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Five analysts and top management from sixteen sector firms examine the Leisure Goods & Services sector in this special 89-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info384.htm

TWST: Robin, what has happened to the stocks of the cruise line companies over the past 12 to 18 months?

Ms. Farley: The last 18 months has definitely been a challenging period for the cruise lines. The stocks came under pressure last year after a couple of very strong years of performance, both by the companies and the stocks in 1998 and 1999. 2000 brought the cruise stocks a tough pricing environment, which was unexpected, given the fact that the economy in early 2000 was still going strong. I think it’s recognized that it’s going to be a tough pricing environment this year, but the cruise line story is really a longer-term growth picture. While there has been recognition of that more recently, the last 12-18 months have been tough for the stocks.

TWST: Is that in the sense that new capacity and state-of-the-art ships attract consumers? When does new capacity become overcapacity?

Ms. Farley: Some might use the word “overcapacity” but I wouldn’t, although we definitely have a lot of new ships coming online this year and next year. But when you look at an industry that operates at 100% capacity utilization, meaning that the ships sail full, the only way to grow passenger volume is to add capacity. The key to all of this, of course, is that you try to grow passenger volumes in a stable or upward price environment. There’s no point in bringing on ships if it drives the prices down to erode earnings. And that’s a differentiation right now between Carnival (NYSE:CCL) and P&O Princess (NYSE:POC) versus Royal Caribbean (NYSE:RCL). It’s a tough pricing environment, but Carnival and Princess still appear able to grow earnings.

TWST: We should talk about Princess, which is a new addition to your coverage list.

Ms. Farley: It is, and the reason it hasn’t been there before is that Princess was spun out of a very large UK conglomerate, P&O, only about nine months ago. P&O owns real estate, ports and ferries, and construction concerns. They are a huge conglomerate, so they were not a pure play in the cruise sector. Now that they’ve spun off P&O Princess, and now that it has a US listing, we have picked up coverage. So we now have the three largest cruise lines under coverage and, when combined, they represent more than 75% of the market.

TWST: How does Princess compare to Royal Caribbean and Carnival in terms of amenities and the passengers it attracts?

Ms. Farley: P&O Princess as a company has more geographic diversity than Royal Caribbean because it has the UK brand P&O, the German brand Aida, and a small ship in Australia as well. But most of the fleet has the Princess brand, and the Princess brand is a little bit more of a premium brand than the Royal and Carnival brands.

TWST: Do you expect to see pressure on ticket prices for the 2001 summer season, or is that already in the bag?

Ms. Farley: Certainly by March, the end of wave season, more than 60% of the year is booked and you need a strong wave season to ensure that you don’t have to do a lot of discounting as you get closer to the sailing dates. The summer season tends to be the best quarter because you can send a lot of ships to higher yielding markets, such as Alaska and the Mediterranean. Alaska is only a summer market; you don’t cruise to Alaska in the winter. So a lot of these higher yielding markets make Q3 a stronger quarter seasonally. It’s possible that we could still see discounting. We hope that’s not the case; we hope things have stabilized at current levels. Although most of the third quarter would be booked by now, it’s that last 5%-10% of bookings that can really swing the average price.

This special issue includes:

1) Leisure Goods & Services - In an in-depth (4,100 words) Analyst Interview, Timothy Conder, Vice President at A.G. Edwards & Sons, Inc., examines the outlook for the sector and shares specific stock recommendations.

2) Leisure Industry Overview - In an in-depth (3,700 words) Analyst Interview, Hayley Kissel, Director of Merrill Lynch's Global Securities Research and Economics Division, examines the outlook for the sector and shares specific stock recommendations.

3) Outlook for Leisure Stocks - In an in-depth (3,900 words) Analyst Interview, Scott Barry, Director in Credit Suisse First Boston's Equity Research group, examines the outlook for the sector and shares specific stock recommendations.

4) Cruise Lines & Motor Sports - In an in-depth (2,600 words) Analyst Interview, Joseph Hovorka, Senior Analyst at Raymond James & Associates, examines the outlook for the sector and shares specific stock recommendations.

5) Outlook for Cruise Lines - In an in-depth (4,100 words) Analyst Interview, Robin Farley, Executive Director in the equity research division of UBS Warburg, examines the outlook for the sector and shares specific stock recommendations.

6) CEO interviews (average 2,500 words). Top management of sixteen sector firms examine the outlook for their firm and the sector.