Pearl Harbor for the Cruise Industry
“Silent Spring” — the nickname I coined for this national lockdown on March 17— is now extended through April… if we’re lucky.
Last week, Congress passed a hasty bailout bill. It’s truly a “midnight special” with money for everyone. Banks. Boeing. General Electric. Automakers. Airlines. Hospitals. Hotels. Casinos. Restaurants. Other big business. “Small business,” too. Organized labor. Plus states and localities. Even the Kennedy Center, as well as NASA.
Indeed, it’s easier to identify companies that are doing well and don’t want a bailout. Netflix comes to mind.
In a harbinger of things to come, there’s “helicopter money” to bail out Main Street as well as Wall Street. The idea is to send a U.S. Treasury check — up to $2,400 or more, depending on the size of your family — to every working household in the country.
Open the valves, goes the thinking. Send a Niagara of federal funds cascading across the nation. Let new liquidity help heal the land from the wicked virus scourge.
Desperate times call for desperate measures; bailouts and money-bombs. Details to follow, of course.
One industry was conspicuous by its absence, however. It’s still adrift, in terms of survival, but taking on water and sinking fast. I refer to the cruise ship business.
Indeed, it may well be Pearl Harbor for cruise ships.
The original Pearl Harbor, as you likely know, occurred on Dec. 7, 1941. In under two hours, an entire fleet and operational theory of war — the battleship Navy of old — was rendered obsolete by global events and technology that originated far over the horizon in Asia.
Now, it’s cruise ship industry’s turn to meet its fate.
Over the past month or so, the business model for “cruising” simply went belly-up. Those fleets of mega-ships ceased being a relevant, workable global industry with any semblance of a future. Cruising is finished.
In the space of just a few weeks, multibillion-dollar assets have transformed into multibillion-dollar liabilities. Massive destruction of capital — evaporation of value — is occurring before our eyes.
The global cruise ship market is made up of dozens of cruise lines, large and small, with over 250 ships. Three familiar names dominate: Carnival Corporation PLC, Royal Caribbean Cruises LTD, and Norwegian Cruise Line. Between them, they control about 75% of the market.
In 2018 (most recent data), these three companies, and subsidiary cruise lines, collectively raked in over $34 billion in revenue. Another $11 billion went through the remaining 25% of companies.
According to news accounts, the cruise industry claims to employ over 450,000 people worldwide. If this business goes under (sort of a pun there), many people will lose their jobs. We’ll see hardship across the spectrum, from boarding facilities in Miami and Seattle to T-shirt shops in Trinidad and Skagway.
It’s a hard-luck tale, to be sure. Enough to pull at your heartstrings. But then again…
It’s the passing of an era. Or perhaps it’s better to view what’s happening as an extinction event.
So why not give the cruise ships some government money? Let me count the ways…
For starters, with a few small exceptions, the cruise ship industry is a foreign business. And if the U.S. government is going to bail out anything or anyone, it ought to be a U.S. industry that employs U.S. citizens and pays U.S. taxes.
Right away, cruise ships hit the rocks. All those gleaming white leviathans of the sea are registered somewhere other than the U.S.: in Panama, Bermuda, Bahamas, Malta and more.
The flag on the mast defines a ship’s legal status. When you register a ship under the Stars & Stripes, you must… well… obey all sorts of pesky U.S. laws. You must employ U.S. citizens, too. That’s costly for the cruise business. Hence, most companies use foreign flags of convenience.
Indeed, it’s remarkable to meet a U.S. employee on a cruise ship.
You’ll meet cabin stewards from Colombia, Brazil and Ecuador. Maids from the Philippines or India. Wait-staff from Costa Rica, Romania, Poland or Turkey. Hallway cleaning personnel from Malaysia or Indonesia. Invariably polite and well-trained.
If you have “business”-level contacts onboard, like with the purser’s office, you’ll often deal with British or Australians. Bridge and navigation staff might be Greek. And the captain could be a weather-beaten Norwegian who speaks with an engaging accent. People have their roles to play, for sure.
I take nothing away from anyone here. I’ve been on a few cruises, and in my experience the personnel have tended all to be nice, hard-working people. I never had any problems with the ships, the general cleanliness or helpfulness of staff.
But that doesn’t mean I think that this industry should be eligible to receive money from U.S. taxpayers. .
Congress and from President Trump seem to agree. that U.S. funds should go only to U.S. companies that employ Americans. Uncle Sam should not bail out a business model that relies almost entirely on foreign-registered ships, employing mostly low-paid foreign labor.
Sometimes that flag of convenience becomes inconvenient.
If for some reason you still think the U.S. government is being unfair, however, please consider this…
Major cruise lines pay a pittance of U.S. taxes — an effective rate of .8%, far below the 21% rate that other large companies pay. It’s insultingly low, considering the revenues that come from U.S. passengers.
They do a thriving business selling alcoholic beverages to American passengers, and nearly all have a casino nestled somewhere amidships. Plenty of U.S. dollars exchange hands. But do the companies pay U.S. taxes on the liquor or gambling that goes down? Nope.
Cruise lines avoid taxes because, obviously, those big ships spend the bulk of their time at sea, outside U.S. jurisdiction. The taxman’s reach ends where international waters begin. Okay, but then U.S. bailout bucks shouldn’t extend beyond that 12-mile national limit either.
But how about the benefits of shore services? Cruise ships call at American ports like Miami and Seattle. Further north, they tie up at places like Ketchikan and Anchorage. That’s worth something to the local economies, right?
The Port of Seattle recently estimated that every cruise ship generates about $4 million in revenue ashore, from hotels and restaurants to piano-tuners. Seattle sees nearly $1 billion per year of economic activity from hosting cruise ships.
And the numbers are far greater in Miami, which hosts many more sailings than Seattle. Then again, cruise companies have captive relations with most of their service providers. Many of those U.S.-based shore-service businesses work at thin margins.
It’s a balance. How do we deal with a “foreign” industry that delivers some benefits to U.S. ports? Is it worth bailing out a large, mostly foreign business to “save” a much smaller level of domestic jobs and economic activity?
There’s the rub…
To answer those questions, first we need to ask: who or what is getting bailed? What’s the idea? Offer money — loans or whatever — to cruise companies… to do what, exactly?
Right now, the bulk of funds will go towards payments, care and maintenance on a fleet of empty, idle vessels that serve a now-shattered business model. Massive cruise ships that haul thousands of passenger and crew just became obsolete.
Meanwhile, most of the foreign staff have already been furloughed or fired.
Face it… Any bailout funds for cruise ships would be gone soon; tossed overboard into a dark sea of debt and pointless overhead.
The big issue here is that the current global virus problem is far from a short-term issue. That’s true by an order of magnitude for the cruise ship biz.
No, things will NOT resolve in a few months and the world will NOT get back to cruising.
Right now, entire nations are being trained and conditioned towards “social distancing.” Few people will wish to embark on a vessel and rub elbows with thousands of complete strangers anytime soon. And this new pattern of behavior will be difficult to un-learn.
Meanwhile, almost no country or port in the world currently permits cruise ships to dock, for fear of infected passengers or crew. It’ll be many months — more likely years — before most ports routinely reopen to daily inflows of massive ships carrying thousands of people from global origins.
Then there’s another very significant issue concerning transport. Almost all cruise passengers move to their point of embarkation, or return home, via airlines. Yet the global airline industry is on life support. International flights are down by 70%, moving fast to 90%. Domestic U.S. flights are down by 50%, and there’s discussion of suspending almost all domestic airline traffic, per the Wall Street Journal.
Point is, in order to have a “working” cruise line model, you need “working” airlines. And the airlines don’t work just now. Airlines won’t work for many months to come, from all the evidence. Delta, American and United all have forecasted that the best they can hope for is to emerge “smaller” in the months and years to come.
More than likely, we’ll never again see the level of air traffic availability that we had as recently as this past February. Airline management teams are currently talking about how it will take many years to rebuild traffic volumes and routes. That is, they say this when they aren’t talking about filing for bankruptcy.
Let’s frame things another way…
My friend Jim Kunstler stated the issue nicely not long ago. The “hologram of capital that was not really there” has dissolved, he wrote. “That capital, you understand, was our notion of how wealthy we used to be, like, five minutes ago. And now the capital, the money, the mojo of modern life is going-going-gone.”
Getting back to the cruise industry… The business was built for a global economy — an open, global culture — in which people had easy, free movement across continents and international borders. Well, that world just had a virus attack, froze up and died. It’s over.
For now, the U.S. government priority is rescuing American companies, as well as handing out “walking around money” to American households. Families need cash just to buy food and pay other necessary bills. The alternative is food riots. Cruising is not on most people’s agenda, let alone a policy priority.
There’s no political will or drive to bail out the cruise industry. The overall business model was always a parasite feeding on the U.S. economy. Foreign-registered ships, foreign crew, next to no taxes…
There’s no cruise ship business model anymore. It’s over, and not coming back. There’s nothing left but the memories.
Remember Pearl Harbor…
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Managing Editor, Whiskey & Gunpowder
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