Were it not for a little-noticed provision in the 1998 Defense Appropriations Bill, chances are good that the state’s preparations for a bull market in cruise ship traffic would be less focused and urgent.
The act contains a section called the “U.S. Flag Cruise Ship Pilot Project” that is the outcome of close collaboration between Philip Calian, chief executive officer of American Hawaii Cruises’ parent company, American Classic Voyages, and the office of Hawai`i’s senior senator, Daniel Inouye, who also is the ranking Democrat on the Senate Armed Services Committee.
The relationship between Calian and Inouye goes back at least as far as 1996. Early that year, one of the line’s two ships, the S.S. Constitution, was decommissioned because of age. As a result of that, American Classic Voyages reported a $17.6 million loss in 1996. Since then, the company has been operating one ship, the S.S. Independence.
U.S. maritime law (the 1886 Passenger Services Act) says that only ships that have been manufactured in the United States and are owned and operated by U.S. companies can carry cargo or passengers directly from one U.S. port to another. So, when American Classic Voyages wanted to expand its operations in Hawai`i and the southeast (where it owns the Delta Queen Steamboat Company), it had to find an American shipbuilder.
The 1998 appropriations act stated that up to $250,000 from the Maritime Technology Program would be used to help U.S. Shipyards acquire commercial cruise ship construction technology, so that a U.S.-flagged cruise ship operator could have two new ships built. (Since American Hawaii is the only U.S.-flagged cruise line, this provision can only refer to it.) The U.S.-flagged company was given 18 months to sign a contract with an American shipyard for ships whose size would be equal to or greater than the Independence.
On March 9, American Classic Voyages signed an $880 million contract with Litton Industries’ Ingalls Shipbuilding division in Pascagoula, Miss., to build at least two cruise ships for American Hawaii. These will be the first cruise ships built in this country in more than 40 years and the largest ever built in the United States. Each will be 840 feet long and about 72,000 gross tons. The first ship, according to the act, must be delivered no later than January 1, 2005 and the second by January 1, 2008.
Ingalls has benefited from federal funds before. In 1994, Congress appropriated Department of Defense funds to have Ingalls develop designs for cruise ships that could be refitted for war, if needed.
The 1998 act also gives the U.S.-flagged company a monopoly on interisland service in Hawaiian waters. That monopoly lasts from the date of the contract signing “throughout the life expectancy of a newly constructed U.S.-flag cruise ship” if the ships stay in Hawai`i.
Another part of the act exempts American Hawaii Cruises from the Passenger Services Act, allowing it to reflag a foreign vessel to use with the Independence while the new ships are being built. American Hawaii plans to have that vessel in service by summer 2000.
Bill Anonson, director of marine operations at American Hawaii, said the interim ship is needed at least a year before the arrival of the first new ship. “We need that lead time to get berths full and to meet operating costs,” Aronson said at the Hawaiian Maritime Industry Day on March 3.
On April 12, American Classic Voyages issued a statement that the Maritime Administration of the U.S. Department of Transportation would provide financing guarantees for building as many as three new ships. The U.S. DOT committed to guaranteeing as much as $1.1 billion, or 87.5 percent of the total cost of construction of three vessels, should American Classic Voyages exercise its option to have Ingalls build it a third liner. Each of the new ships will each carry 1,900 passengers and 570 crew, essentially quadrupling the capacity of the Independence, which takes weekly interisland cruises of three, four and seven days to five ports on four islands.
Construction of the first vessel is expected to begin next year, and it should be in Hawai`i by February 2003. When the second ship is completed, which is scheduled to occur in 2004, the re-flagged foreign vessel must be decommissioned, according to the Defense Appropriations act, but American Hawaii plans to continue to use the Independence for a few more years, keeping a fleet of three.
Many expectations come with these ships. On news of the signing of the contract, Governor Ben Cayetano issued a statement that he expects the new ships to create 2,000 new jobs and generate $38 million a year in state taxes.
A Troubled Past
American Hawaii has a long history of environmental violations in these islands, although no violations have been cited since American Classic Voyages bought the company in 1993, according to the U.S. Coast Guard. The Coast Guard has 23 violations on record for which 18 penalties were paid, all before the ownership change.
In 1986, American Hawaii was fined for two cases of sewage dumping, including a major infraction in Kailua-Kona. In 1989, the Independence was cited by the Coast Guard for using a faulty oily water separator for two months. During that time, unseparated bilge water was pumped overboard. Also in 1989, the Coast Guard established that the Independence caused an oil spill that polluted 20 miles of beaches on Lana`i and Moloka`i. Two years later, the same ship was fined for releasing galley bilge water into Nawiliwili Harbor. All of these incidents were categorized as accidental.
However, American Classic Voyages did pay $115,000 in fines resulting from the previous owner (American Global Lines, Inc.) having pleaded guilty to dumping five tons of kitchen supplies into the Pacific. As part of the galley renovations required on both ships after the U.S. Food and Drug Administration flunked them for their sanitation practices, a contractor threw all the old appliances overboard off the West Coast. (Since that time, American Hawaii has had a clean record with the FDA.)
The new owners also inherited a state tax break dating back to 1981 and continuing for 15 years. Beginning on July 1, 1981, one year after starting service in the islands, American Hawaii was exempted from paying a 4 percent Public Service Company Tax on gross revenues.
Since foreign flag ships don’t pay American taxes or union wages, American Hawaii had argued that the tax break was needed to allow it to complete in the cruise ship market. As of 1991, American Hawaii estimated that the tax break saved them $1.6 million a year. In order to continue the subsidy, the Legislature required that American Hawaii open its tax returns for legislative review every year. The last extension of the exemption ended on June 30, 1996.
However, that did not end the state’s favorable treatment of American Hawaii, whose port entry, docking, and anchoring fees are substantially less than those for foreign-flagged vessels. The “wharfage rate” paid to each Hawaiian port per passenger for a foreign vessel is $5, while the rate for American Hawaii is $1.85. American Hawaii also pays an average of two-thirds what foreign vessels pay for commercial port docking fees. In the small boat harbors of Kailua-Kona and Lahaina, where ships pay an anchoring fee, American Hawaii pays an average of 70 percent of what the foreign ships pay.
For example, if one of the new, 840-foot-long vessels that American Hawaii is building were to anchor in Lahaina for a full day (over 12 hours), it would pay $787.50, while a foreign vessel the same size would pay $1,437.50. If American Hawaii’s vessel then docked in Hilo and was carrying a full load of 1,900 passengers, all of whom went ashore, it would pay $3,515, while a foreign vessel with the same passenger numbers would pay $9,000.
— Heidi Kai Guth
Volume 9, Number 11 May 1999
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