2018 Annual Report for Norwegian Cruiseline Holdings - 37

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Presentation
The following discussion and analysis contains forward-looking statements within the meaning of the federal securities laws, and should be
read in conjunction with the disclosures we make concerning risks and other factors that may affect our business and operating results. You
should read this information in conjunction with the consolidated financial statements and the notes thereto included in this annual report.
See also "Cautionary Statement Concerning Forward-Looking Statements" immediately prior to Part I, Item 1 in this annual report.
We categorize revenue from our cruise and cruise-related activities as either "passenger ticket" revenue or "onboard and other" revenue.
Passenger ticket revenue and onboard and other revenue vary according to product offering, the size of the ship in operation, the length of
cruises operated and the markets in which the ship operates. Our revenue is seasonal based on demand for cruises, which has historically
been strongest during the Northern Hemisphere's summer months. Passenger ticket revenue primarily consists of revenue for
accommodations, meals in certain restaurants on the ship, certain onboard entertainment, and includes revenue for service charges and air
and land transportation to and from the ship to the extent guests purchase these items from us. Onboard and other revenue primarily consists
of revenue from gaming, beverage sales, shore excursions, specialty dining, retail sales, spa services and photo services. Our onboard
revenue is derived from onboard activities we perform directly or that are performed by independent concessionaires, from which we receive
a share of their revenue.
Our cruise operating expense is classified as follows:
x

Commissions, transportation and other primarily consists of direct costs associated with passenger ticket revenue. These costs
include travel agent commissions, air and land transportation expenses, related credit card fees, certain port expenses and the
costs associated with shore excursions and hotel accommodations included as part of the overall cruise purchase price.

Onboard and other primarily consists of direct costs incurred in connection with onboard and other revenue, including casino,
beverage sales and shore excursions.

Payroll and related consists of the cost of wages and benefits for shipboard employees and costs of certain inventory items,
including food, for a third party that provides crew and other hotel services for certain ships.

Fuel includes fuel costs, the impact of certain fuel hedges and fuel delivery costs.

Food consists of food costs for passengers and crew on certain ships.

Other consists of repairs and maintenance (including Dry-dock costs), ship insurance and other ship expenses.

Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial
statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenue and expenses
during the periods presented. We rely on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances to make these estimates and judgments. Actual results could differ materially from these estimates. We believe that the
following critical accounting policies reflect the significant estimates and assumptions used in the preparation of our consolidated financial
statements. These critical accounting policies, which are presented in detail in our notes to our audited consolidated financial statements,
relate to ship accounting, asset impairment and contingencies.
Ship Accounting
Ships represent our most significant assets, and we record them at cost less accumulated depreciation. Depreciation of ships is computed on a
straight-line basis over the estimated service lives of primarily 30 years after a 15% reduction for the estimated residual value of the ship.
Improvement costs that we believe add value to our ships are capitalized to the ship and depreciated over the shorter of the improvements'
estimated useful lives or the remaining useful life of the ship. Repairs and maintenance activities are charged to expense as incurred. We
account for Dry-dock costs under the direct expense method which requires us to expense all Dry-dock costs as incurred.

2018 Annual Report for Norwegian Cruiseline Holdings

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