GAO wary of cruise exemption

By Kelly Yamanouchi
Advertiser Staff Writer

Norwegian Cruise Line received an exemption to federal law allowing it sail non-U.S. made ships interisland. Advertiser library photo

The GAO report also cites analysts' concerns that Norwegian may not be successful with its U.S. flag operations in Hawai'i and that the company could switch back to lower-cost foreign flag ships to remain competitive. Such a move could result in the loss of both tax revenue and U.S. jobs, including those held by Hawai'i residents.

While raising competitive and profitability issues, the report provided relatively little ammunition for critics of the exemption; it did not recommend that the exemption be repealed nor did it question its legality.

Federal law requires non-U.S. ships to make a foreign stop when cruising among U.S. ports, preventing most cruise lines from basing cruise ships in Hawai'i. But under the legislation, Norwegian was exempted from the requirement and permitted to sail three foreign-built ships flying U.S. flags.

In its report, the GAO — the research arm of Congress — said the exemption "effectively gives NCL a monopoly on interisland Hawaiian cruises — providing consumers with itineraries that were previously unavailable."

Any competitor considering entering the market would need a similar federal exemption to operate on equal terms, the report said. But the report also notes that NCL will not likely be able to charge higher prices because of existing competition, which includes foreign-flagged cruises based in California that come to the Islands.

The legislation also allowed the revival of the failed Project America/American Classic Voyages program that had been pushed by Inouye to boost the U.S. shipbuilding industry and Hawai'i's cruise industry. Under the program, American Classic Voyages was to build the first cruise ship in the United States in more than 40 years.

When American Classic Voyages filed for bankruptcy protection following Sept. 11, 2001, and shut down, taxpayers lost $330 million, according to a federal audit.

The NCL legislation allowed the ship hulls and parts from the project to be recommissioned and used for new interisland cruise ships.

The GAO report arose from a political fight between Hawai'i Sen. Daniel K. Inouye, who engineered the legislation to promote the state's cruise industry, and Arizona Sen. John McCain, an opponent of "pork barrel" projects.

McCain asked the GAO for the report shortly after the NCL exemption was signed into law last year. The senator was not available for comment on the report yesterday.

In the past, McCain blamed Inouye for the Project America taxpayer losses and predicted the Norwegian exemption would also cost consumers in the long run.

In response to the report yesterday, Norwegian said in a statement that it shows "Project America is good for American workers and for consumers." The company emphasized that its interisland cruise project will generate 3,000 shipboard jobs and more than $800 million annually in economic activity.

Norwegian said it "is proud to be the only cruise operator willing to embrace a U.S.-flag operation." The company pointed out that the report said even if competitors won similar exemptions, they would need to overcome "substantial obstacles" to start U.S. flag cruises.

"We believe the report confirms that Congress took the opportunity to turn what was an unfortunate situation into a positive and fulfill the intent of the original Project America legislation," said Robert Kritzman, executive vice president and managing director of NCL America.

Addressing concerns about NCL's ability to operate the Hawai'i interisland cruises profitably and the "uncertain Hawaiian market demand," Kritzman said: "We've obviously done a lot of financial analysis on this ... We think that we can create some efficiencies."

Inouye's office issued a statement also highlighting the positive aspects of the report.

"I am pleased to see that after thoroughly examining all the facts, the GAO agrees there will be increased competition, new U.S. jobs, and a positive impact on Hawai'i's economy," the senator said.

"The GAO concludes that these ships will play an important role in providing consumers with a broader choice of how to vacation in our islands, helping to attract new visitors and tourism dollars to Hawai'i," he said.

Reach Kelly Yamanouchi at 535-2470, or at kyamanouchi@honoluluadvertiser.com.