American Classic Voyages dispute resolved

By Frank Cho and Michele Kayal
Advertiser Staff Writers

American Classic Voyages, the parent company of Hawai'i's only locally based cruise ships, has settled a dispute with its Mississippi shipyard over delivery and cost overruns of two new vessels, keeping alive plans to home-port modern ships in the Islands, but delaying them by a year.

Under the agreement, American Classic Voyages agreed to pay an extra $19 million per ship to Pascagoula-based Northrop Grumman/Ingalls Shipbuilding for the two 1,900-passenger vessels that were slated to be delivered in January 2003 and January 2004. As part of the settlement agreement, the delivery dates for the ships will be delayed to Feb. 1, 2004, and Feb. 1, 2005.

American Classic Voyages agreed to buy the ships in 1999 for $440 million apiece.

"We are extremely pleased to reach an amicable resolution," said Phil Calian, chief executive officer of American Classic, which operates the Independence and Patriot cruise ships.

But Calian said he was disappointed about the delayed deliveries as it will cost American Classic an undetermined amount in lost revenues and millions more in construction costs.

The settlement was crucial for Hawai'i's cruise market and American Classic, which is arguably the local industry's most important player and is facing increased financial and competitive pressures.

More than half of all port calls in Honolulu next year will be by American Classic's Patriot or Independence.

American Classic was already facing what some analysts consider an extreme cash-flow problem, and it is unclear how the settlement with Ingalls might affect that. Wall Street reacted unenthusiastically to the announcement yesterday, sending the stock down 36 cents, from $1.27 at Thursday's close to 91 cents at the close of business yesterday. The issue hit a low of 80 cents during the trading day.

Analysts were also tempered in their response, and said the company's main issue right now is to continue generating revenue, and that 2004 is a long way off.

"The overall outlook for leisure travel is in the dumps right now, and the (daily rates) cruise lines are getting are going down," said Tim Conder, an analyst with A.G. Edwards and Sons, which stopped covering the stock earlier this month. "Between what we're seeing right now and '04 a lot can change. But the key for them in the interim is to generate enough cash flow to stick around until the new ships come."

In recent weeks, the company suspended dividends, announced a 15 percent cut in its land-based work force, and had its credit line reduced from $30 million to $10 million when it came time to renew.

But the company does enjoy a monopoly on the interisland cruise market. Because of a law that forbids foreign vessels to sail 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.

"With these business issues behind us, we can again concentrate solely on the business of building these ships," said Jerry St. Pe', chief operating officer of Northrop Grumman's Ship Systems sector, in a statement this morning. "This project is not only important to Northrop Grumman and American Classic, but it has far-reaching benefits for the U.S. economy, creating thousands of American jobs and bolstering the U.S. shipbuilding industrial base."

American Classic has said for months that it was concerned about the ability of the Northrop Grumman shipyard, which has handled mostly military contracts, to make the transition to commercial production.

Some cost overruns have centered around interior finishing, and Calian said the company is particularly concerned about the yard's steel production and processing.

"We have those bumps behind us now," Calian said. "When we started down this path a few years ago, no one thought it would be a smooth one."

The $19 million added cost per ship will cover increased interior finishing costs.

And both companies agreed to buy preferred stock that Project America, a unit of American Classic Voyages, plans to issue.

American Classic Voyages will spend $42 million on the equity through 2005; Northrop Grumman will spend $44 million. The additional equity should help offset the price increase and other costs associated with the delay.

Calian said the agreement did not increase the $1.1 billion loan guarantee from the Maritime Administration for the ships.

"The guarantee already covers 87.5 percent of the cost of building the ships," Calian said. "What was important to us was we get these ships built."

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 could operate large cruise vessels between the Islands for the life of the ships being built by American Classic.

Norwegian Cruise Line will challenge that dominance when it bases its 2,200-passenger Star here in December, running it to Fanning Island to satisfy the restriction on foreign-flagged vessels.

Reach the reporters at fcho@honoluluadvertiser.com or mkayal@honoluluadvertiser.com