Tide turns against cruise company
By Michele Kayal
Advertiser Staff Writer
New ships that were supposed to help Hawai'i's leading cruise operator grow its island business starting in 2003 could be delayed by as much as a year, a blow of bad luck that comes at an already critical time for the company.
American Classic Voyages is embroiled in a dispute with Mississippi-based Ingalls Shipbuilding over the cost and production of its two, new 1,900-passenger vessels, the first of which was supposed to hit the water a little more than a year from now.
The luxury liners are intended to make American Classic more competitive in a market flooded with new ships and clients who demand the newest liners with the finest amenities. The ships also would give the company the capacity to take advantage of an industry growing by an average of about 8 percent a year.
But the ships are likely to be delayed by as much as a year, and could be cancelled altogether, though both sides appear intent on resolving their differences.
The setback comes at a crucial time for Florida-based American Classic, which holds exclusive rights to offer interisland cruises and accounts for about half of all Hawai'i's port calls. Pushed by an untimely confluence of internal and external factors, the company has gone from being an industry darling several months ago, with financial analysts fawning over its aggressive young CEO and urging investors to buy the stock, to one that is facing an extreme cash flow problem and competition that wasn't supposed to be there.
In the past few weeks, American Classic has suspended dividends, announced a 15 percent cut in its land-based workforce, and had its credit line reduced from $30 million to $10 million when it came time to renew. Its stock price hovers around $2 these days, down from a 52-week high of $18.38. Three different analysts have downgraded their recommendations on the stock since March. AG Edwards has downgraded its recommendation twice, from "buy" to "hold" in June, and from "hold" to "sell" in July.
And no immediate relief appears in sight. The slowing U.S. economy, which has dented AMCV's business both in Hawai'i and on the Mainland, where it runs passenger vessels on rivers and coastal waters, doesn't appear headed up any time soon. The company's flagship Hawai'i liner, the Independence, a vintage vessel in service since the 1950s, grows older every day in a market that increasingly rewards newness and flash.
On top of that, the ship delays mean revenue going out when it was supposed to be coming in, though the contract between Ingalls and AMCV requires the builder to pay damages if it is found responsible for the delays.
But the delay also throws a monkey wrench into the company's aggressive growth strategy. A cancellation of the ships would stunt that growth at a minimum, and would cast its Hawai'i business — and possibly its entire operation — into uncertain waters.
"The future of our business, the growth of our business, is a function of getting new ships in the Hawai'i market," said AMCV chief executive officer Phil Calian. "To the extent there are not new ships in the Hawai'i market, it fundamentally changes our growth strategy and how this business is managed and its future prospects."
American Classic contracted in March 1999 with Ingalls, acquired in April by defense contractor Northrop Grumman, for two 1,900-passenger vessels, at a fixed price of $440 million each with firm delivery dates in January 2003 and January 2004. Options for as many as four more vessels were agreed to, with the price on the first bringing the potential value of the contract to $1.4 billion.
Delays began to emerge last spring. The yard wasn't meeting agreed-upon milestones, Calian said, putting the "economic viability" of the project at risk. Negotiations to settle the production and cost disputes have intensified in recent weeks, and Calian has said the company is prepared to go to binding arbitration to settle the matter.
Northrop declined via fax to comment, citing the delicate negotiations.
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It is unclear from the contract, filed with the Securities and Exchange Commission, how much delays could cost the builder, and at what point penalties kick in.
The Patriot was the first of what was expected to be four large ships to arrive in Hawai'i through 2004 for American Classic Voyages' Island-based operations.
The contract also allows AMCV to abandon the project for a number of reasons, including a failure on Ingalls' part to practice "due diligence" in executing the project.
The contract allows AMCV in that case to finish the ships at another shipyard.
Ingalls also can bow out of the project under certain conditions.
Any changes to the contract must be approved by the U.S. Maritime Administration, which granted the cruise company federal loan guarantees of $1.1 billion. So far, American Classic has drawn on $185 million of those guarantees.
AMCV already has made a considerable investment in the new ships. Through June 30, it had paid about $236 million for the ships, including $200 million for the first one. Of the total, $100 million is the company's equity.
AMCV agreed to build the liners at Ingalls — a shipyard in the home state of Senate minority leader Trent Lott that has made its mark over the past 60 years building destroyers for the Navy — in exchange for a congressionally sanctioned monopoly in the Hawai'i market for the life of those ships. Ingalls has not built a cruise vessel since 1958, when it delivered the last two passenger cruise ships built in the United States.
The agreement also allowed AMCV to sail the foreign-built Patriot around the islands — an exemption to U.S. maritime law, which allows only U.S.-built ships to pick up and discharge passengers while sailing between U.S. ports. AMCV was allowed to use the Patriot while the new ships are being built.
It is unclear what would happen to the Patriot — and AMCV's monopoly — if AMCV and Ingalls end their relationship.
Despite the congressional sanction, AMCV's monopoly will be challenged in December by Norwegian Cruise Line, which will become the first foreign cruise line to offer seven-day interisland cruises.
Using its brand new, ultra-fast, 2,200-passenger Star, NCL will satisfy the maritime laws by running about 600 miles south of Hawai'i to Kiribati and returning to the Islands.
If NCL is successful, the company has said it will consider adding a second and possibly several ships. If the cruises become popular — and NCL chief executive Colin Veitch has said he expects his Hawai'i cruises to be full — copy cats with fast new ships are likely to follow.
Michele Kayal can be reached at mkayal@honoluluadvertiser.com
