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July|August 2005
A Platinum Parachute By Nicholas Thompson
When Pigs Float By Krista Carothers
Land of the Rising Lawyer? By Annie Murphy Paul

When Pigs Float

A pork barrel project meant to revive the American cruise industry sinks under its own weight.

By Krista Carothers

COMMERCIAL CRUISES MAKE UP THE FASTEST GROWING SECTOR of the leisure travel industry. Passenger rolls have grown more than 10 times since cruising as we know it emerged around 1970. An estimated 77 million passengers have spent two or more days on a cruise ship since then, 60 percent of them within the last 10 years. In 2003, cruise ships did $12.9 billion in business and carried close to 9.8 million passengers worldwide. Most of these passengers have been Americans and most cruises—80 percent—have left from North American ports. Carnival, which owns 12 cruise lines, is the world's most profitable leisure travel company.

The average cruise ship holds about 2,000 passengers, but the largest ships can carry almost 4,000 spendthrift passengers. Wherever the ships tie up, they spill their bounty. The average cruise traveler spends upwards of $112 per shore visit. The industry says it has pumped an estimated $2.3 billion into the flagging airline industry (many cruise passengers fly to ports of embarkation) and $873 million into the commercial food and beverage market. The ships are staffed by a small army of bartenders, aerobics instructors, cabaret singers, deck hands, and engineers, with standard ratios of one staff member for every two to four passengers. More than 200,000 people are employed on cruise ships worldwide.

Despite the wealth the cruise industry has spread, one country has consistently felt left out: the United States. American law, in particular American labor law, makes building and operating cruise ships in this country far more expensive than doing so under a foreign flag. So nearly 10 years ago, the federal government embarked on a campaign to nurture an American cruise industry, in the hope of creating jobs for Americans both aboard ships and in shipyards and of creating profits for an American-based cruise line. At the time, all the major cruise lines were incorporated abroad, and every major ship they sailed flew the flag of a country other than the United States. Project America, as Congress's 1997 venture came to be known, attempted to help an American company get in on the action. It did so by bestowing legislative gifts and federal loan guarantees on a small, struggling American cruise ship operator with as much experience on the Mississippi as on the Pacific.

A decade later, the cruise line that was the beneficiary of Congress's largess has gone belly up, and a massive cruise ship built with the generous assistance of American taxpayer dollars has spent more time under than on the water. The ship is called the Pride of America. When at last it sets sail on interisland cruises in Hawaii this month, it will do so as an American-flagged vessel; its parent company, however, will be Norwegian Cruise Lines.

Project America's failure is in part the result of the exigencies of running a cruise line and in part the result of bad luck. But mostly the failure is a cautionary tale about the folly and frivolity of porkbarrel spending. A close reading of the Congressional record reveals that the senators whose states stood to gain from an American cruise industry pushed through a shortsighted and self-serving piece of legislation. American taxpayers were left to pay the bill when Project America was sold at a massive loss to Norwegian Cruise Lines—whose parent company is owned by a Malaysian businessman, incorporated in Bermuda, and headquartered in Hong Kong.

IT WAS IN ATTEMPTING TO PROTECT THE U.S. SHIPPING INDUSTRY—back in 1886—that the U.S. government hamstrung a future American cruise industry. That year, the United States enacted the Passenger Vessel Services Act. The law prohibited foreign-flagged ships from picking up passengers in one American port and dropping them off in another. The law's intention was to give United States shippers moving passengers across the Great Lakes a leg up over Canadian competitors. It was also meant to help both American shipbuilders and sailors: In order to be registered in the United States, ships must have been built domestically and sail with crews made up of United States citizens or legal residents, who were to be afforded the protections of American labor law.

More than a century later, the act is a hindrance more to American cruise lines than to their foreign competition. Over the years, the law's barriers to entry were gradually lowered by American attorneys general and various courts, and foreign cruise lines have devised ways of circumventing what restrictions remain. Foreign vessels are now allowed to carry passengers between U.S. ports, provided they make at least one stop at a foreign port somewhere along the way. On most itineraries, this is not much of a burden: Fall foliage cruises on the East Coast include a call in Canada; Gulf of Mexico cruises stop in the Yucatan; ships leaving southern California zip down to Baja. For Atlantic and Caribbean cruises, Bermuda, the Bahamas, and any island beyond Key West qualify as a foreign port.

There is little motivation, then, for cruise lines to build or sail U.S.-flagged vessels on these trips, and none of the major cruise lines do. European shipyards have far more experience and can work faster and significantly cheaper than American shipyards, which haven't built a large cruise ship in nearly half a century. And why would you build a ship in the United States if flying the flag of a foreign country has the added benefit of allowing you to hire low-paid crews from developing countries and avoid providing overtime pay or disability insurance, as American labor law requires?

Cruise companies register their ships under foreign flags, avoid these expenses, and suffer no consequences. Except in Hawaii. The foreign port requirement is much harder to meet on voyages to the Hawaiian Islands. The options are to depart from the West Coast and stop on the left coasts of Canada or Mexico on the way and add about five days at sea before getting to the tropics, or start the itinerary in Hawaii and include a Pacific port such as Fanning Island in the Republic of Kiribati. Getting there and back can take as many as four sea days. Most cruise passengers prefer weeklong trips, but with so much time spent steaming to or from a foreign port, cruise lines are hard pressed to offer trips that short.

PROJECT AMERICA WAS SUPPOSED TO HELP A U.S.-OWNED CRUISE LINE build new ships in U.S. shipyards. The ships were to be paid for, eventually, with profits earned as the exclusive provider of interisland Hawaiian cruises. The legislation would also give the cruise line permission to buy a foreign-built ship and convert it to U.S. registry for such trips. The cruise line chosen to receive this special treatment was one called American Classic Voyages, known in the industry as AMCV. At the time, AMCV owned a subsidiary that was sailing the only U.S.-flagged vessel—a 1951 liner named the S.S. Independence—between the Hawaiian Islands.

The legislation would mean a windfall for AMCV, which had long pined for a new, modern cruise ship. AMCV wasn't to be the only beneficiary of Project America. Senator Daniel Inouye of Hawaii hoped his state would reap the benefits of more cruise tourism. The Hawaiian economy relies on tourism for more than a quarter of its gross state product. Its isolated location, however, had meant that the explosive growth of cruise tourism had largely passed it over—and had actually begun to compete with Hawaii for vacationers. Inouye said publicly that he believed the bill would generate 700 seafaring jobs within the first year and a half and 2,000 jobs once the new Project America ships were completed.

Unions for seafarers, including the American Maritime Officers and the Seafarers International Union, hoped the bill would create jobs for their members. The shipbuilding industry, a big player in Mississippi, whose interests are represented in the Senate by Trent Lott, hoped to lessen its dependence on military contracts and to cash in on the cruise boom. "We thought Project America would be a revitalization of the industry domestically," said Warren Fairley, director for the shipbuilding division of the Boilermakers Union. According to Fairley, U.S. shipyards build only about 1 percent of the world's commercial ships and for the past few decades have been building fewer and fewer Navy vessels. "We are down to six major shipyards for new construction," he said.

Even the Defense Department was behind the project. In a 1997 memo, then-Assistant Secretary of the Navy John W. Douglass wrote that cruise ship building would help keep U.S. shipyards afloat at a time when the Navy wasn't ordering enough ships to keep the yards busy.

Inouye, the legislation's sponsor, argued passionately for its passage, ticking off the wide-ranging benefits the bill would have for the American economy. The project, he said, would "jump-start cruise ship construction in the United States, develop the U.S.-flag cruise industry, and help reduce U.S. shipyard dependence on DOD construction—all without federal funds." In October 1997, Congress passed the bill as part of the Department of Defense Appropriations Act. The Ingalls shipyard in Pascagoula, Miss., where Trent Lott's father had once worked, won the contract to build the two Project America vessels.

THE PASSAGE OF THE LEGISLATION was just the first in a line of government favors bestowed upon AMCV, a company with few tangible assets. Other than the creaky Independence, it owned only a few smaller boats, like its Delta Queen, which toured the Mississippi. With Project America's help, AMCV planned to dramatically increase its passenger capacity in Hawaii. But given the company's shaky standing and lack of assets, no private lender would have been willing to give the company the line of credit it needed to go forward with its expansion. So AMCV went to the U.S. Maritime Administration, known as MARAD. The federal body offers loan guarantees for shipping projects under a program called Title XI. MARAD approved the biggest loan guarantee in its history—$1.1 billion—for two new AMCV ships, provisionally called Project America One and Two.

Later, after the deal had gone bad, Maritime Administrator William G. Schubert would admit that the agency had approved AMCV's application under duress. "Political pressure on MARAD," he wrote, "played a major role in the issuance of the loan guarantees." But if MARAD was aware at the time that AMCV was a risky bet, it didn't seem overly concerned. The agency looked on as AMCV's stock price fell from a high of $35 a share in December 1999 to less than 50 cents a share two years later.

And it wasn't just the cruise line having problems. The Ingalls shipyard was behind schedule and over budget, realities even the project's defender, Daniel Inouye, would eventually admit. Speaking on the Senate floor a year after the project failed, the senator allowed that a diet heavy in government contracts had not kept the American shipbuilding industry lean. "Based on past experience, the government is more willing than the private sector to absorb increases in the price tag or delays in delivery of the vessel," he said. "A commercial company requires more stringent pricing and schedule discipline to ensure that projects are economical. With Project America, that discipline did not exist." (Inouye's office, declining an interview request, said the senator had nothing new to say about Project America.)

A FEW WEEKS AFTER THE SEPTEMBER 11, 2001, TERRORIST ATTACKS, AMCV declared bankruptcy. The company said a drop-off in bookings and a spike in cancellations in the wake of the attacks pushed the line over the edge. But critics accused AMCV of using the attacks as an excuse. "Any argument that it was September 11 that caused this pork barrel project to fail is simply not in compliance with the facts," Senator John McCain said on the Senate floor.

At the time AMCV declared bankruptcy, the first Project America ship was between 40 and 50 percent completed: The hull was partially built, but the ship was not in good enough shape to be towed. The second Project America ship had not entered the construction stage, though 400 containers of parts had arrived at the Pascagoula shipyard. The first idea for disposing of the ships came from 14 members of Congress, who wrote a letter to the Transportation Department asking that MARAD pay Ingalls to finish the first ship and sell it, most likely at a loss. Representative Gene Taylor of Mississippi suggested that both ships be completed by the federal government to be used as barracks for troops deployed near coastlines. The government had rented cruise ships before for such purposes, including during the Persian Gulf war of 1991, when a ship was docked in Bahrain and used for soldiers' rest and relaxation periods. The Navy, meanwhile, was more interested in using the first Project America as a warship—a duty it was wholly inappropriate for—and rejected both plans. The ship parts languished at the Pascagoula yard without an owner.

In August 2002, Norwegian Cruise Lines or NCL, came along and offered to pay about $23 million for pieces of the two ships. The pieces had cost eight times as much for AMCV to order and build. But the price tag wasn't the sweetest part of the deal for NCL. Five months after news of NCL's commitment to buy the ship parts, a provision appeared in an omnibus appropriations bill allowing the company to finish the two ships abroad but still register them as American. The provision would allow NCL to reflag an older, foreign-built ship in its fleet as American as well. The company would be required to open a U.S.-based subsidiary, hire American crews, and follow U.S. labor laws, but its payoff would be dominance in the Hawaii cruise market, since its U.S.-flagged vessels would not have to make cumbersome foreign port calls. The clause was placed in the bill without any committee hearings, according to McCain, who complained on the Senate floor that month, "There has been no analysis, no discussion, no hearing, no debate on the value of granting an exclusive exemption for this one foreign-owned company."

Inouye, for his part, defended the deal with NCL, enumerating the benefits of fostering a U.S.-flagged cruise business, even if the dream of reinvigorating domestic shipbuilding had to be deferred. "Such an industry would maintain qualified seafarers. . . create tens of thousands of seagoing and shoreside American jobs, and stimulate the development of a U.S.-flag cruise ship tourism business with commensurate benefits to the U.S. tax base, the U.S. economy, and U.S. employment," he told the Senate.

In the meantime, Pascagoula was out of luck. In a February 2004 report on the economic effects of the legislative exemption granted to NCL by Congress, the General Accounting Office estimated that building the whole Project America ship at Ingalls would probably have cost at least 70 percent more than what NCL ended up paying to buy the unfinished hull and have it finished abroad.

DESPITE THE BARGAINS AND ADVANTAGES NCL HAS ENJOYED, it's not yet clear whether its Hawaiian service will prove profitable, which raises questions about whether Project America could have succeeded if AMCV had remained solvent. NCL's service has had an almost comically rough start. Once it decided to complete the first ship overseas, NCL paid to have the vessel made watertight so that it—along with ship parts that filled acres of warehouses in Pascagoula—could be towed to Bremerhaven, Germany, where the Lloyd Werft shipyard was to turn them into luxury cruise liners. Work started at the end of 2002, and construction seemed to be moving along toward the planned inauguration date of July 2004. Then, near the beginning of that year, during a large storm, water flooded the ship through an open side door and it sunk at the dock."It went down in 25 feet of water," said Robert Kritzman, executive vice president and managing director of Hawaii operations for NCL's American subsidiary, NCL America. "The machinery and engine spaces were flooded."

It took a month to survey the damage and refloat the vessel, during which time the shipyard declared bankruptcy as a result of not receiving payments that NCL was withholding while its ship sat on the bottom. The cruise line, meanwhile, had already started selling cruises on the ship, called Pride of America, but since NCL didn't know if the ship was even salvageable just six months ahead of the inauguration date, the line decided to delay the ship's premiere and start its Hawaii service with the existing ship reflagged as American. The ship was put through a multimillion-dollar redesign and its name was changed from Norwegian Sky to Pride of Aloha. Passengers booked on the Pride of America were automatically rebooked on the older ship, and interisland service began as scheduled last July.

Passengers were not impressed. Reviews posted on by people on the July 4 inaugural sailing describe dirty cabins, food and coffee shortages, and slow service (though they enjoyed Hawaii and had fun on their shore excursions). One passenger who had sailed on AMCV's old S.S. Independence in 2001—the year the company declared bankruptcy—noted that the NCL experience did not compare favorably. "If NCL America doesn't remedy the problem soon, the American flagship doesn't stand a chance." But things seemed to get worse as the summer went on. "By the last half of our cruise, the staff avoided contact if possible, walking with their heads down and avoiding problems they couldn't solve," said John Miller, a 49-year-old biomedical technician who sailed on the Pride of Aloha with his wife and daughter last August.

NCL's Kritzman acknowledged the rough start. "We went through a few cruises where training broke down and service deteriorated," he said. The problems seemed to stem from the all-American crew mandated by American law. NCL usually puts experienced employees from other ships onto its new vessels, but it had very few American crew members on its foreign-flagged ships.

NCL made a formal apology for the service shortcomings and offered all passengers a cruise credit worth 20 percent of their ticket price (which Miller said he had yet to receive), and an opportunity to buy 2005 cruises at the original rates offered in 2003. The company hired expert trainers and extra crew members to pick up the slack, according to Kritzman, and the ship's service problems smoothed out, with online reviewers reporting clean cabins and accommodating (if slightly slow) staff by the ebe transferred to the Pride of America for its debut this summer, with the goal of allowing it to avoid the same growing pains.

NCL IS PLANNING TO INTRODUCE THE DRIED-OUT-AND-REPAIRED SHIP on its new Hawaiian routes this month, and has said that the other Project America ship will be ready for next summer. It will sail as the Pride of Hawaii. The company has also purchased AMCV's old S.S. Independence and another '50s-era U.S.-flagged cruise liner but has not elaborated on its plans for either ship. Some in the industry speculate that it snapped up the two ships to ensure that its competitors would not have an easy means of developing U.S.-flagged cruise itineraries in Hawaii to compete with NCL's new division.

So much for Daniel Inouye's hope that NCL's special dispensations would spur the development of a U.S.-flag cruise industry. As for whether any of Project America's other goals will ever be met, NCL's Kritzman says his company expects its interisland cruises to become profitable enough to pay back, in wages and taxes, part of the investment the U.S. government put into the ships. The foreign cruise line is unabashed in accepting the fruit of the botched Project America. "In our view," Kritzman said, "if the legislation hadn't passed, all the money the government put into the original Project America would have been sunk costs for U.S. taxpayers." The pun was presumably intended.

Krista Carothers is the environmental editor at Condé Nast Traveler magazine.

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