Sunday, October 21, 2001

The S.S. Independence finished its last Hawaii voyage
yesterday. Thought its owner says it will be back, it
opens the market to a formidable competitor.

Return trip

American Classic Voyages says it
will be back in 3 years with new
cruise ships. But its competition
gets a big head start.

By Dave Segal

The S.S. Independence and the ms Patriot may be finished cruising Hawaii waters, but American Classic Voyages Co. Chief Executive Officer Philip Calian isn't abandoning ship as far as the island market is concerned.

Just hours after the company filed for Chapter 11 bankruptcy protection Friday in a Delaware court, Calian expressed optimism that the financially ailing company would be able to return to Hawaii once the first of the company's new U.S.-built ships is delivered in February 2004.

"Between now and 2004, we remain confident in the Hawaii cruise market and anticipate when the new ships are built in 2004 (and the second in 2005), it will make sense to operate them in Hawaii," he said.

But in the meantime, American Classic's absence will give newcomer Norwegian Cruise Line an anchor up in establishing itself in the Hawaii market. The foreign-flagged vessel is building a new 2,300-passenger ship, the Norwegian Star, that will be based in Honolulu beginning in mid-December.

For now, though, Calian was dwelling on bankruptcy.

"I'm at a loss for words," he said. "It certainly hurts the state of Hawaii, and Hawaii is an incredible destination. Its people and its government deserve much better. Yet, the results and the aftermath of Sept. 11 have certainly hurt the state and the tourism industry of the state."

Crew members unload personal belongings from the
S.S. Independence Thursday before the ship left for
its final two days cruising Hawaii waters.

The decision by American Classic to cease Hawaii operations yesterday and stop voyages on all but one of its five mainland vessels resulted in 1,150 layoffs in Hawaii and 2,150 lost jobs companywide. Between Sept. 17 and Thursday, Hawaii had received 14,786 initial claims for unemployment insurance. That number undoubtedly will go up since 90 percent of the Independence crew and 30 percent of the Patriot staff are based in Hawaii.

"The loss of jobs is large and it's extremely sad," Calian said. "These people, through acts of their own, built this company. And now, through no acts of their own, are losing their jobs. It's sad and unfortunate. It's a tragedy."

Calian, though, said he's hopeful the company can proceed with the U.S. Maritime Administration-backed Project America program that guarantees the first U.S.-built ships in more than 40 years.

"The shipyard wants to continue with construction," Calian said. "They haven't stopped work on the vessels and we're hopeful our discussion with the Maritime Administration will result in the construction continuing.

"Ironically, before Sept. 11 when we reached agreement with Northrop Grumman for continuation of that project, part of the agreement didn't require any cash from AMCV to go toward construction of the new ships until those ships were built. So, in this filing process, money would not be required from AMCV for construction to continue."

Northrop Grumman Corp. issued a statement Friday confirming it was in discussion with the Maritime Administration and American Classic.

"We hope to reach a successful resolution of future funding for this program," the statement said. "In the meantime, work continues on Project America."

Calian said he and other executives brainstormed 11 business plans to come to grips with the impact that the Sept. 11 attacks would have on the company. In the end, filing for Chapter 11 bankruptcy and keeping just the Mississippi River-based Delta Queen Steamboat afloat made the most sense.

"Pre-Sept. 11, we had restructured (the shipbuilding deal with) Northrop Grumman, our Hawaii ships were full with rising per diem and we were feeling positive about the prospects for 2002," Calian said. "While none of us were high-fiving each other and while we weren't in the land of milk and honey, we clearly saw the path of success to the future.

"Post-Sept. 11, our cash-burn rate was increasing dramatically because of lower bookings, higher cancellations and a weakened cash position as vendors were demanding payment."

Even though Hawaii's two ships recently have been operating at about 90 percent occupancy, Calian said the damage already had been done.

"It's the people who paid in full 60 days in advance," he said. "What we saw in the five weeks following Sept. 11 was a 50 percent decrease in gross bookings and a 30 percent increase in cancellations. More importantly, cash in hand was $40 million at the start of the month. But vendors and creditors basically were squeezing us for cash, which made it clear to us that we were going to hit the wall. Rather than hit the wall with zero dollars and face a likely liquidation at depressed prices, we made the decision to file Chapter 11 with plans to restructure and reorganize with $18 million in cash."

In its bankruptcy filing, American Classic listed $37.4 million in assets and $452.8 million in debts.

American Classic's decision to shut down its Hawaii operations will leave Norwegian as the only Hawaii-based ship when it brings the Norwegian Star to Honolulu for its Dec. 16 maiden voyage. The cruise line will make a port stop at Fanning Island in the republic of Kiribati in addition to stops at Kona on the Big Island, Maui and Kauai. The Fanning Island stop is included in order to comply with a federal law that prohibits foreign-flagged vessels from receiving and discharging passengers at any two U.S. ports without stopping at an intervening foreign port. Fanning Island is about 800 miles south of Hawaii.

Norwegian, despite the opportunity to be able to operate a daily cruise without competition in Hawaii, was hardly celebrating American Classic's demise.

"It may sound counterintuitive, but we're not pleased to see this happen. It's disappointing," said Robert Kritzman, senior vice present and general counsel for Norwegian. "Obviously, people are losing their jobs and are negatively affected by the Sept. 11 impact on the leisure industry. I think it's a shame.

"In the short term, it may provide some additional business. But for the first three months of our ship deployment in Hawaii that begins Dec. 16, we're 90 percent booked for the first quarter of 2002. From that perspective, it's not a dramatic impact.

"Overall, having American Hawaii Cruises (the cruise line subsidiary that operated the Independence) promoting cruising in Hawaii was also beneficial to us. Their product was somewhat different from ours and it was another product in the market, which I think is beneficial overall to the industry. We're still committed to our analysis of entering the Hawaii market on the basis that there was room for both us and American Hawaii and eventually their new ships as well."

Calian agreed that there would have been room for more than one company in the Hawaii cruise market.

"We believe the Hawaii cruise market has been very good," he said. "It presents good longtime opportunities for Norwegian Cruise Line and we believed the Hawaii cruise market represented a good market for both NCL and AMCV. We are optimistic that NCL will continue to develop the Hawaii cruise market."

The 91,000-ton Norwegian Star, which will be the largest in Norwegian's fleet, is being specially built for Hawaii because of a measure introduced by Sen. Daniel Inouye and passed by Congress last year that prohibits ships with casinos aboard from beginning and ending cruises in Hawaii. The vessel is being built in Germany without a gambling facility aboard.

Inouye declined to comment but a spokeswoman reflected on the impact for the state.

"It's a sad day for Hawaii, but in light of the Sept. 11 tragedy, continuing operations at American Hawaii Cruises proved to be too difficult," said Jennifer Goto Sabas, chief of staff for Inouye. "We remain hopeful that the Maritime Administration will allow the construction to continue. By law, both of those ships are destined for Hawaii waters and there may be a brighter day for Hawaii in the future."

Gov. Ben Cayetano said Friday it should be made easier for ships with gambling facilities to dock in Honolulu, although he doesn't think the ships should be permitted to conduct gambling in Hawaii waters.

"I think that there has to be a change in the federal law about cruise ships with gambling capabilities," he said. "It gave those guys an edge over everyone else. We need to level it up, now that American (Classic) has gone into bankruptcy.

"The gambling prohibition was designed to help American. I thought it was unfair to begin with. American is no longer around, so why should we penalize these people just for having gambling on their ships?"

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