FL MORRIS / FLMORRIS@STARBULLETIN.COM Norwegian Cruise Line ship Pride of Hawaii, which is pulling out of Hawaii in 2008, arrived in Honolulu Harbor last year. The company is expected to know by next year if its struggling Hawaii operation is financially viable.

NCL gets a financial lifeline

A $1 billion infusion of private equity might help keep its Hawaii cruise business afloat

NCL Corporation Ltd., parent company of Norwegian Cruise Line and Honolulu-based NCL America, should know by the middle of next year if its U.S.-flagged ship operation is viable, the company's top official said yesterday.

A $1 billion investment from private-equity group Apollo Management LP to NCL Corp. has bought the struggling Hawaii operation a little more time to turn its performance around, said NCL Corp. President and Chief Executive Colin Veitch.

"We haven't drawn a specific line in the sand or set any absolute thresholds; however, it will be apparent to shareholders at some time in the future that (NCL America) will be a good business or it won't be a good business," Veitch said yesterday.

While NCL has maintained that NCL America is well-anchored in Hawaii, the U.S.-flagged company's future has been uncertain since it was blamed by its parent company for a threefold widening of losses in the fourth quarter of last year. NCL indicated at the time that it would consider "all options" to stem financial bleeding, and later followed up that ominous announcement with news that it planned to send Pride of Hawaii, its newest member of NCL America's fleet, to Europe in February 2008.

"It's been a challenge, but now is not the time to throw in the towel. We're optimistic and the new shareholder has said that this business has potential," Veitch said. "The people in Hawaii should recognize that nothing is forever and everything needs to be worked on, but this company has committed in a way that no one has before. And, we're running the business much better now than we were before."

Hawaii's high labor costs, as well as inconsistent product delivery and booking prices, have created challenges for NCL, a subsidiary of Star Cruises Ltd. of Hong Kong. Star Cruises, controlled by Malaysia's Genting Bhd., posted losses last year.

Also, NCL America's competition in the Hawaii market has quadrupled since the company began its U.S.-flagged operations in 2004, Veitch said.

"There is a total of four million capacity days or bed nights being sold in the market as Hawaii cruises by ourselves and our competitors," he said. "When we began in 2004 there was just one million, so there has been a quadrupling of the market in the last three years and it has had a downward impact on the pricing."

The new investment, in the form of common stock alongside NCL's existing sole shareholder, Star Cruises, is designed to strengthen NCL's balance sheet and support its continuing expansion plans, Veitch said. The agreement is expected to finalize during the fourth quarter of this year, he said.

NCL has said that it will use the proceeds of the Apollo investment to repay existing debts and increase liquidity for its aggressive building program, which includes the planned introduction of eight more Freestyle Cruising ships to the fleet within the next six years.

Apollo and Star also have entered into a sub-agreement relating to NCL America providing for deferred consideration to be paid to Star by NCL in the future, which represents a total enterprise valuation of about $4 billion.

The sub-agreement will buy NCL America more time to see if performance-boosting measures can make the company profitable, Veitch said. As part of the agreement, Star will underwrite NCL America's cash losses up to $50 million to allow time for the business to continue to develop, he said.

NCL, Star Cruises and Apollo Management are optimistic that NCL America will benefit from its capacity reduction. as well as from new federal legislation which relaxes some of the company's hiring limitations and costs by allowing that a portion of the formerly all-American crew be international. NCL began shifting more experienced international crew members to its Hawaii operations in June and expects to have as many as 600 foreign crew members soon, Veitch said.

"At some stage, before the end of next year, it should be apparent how these measures that we have taken has impacted the business," he said, adding that the company already has seen some improvement in the prices of its forward bookings for cruises taking place after Pride of Hawaii leaves the island market.