In one four-day stretch last week, the U.S.-flagged cruise ship industry, and NCL's aspirations to revive it, took two major blows, one symbolic and one literal.
NCL Corp. said it would reduce its Hawaii-based fleet, once four ships strong, to a single vessel in May when it sends the 2,002-passenger Pride of Aloha to its Asia-based sister-company, Star Cruises.
Only days before NCL Corp. announced its plans for the Aloha, the Independence, the 57-year-old U.S.-flagged ocean liner purchased by NCL in April 2003, made its final departure as a U.S.-flagged vessel when it left its berth in San Francisco bound for Asia, where it will meet an as-yet-undetermined fate.
NCL bought the Independence and another classic ocean liner, the 1952-built United States, as it was about to launch its NCL America operations with the Pride of Aloha. At the time, NCL Corp. announced plans to grow its U.S.-flagged NCL America operations beyond Hawaii, building on its anticipated success there.
Expecting a "good, solid market in Hawaii," NCL Corp. CEO Colin Veitch said in 2003, "On the back of that, we believe we can grow our U.S.-flag business" in other markets.
Fast forward to 2008. On Feb. 4, the 2,146-passenger Pride of Hawaii left Honolulu on its final cruise flying Old Glory. Its destination was two scheduled refits where the ship will become the Norwegian Jade, a foreign-flagged vessel complete with a new casino. It is scheduled to join NCL's European operations this spring.
NCL announced one year ago that the Pride of Hawaii would leave the fleet. But with the Pride of Aloha, it gave only three months' notice; the ship will transfer to Star on May 11, where it will be reflagged and redeployed in Asia this year.
That leaves one ship on year-round interisland Hawaii rotation: the 2,146-passenger Pride of America, which was introduced in 2005.
To cement its commitment to NCL America, and possibly to discourage any rumors about the Pride of America being the next to go, NCL opened the books on the Pride of America's Honolulu sailings through 2010.
Andy Stuart, NCL's executive vice president of marketing, sales and passenger services, stressed that the company had long-term plans for its Hawaii operations.
"We have definitely not ruled out the possibility of adding capacity to Hawaii," he said. "We have committed long-term to Hawaii with Pride of America ... and we are very open to saying that if that goes according to plan and is as successful as we believe it can be, then we would look closely at bringing the Pride of Hawaii back."
However, back in 2007, just before announcing that it would send the Pride of Hawaii to Europe, NCL Corp. announced it would transfer the Norwegian Wind, the only foreign-flagged ship it operated in Hawaii, to Star Cruises. During an interview at that time, Stuart said, "There will be no further downsizing."
The difference now, Stuart said last week, was that the Pride of America has been commercially successful.
"It's already profitable, and we expect it to go from strength to strength from here," he said. "It's the youngest ship now in Hawaii, it's very successful, and it's been very well-received."
He said that yields for the Pride of America substantially improved once the Pride of Hawaii, which was the largest ship in the NCL America fleet, was taken out of the seven-day rotation, the itinerary the Pride of America operates.
The Pride of Aloha, an older ship, formerly the Norwegian Sky, is on 10- and 11-day itineraries through April and did not see the same improvement.
However, when Apollo Management LP entered into an agreement to take a 50% stake in NCL Corp. from Star Cruises last August with a $1 billion investment, the private equity firm washed its hands of NCL America and its Hawaii operations.
The deal included a provision that spared Apollo the brunt of losses associated with NCL America, which NCL blamed for most of its $130.9 million loss in 2006.
Under a subagreement, Star agreed to underwrite the losses and bear the costs and expenses of NCL America while allowing time for the business to develop.
The parties agreed that if NCL America turned itself around and became successful, both partners would invest a combined $340 million in the company. If it did not, the operation would shut down, and one NCL America ship would go to Star Cruises' fleet, the other to NCL's international fleet.
So despite Stuart's assurances to the contrary, now that one ship has gone to Star's fleet, speculation is rife that the other will go to NCL.
Despite the seeming upside of being the only line able to sail the chain of Hawaiian islands without stopping at a foreign port, NCL America's venture has been an endless trail of troubles.
The main problem, NCL Corp. has repeatedly said, is overcapacity in the market due to its own growth, and foreign-flagged competition operating from West Coast ports. Cruises from the West Coast to Hawaii since 2003 have increased fivefold, Veitch said.
In a January interview, Veitch said, "There is almost as much capacity being sold in 2007 out of the West Coast as we are going to be selling in 2008 out of Honolulu."
Because it pays U.S. wages and U.S. taxes on its operations, NCL America has said that it cannot compete with low-cost foreign-flagged competition.
The removal of the Pride of Hawaii prompted the Department of Homeland Security's Customs and Border Protection branch to propose a new interpretation of the Passenger Vessels Services Act, which requires a foreign-flagged ship to stop at a foreign port if it is traveling between any two U.S. ports.
In an effort to reduce the flow of foreign-flagged competition from the West Coast, the proposal would require foreign-flagged ships to spend 48 hours, or 50% of the time scheduled at all U.S. ports, in a foreign port. The proposal is currently under review.
Several travel agents said that the reduction in capacity could only help NCL America. Some expressed hope that the move would boost prices there.
"It will be a win-win for both of us -- for NCL and for the agencies," said Karolina Perkins, manager of marketing and sales operations for Cruise Web in Landover, Md., an NCL top producer. "NCL has gone to great effort to make this transition work for its customers and its retailers. Additionally, the strategic reasons behind NCL's decision seem very sound."
As for the Independence, its doom as a U.S.-flagged vessel has been in the cards for a while. The ship had not moved from its anchorage since being purchased by NCL and had not undergone any renovations. The same is true of the United States, which remains mothballed in Philadelphia.
NCL said that it sold the Independence last summer through a broker to an "unknown buyer." The U.S. Maritime Administration lists the current owner as Global Shipping LLC. The ship has been renamed the Oceanic, the same name given to its sister ship, the Constitution, before it embarked on a final journey to Asia to be scrapped, in 1997. It sank en route.
To contact reporter Johanna Jainchill, send e-mail to [email protected].