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Cruise Industry Enjoys Unprecedented Growth

The U.S. flag cruise industry is on the verge of the most significant expansion in decades. Not since the early 1950s has there been such interest in building and operating U.S.-flag passenger vessels. American Classic Voyages, the largest operator of U.S. flag passenger ships, has two new cruise projects well underway (Project America in Hawaii and the Delta Queen Coastal Cruise Line) which will more than quadruple its capacity in the coming decade. SeaAmerica Cruise Lines has announced its plans for three new midsized cruise ships to operate on the U.S.

coasts. And America West Steamboat Co., a riverboat cruise company in the Pacific Northwest, is planning a new overnight cruise vessel for the Alaska and Hawaiian trades. At the same time, the U.S. continues to have a vibrant and growing fleet of dinner cruise, casino and gaming boats, and passenger ferries. Virtually across the industry there are new opportunities available for further expansion, using existing programs or by taking advantage of recent changes in the law. But keep a weather eye on Congress. Changes being debated there could impact the entire U.S.-flag cruise industry. Navigating the uncharted waters of the "new" U.S.-flag cruise industry will require an astute captain and crew.

Project America - A New Era in the U.S.-Flag Cruise Industry The most notable development in the U.S.-flag cruise industry is American Classic Voyages' Project America.

Enacted in 1997, the U.S. Flag Cruise Ship Pilot Project statute sponsored by Sen. Daniel K. Inouye of Hawaii has enabled American Classic, the parent of American Hawaii Cruises and of The Delta Queen Steamboat Company, to take the Defense Department's MARITECH program to new levels. Where earlier projects focused solely on proposed cruise ship designs, it will now result in actual construction, helping to jump start cruise ship construction in the U.S. and to sustain the U.S. shipbuilding industrial base. Modeled after U.S.-flag cruise ship development bills from the early 1990s that never got out of Congress, the new law enables American Hawaii, which following the removal of service of the SS Constitution had only the venerable SS Independence to serve its Hawaii market, to again expand its operations in Hawaii. Just last month American Classic signed an $880 million contract with Ingalls Shipbuilding to construct at least two new 1,900-passenger cruise ships for the Hawaiian Islands trade (with options for four additional vessels). In return for assuming the consider able "first mover" risk associated with building the first major cruise ships in a U.S. shipyard in forty years, American Classic was given a trade preference for the new vessels operating in regular coastwise service among the Hawaiian Islands and the right to temporary use of a foreign-built cruise ship (re-flagged U.S. and employing American crews) in those trades until after delivery of the new ships.

Employing Old Programs and Understanding the New Perhaps the most utilized current program for new ship construction in U.S.

yards is the U.S. Maritime Administration's Federal Ship Financing Program.

The Title XI program, as it is commonly called, provides for a full faith and cred- j it guarantee by the U.S. government of private capital invested in new ship construction for the purpose of promoting the growth and modernization of the U.S. merchant marine and U.S. shipyards. This program enables prospective shipowners to qualify for more favorable long-term financing that is comparable to what's available to large and financially strong companies. Several cruise companies, including dinner cruise and the ferryboat operators, have utilized Title XI guarantees to make their projects more viable and cost effective. The most recent example is AMCV's use of Title XI to guarantee financing for its two new Hawaiian cruise ships.

Another option available to help finance new cruise ship construction is the Capital Construction Fund. Under an often overlooked provision in the tax code, the CCF program allows for the deferment of federal income taxes on certain deposits of money or other property placed into a CCF account.

There are certain restrictions on the use of CCF funds (e.g., currently the new ships built with CCF must operate in the non-contiguous trades). But if you are an operator of U.S.-flag excursion boats in the Puget Sound area, for example, you can put income from those operations into a CCF account for the purposes of expanding your operations to Alaska. Other opportunities for CCF construction may be just around the corner as there are proposals being floated to expand the program to allow use of CCF accounts for other cruise trades. Aside from these more conventional financing arrangements, recent changes in the law also allow opportunities for increased foreign investments in ships to be operated in the coastwise trades. The Vessel Lease Financing provisions of the 1996 Coast Guard Authorization Act is an example. It allows a vessel owned by a U.S. entity that is itself wholly foreignowned to operate in coastwise trade under bareboat charter to a qualified U.S. operator, provided the foreign owners, a parent, or a subsidiary of that parent is engaged primarily in leasing or other financial transactions.

Are Other Public Policy Changes Forthcoming? The growth in the worldwide cruise industry has increased its visibility - both in the public eye and on Capitol Hill. Changes being proposed could dramatically impact the cruise industry - from repeal of the of Passenger Vessel Services Act which governs domestic passenger carriage to bills that would restore State authority to regulate (or eliminate) certain types of U.S. gaming and gambling vessels. Foreign cruise lines have also been the subject of intense Congressional and media scrutiny, not always favorable. Questions have been raised about safety on board these vessels, intentional ocean dumping, and the taxation (or lack thereof) of foreign cruise ships.

Notwithstanding such talk, the U.S.- flag cruise industry continues its unprecedented resurgence. There are programs available to encourage continued development, and recent changes in the law could stimulate even further activity. How it all plays out may not yet be certain, but the U.S. cruise industry is unquestionably embarked on an exciting voyage.

 
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