Cruise company continues talks with shipbuilder
By Michele Kayal
Advertiser Staff Writer
The future of Hawai'i's budding cruise industry could be in question as the parent company of the state's only locally based leisure vessels tries to iron out disputes with a Mississippi shipyard that could delay or even scuttle delivery of two ships bound for the Islands in coming years.
American Classic Voyages is in discussions with Pascagoula-based Northrop Grumman/Ingalls Shipbuilding over production issues and cost overruns for its two 1,900-passenger vessels due to be delivered in January 2003 and January 2004, the company's chief executive officer Phil Calian said during a call with analysts yesterday.
"By spring of this year, it was clear the project was running behind schedule and was not meeting the progress milestones established at the time of the contract," Calian said. "We believed the economic viability of the project needed revaluation. We entered into discussions with Northrop/Ingalls this summer with the goal of putting the project back on track."
Asked what would happen if disputes could not be resolved and the ships were not built, Calian said: "Clearly, we've thought through that contingency. But our discussions are ongoing with Northrop Grumman, and we are hopeful that the product of those discussions will be new ships in the Hawai'i cruise market."
He said the company is prepared to go to binding arbitration if a negotiated settlement cannot be reached.
More than half of all port calls in Honolulu next year will be by American Classic's Patriot or Independence. Because of a law that forbids foreign vessels from sailing between U.S. ports unless they include a foreign stop in their itinerary, the Florida-based American Classic and its U.S. flagged vessels are the only ones that can offer cruises solely in the Hawaiian Islands.
In exchange for building its new ships in an American shipyard, Congress granted American Classic a virtual monopoly on the Hawai'i interisland cruise market in 1997. The measure said no other company can operate large cruise vessels between the Islands for the life of the ships being built by American Classic.
Norwegian Cruise Line will challenge American Classic when it bases its 2,200-passenger Star here in December, running it to Fanning Island to satisfy the restriction on foreign-flagged vessels. But American Classic's unique mandate to provide all-Hawai'i cruises arguably makes it the market's most important player.
American Classic has said for months that it is concerned about the ability of Ingalls, which has handled mostly military contracts, to make the transition to the demands of commercial production.
Some cost overruns have centered on interior finishing, and Calian said the company has been particularly concerned about the yard's steel production and processing.
In a recent letter to President Bush, Arizona Republican Sen. John McCain, who opposes the federal guarantee program under which the ships are being constructed, charged that the ships are 18 months behind schedule, and millions of dollars over budget.
Ingalls has said American Classic is responsible for cost overruns and delays, a charge Calian rejects.
Calian's comments came during a call with financial analysts to discuss the company's troubled second-quarter earnings, which showed a loss of $7.7 million for the quarter, or 36 cents a share, compared with net income of $1.3 million, or 6 cents a share, in the second quarter of 2000. Revenue was $78.1 million, up 28 percent from a year ago, the company said.
The losses stemmed mostly from weak economic conditions that have affected Hawai'i tourism, the company said, and from competition that has forced price cutting.
The news followed a first quarter that saw the company's losses widen to nearly $13 million.
But advance bookings for 2002 are running 60 percent higher than at this time last year, the company said, and fares per person per day are also increasing.
American Classic's stock closed down 15 cents yesterday at $2.40. Over the last 52 weeks, the issue has swung from a high of $18.38 to a low of $1.45 a share.
Analysts said they were concerned over the future of the ships, called Project America, and about the company's tightening cash flow.
"Investors want resolution to the Project America initiative, that is, confidence that that can be completed is paramount," said Ian Calame, an analyst with AG Edwards in Wisconsin, which recently downgraded its recommendation on American Classic's stock from "hold" to "sell." "If you had to pick the No. 1 concern, that's it. No. 2 is the cash flow from continuing operations, given the difficult cruise environment we're in."
American Classic said yesterday it would cut administrative costs by 15 to 20 percent on an annualized basis.
Last month, the company said it would suspend dividends on its preferred stock and in June it announced it would cut 15 percent of its land-based work force. The company said yesterday it is seeking a $10 million credit agreement that will run through March. It has drawn down the $30 million credit agreement it has, which expires in September.
Calian said in the call that the company has more than $40 million of unrestricted cash on its balance sheet.
American Classic and Ingalls signed a contract in March 1999 for two ships to cost $440 million apiece. With the option for a third ship, the contract's potential value was $1.4 billion.
American Classic executives stressed their desire to reach an agreement with Ingalls and to bring the vessels on line in Hawai'i, but said it will depend on the project's financial viability.
"We fully intend for the construction process to continue," Calian said. "That being said, we need to be extremely disciplined as this is a commercial venture. We're not the Navy. We're interested in providing a return on capital. The purpose of Navy ships is to protect the nation."
Michele Kayal can be reached at mkayal@honoluluadvertiser.com.
