboard and other revenues decreased $70 million in 2009 compared to 2008, primarily because there was lower onboard spending for all of the major onboard revenue-producing activities, as well as the impact of the stronger U.S. dollar against the euro and sterling compared to 2008, partially offset by our 5.9% increase in ALBDs.

Costs and Expenses

Operating costs decreased $274 million, or 12.7%, from $2.2 billion in 2008 to $1.9 billion in 2009. This decrease was primarily due to $180 million of lower fuel prices, the impact of the stronger U.S. dollar against the euro and sterling, decreased commissions primarily as a result of our lower ticket revenues and lower fuel consumption as a result of our fuel saving initiatives compared to 2008. This decrease was partially offset as a result of increased capacity driven by our 5.9% increase in ALBDs and a $24 million increase in dry-dock expenses due to more ships being in dry-dock.

Selling and administration expenses decreased $32 million, or 7.5%, from $425 million in 2008 to $393 million in 2009. The decrease was primarily currency driven, and was partially offset by our 5.9% increase in ALBDs.

Depreciation and amortization expense increased $5 million, or 1.6%, from $312 million in 2008 to $317 million in 2009, primarily due to the 5.9% increase in ALBDs through the addition of new ships and additional ship improvement expenditures, partially offset by the impact of the stronger U.S. dollar against the euro and sterling.

Our total costs and expenses as a percentage of revenues increased from 85.7% in 2008 to 88.0% in 2009.

Operating Income

Our operating income decreased $129 million from $482 million in 2008 to $353 million in 2009 primarily because of the reasons discussed above.

Nonoperating (Expense) Income

Net interest expense, excluding capitalized interest, decreased $8 million to $97 million in 2009 from $105 million in 2008. On a constant dollar basis, this decrease was primarily due to a $12 million decrease in interest expense from lower average interest rates on average borrowings, partially offset by $9 million of lower interest income due to a lower average level of invested cash and lower average interest rates on invested balances. In addition, interest expense decreased by $6 million as a result of the stronger U.S. dollar against the euro and sterling compared to 2008.

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Key Performance Non-GAAP Financial Indicators

ALBDs is a standard measure of passenger capacity for the period, which we use to perform rate and capacity variance analyses to determine the main non-capacity driven factors that cause our cruise revenues and expenses to vary. ALBDs assume that each cabin we offer for sale accommodates two passengers and is computed by multiplying passenger capacity by revenue-producing ship operating days in the period.

We use net cruise revenues per ALBD (“net revenue yields”) and net cruise costs per ALBD as significant non-GAAP financial measures of our cruise segment financial performance. These measures enable us to separate the impact of predictable capacity changes from the more unpredictable rate changes that affect our business. We believe these non-GAAP measures provide a better gauge to measure our revenue and cost performance instead of the standard U.S. GAAP-based financial measures. There are no specific rules for determining our non-GAAP financial measures and, accordingly, it is possible that they may not be exactly comparable to the like-kind information presented by other cruise companies, which is a potential risk associated with using them to compare us to other cruise companies.

Net revenue yields are commonly used in the cruise industry to measure a company’s cruise segment revenue performance and for revenue management purposes. We use “net cruise revenues” rather than “gross cruise revenues” to calculate net revenue yields. We believe that net cruise revenues is a more meaningful measure in determining revenue yield than gross cruise revenues because it reflects the cruise revenues earned net of our most significant variable costs, which are travel agent commissions, cost of air transportation and certain other variable direct costs associated with onboard and other revenues. Substantially all of our remaining cruise costs are largely fixed, except for the impact of changing prices, once our ship capacity levels have been determined.

Net cruise costs per ALBD is the most significant measure we use to monitor our ability to control our cruise segment costs rather than gross cruise costs per ALBD. We exclude the same variable costs that are included in the calculation of net cruise revenues to calculate net cruise costs to avoid duplicating these variable costs in these two non-GAAP financial measures.

In addition, because a significant portion of our operations utilize the euro or sterling to measure their results and financial condition, the translation of those operations to our U.S. dollar reporting currency results in decreases in reported U.S. dollar revenues and expenses if the U.S. dollar strengthens against these foreign currencies, and increases in reported U.S. dollar revenues and expenses if the U.S. dollar weakens against these foreign currencies. Accordingly, we also monitor and report our two non-GAAP financial measures assuming the current period currency exchange rates have remained constant with the prior year’s comparable period rates, or on a “constant dollar basis,” in order to remove the impact of changes in exchange rates on our non-U.S. dollar cruise operations. We believe that this is a useful measure since it facilitates a comparative view of the growth of our business in a fluctuating currency exchange rate environment.

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Gross and net revenue yields were computed by dividing the gross or net revenues, without rounding, by ALBDs as follows:

Gross and net cruise costs per ALBD were computed by dividing the gross or net cruise costs, without rounding, by ALBDs as follows:

Net cruise revenues decreased $320 million, or 11.9%, to $2.4 billion in 2009 from $2.7 billion in 2008. This was caused by a $478 million, or 16.8%, decrease in net revenue yields in 2009 compared to 2008 (gross revenue yields decreased by 17.3%). This decrease was partially offset by a 5.9% increase in ALBDs between 2009 and 2008 that accounted for $158 million. The net revenue yield decrease in 2009 was primarily due to the adverse impact of the economic downturn on our cruise ticket pricing and onboard and other revenues, as well as the impact of a stronger U.S. dollar against the euro and sterling compared to 2008. In addition, the CDC’s recommendations against non-essential travel to Mexico as a result of the H1N1 flu virus also adversely impacted our net revenue yields as previously discussed. Net revenue yields as measured on a constant dollar basis decreased 9.8% in 2009 compared to 2008, which was comprised of a 10.0% decrease in passenger ticket yields and a 9.4% decrease in onboard and other revenue yields. Gross cruise revenues decreased $416 million, or 12.5%, to $2.9 billion in 2009 from $3.3 billion in 2008 for largely the same reasons as discussed above for net cruise revenues.

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Net cruise costs decreased $199 million, or 10.6%, to $1.7 billion in 2009 from $1.9 billion in 2008. This was caused by a $310 million decrease in net cruise costs per ALBD, which decreased 15.6% in 2009 compared to 2008 (gross cruise costs per ALBD decreased 16.5%). This decrease was partially offset by the 5.9% increase in ALBDs between 2009 and 2008 that accounted for $111 million. The 15.6% decrease in net cruise costs per ALBD was primarily the result of a 43% decrease in fuel price to $304 per metric ton in 2009, which resulted in a decrease in fuel expense of $180 million, the stronger U.S. dollar against the euro and sterling and $27 million of fuel consumption savings compared to 2008. Net cruise costs per ALBD as measured on a constant dollar basis decreased 9.6% in 2009 compared to 2008. On a constant dollar basis, net cruise costs per ALBD excluding fuel increased 1.0% compared to 2008 primarily due to the $24 million increase in dry-docking expenses. Gross cruise costs decreased $295 million, or 11.7%, in 2009 to $2.2 billion from $2.5 billion in 2008 for largely the same reasons as discussed above for net cruise costs.

Six Months Ended May 31, 2009 (“2009”) Compared to the Six Months Ended May 31, 2008 (“2008”)

Revenues

Our total revenues decreased $718 million, or 11.0%, from $6.5 billion in 2008 to $5.8 billion in 2009. This was caused by a $969 million revenue decrease that was primarily due to the adverse impact of the economic downturn on our cruise ticket pricing and onboard and other revenues, as well as the impact of a stronger U.S. dollar against the euro and sterling compared to 2008. This revenue decrease was partially offset by our 4.1% capacity increase in ALBDs (see “Key Performance Non-GAAP Financial Indicators”). Our capacity increased 3.1% for our North American cruise brands and 7.1% for our European cruise brands in 2009 compared to 2008, as we continue to implement our strategy of expanding in the European cruise marketplace.

Onboard and other revenues included concessionaire revenues of $375 million in 2009 and $406 million in 2008. Onboard and other revenues decreased $138 million in 2009 compared to 2008, primarily because there was lower onboard spending for all of the major onboard revenue-producing activities, as well as the impact of the stronger U.S. dollar against the euro and sterling compared to 2008, partially offset by our 4.1% increase in ALBDs.

Costs and Expenses

Operating costs decreased $538 million, or 12.6%, from $4.3 billion in 2008 to $3.7 billion in 2009. This decrease was primarily due to $347 million of lower fuel prices, the impact of the stronger U.S. dollar against the euro and sterling and decreased commissions primarily as a result of our lower ticket revenues and lower fuel consumption as a result of fuel saving initiatives compared to 2008. This decrease was partially offset as a result of increased capacity driven by our 4.1% increase in ALBDs and a $50 million increase in dry-dock expenses.

Selling and administration expenses decreased $65 million, or 7.6%, from $850 million in 2008 to $785 million in 2009. The decrease was primarily currency driven, and was partially offset by our 4.1% increase in ALBDs.

Depreciation and amortization expense increased $15 million, or 2.4%, from $613 million in 2008 to $628 million in 2009, primarily due to the 4.1% increase in ALBDs through the addition of new ships and additional ship improvement expenditures, partially offset by the currency impact.

Our total costs and expenses as a percentage of revenues increased from 87.8% in 2008 to 88.6% in 2009.

Operating Income

Our operating income decreased $130 million from $794 million in 2008 to $664 million in 2009 primarily because of the reasons discussed above.

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Nonoperating (Expense) Income

Net interest expense, excluding capitalized interest, decreased $7 million to $199 million in 2009 from $206 million in 2008. On a constant dollar basis, there was a $15 million increase in net interest expense because of lower interest income due to a lower average level of invested cash and lower average interest rates on invested balances and a $13 million increase from a higher level of average borrowings, partially offset by a $25 million decrease in interest expense from lower average interest rates on average borrowings. In addition, interest expense decreased by $10 million as a result of the stronger U.S. dollar against the euro and sterling compared to 2008.

Other income, net increased $18 million to $24 million in 2009 from $6 million in 2008, primarily because of the $15 million gain recognized upon the unwinding of one of our LILO transactions.

Income Taxes

Income tax benefit increased $12 million to $16 million in 2009 from $4 million in 2008, primarily because of the reversal of uncertain income tax position liabilities, which were no longer required. During 2009 and 2008 we have recorded tax benefits generated by the seasonal losses of our Alaska tour operation.

Key Performance Non-GAAP Financial Indicators

Gross and net revenue yields were computed by dividing the gross or net revenues, without rounding, by ALBDs as follows: