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Competitive Advantage, but Barriers to Further Entry under U.S. Flag 
Remain' which was released on February 27, 2004.

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Report to the Chairman, Committee on Commerce, Science, and 
Transportation U.S. Senate:

February 2004:

MARITIME LAW EXEMPTION:

Exemption Provides Limited Competitive Advantage, but Barriers to 
Further Entry under U.S. Flag Remain:

GAO-04-421:

GAO Highlights:

Highlights of GAO-04-421, a report to the Chairman, Committee on 
Commerce, Science, and Transportation, U.S. Senate 

Why GAO Did This Study:

No large U.S.-flagged cruise ships (ships registered in the U.S. that 
are U.S.-built, U.S.-owned, and U.S. crewed) are in operation. Foreign-
flagged vessels cruising to foreign ports serve most of the U.S. 
demand for cruises. However, Norwegian Cruise Line (NCL) recently 
obtained an exemption from U.S. maritime law to operate three foreign-
built ships under the U.S. flag in Hawaii. Cruise lines and others 
have raised concerns over the advantage the exemption might confer to 
NCL, since foreign-flagged competitors are unable to offer the same 
itineraries due to the Passenger Vessel Services Act (PVSA), which 
prevents foreign vessels from transporting passengers solely between 
U.S. ports. Concerns have also been raised over the effect this 
exemption might have on future attempts to grow the U.S.-flag cruise 
vessel fleet, since potential U.S.-flag competitors would need to 
build ships in the United States, presumably at higher cost. 

GAO was asked to (1) review the original intent of the PVSA and 
rulings and decisions regarding it, (2) determine if the exemption 
will affect the implementation of the PVSA or other maritime laws, (3) 
assess the potential effects of the exemption on competition and entry 
into the U.S. domestic cruise market, and (4) assess the potential 
economic effects of granting other cruise lines similar exemptions.

The Departments of Homeland Security and Transportation generally 
agreed with the findings in this report.

What GAO Found:

The original intent of the PVSA, enacted in 1886, was to protect the 
U.S. maritime industry from foreign competition by penalizing foreign 
vessels that transport passengers solely between U.S. ports. However, 
several rulings and decisions interpreting the PVSA have allowed 
itineraries for foreign cruise vessels between U.S. ports that were 
previously restricted. For example, voyages by foreign vessels between 
two U.S. ports that include a distant foreign port, and round trip 
voyages from U.S. ports that include a nearby foreign port and other 
U.S. ports, do not violate the PVSA. 

NCLs exemption will likely have little impact on how the PVSA or 
other maritime laws are administered or interpreted because it is 
specific to three NCL vessels and cannot be applied to any other 
vessels in any other areas.

The exemption effectively gives NCL a monopoly on interisland Hawaiian 
cruisesproviding consumers with itineraries that were previously 
unavailable. However, NCL will likely have little power to raise 
prices on these itineraries because of competition from other vacation 
options. Because NCL is able to operate foreign-built ships in Hawaii, 
the exemption provides an additional obstacle for any potential U.S.-
flag competitor to enter that market, since that competitor would need 
to build the ship in the United States at a higher cost. However, 
independent of the exemption, there were and still are other 
substantial obstacles for any potential U.S.-flag cruise vessel due to 
the higher capital and operating costs (e.g., labor costs) associated 
with the U.S. flag, as compared with existing foreign-flag cruise 
vessels offering itineraries through a foreign port. 

Granting additional exemptions to ease entry into the domestic trade 
could lead to benefits for port cities, U.S. seamen, and consumers; 
however, it is unclear how many cruise lines would choose to enter 
even if they were permitted to operate foreign-built ships under the 
U.S. flag, because of the higher operating costs associated with a 
U.S.-flag carrier operating in domestic itineraries and because of 
uncertain market conditions. 

www.gao.gov/cgi-bin/getrpt?GAO-04-421.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact JayEtta Hecker at 
(202) 512-2834 or heckerj@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Intent of PVSA Was to Protect U.S. Maritime Transportation Industry, 
but Rulings and Decisions Have Expanded Itineraries for Foreign Cruise 
Ships: 

Interpretation and Enforcement of the Exemption Will Likely Have Little 
Impact on the Implementation of the PVSA and Other Related Laws: 

Exemption Allows NCL to Offer Exclusive Domestic Itineraries and 
Creates an Additional Barrier to U.S.-Flag Entry, but It Could Generate 
Economic Benefits: 

Unclear if Granting Other Cruise Lines Similar Exemptions Would Lead to 
Entry by Other Cruise Lines and Resulting Economic Benefits: 

Agency Comments and Our Evaluation: 

Appendixes:

Appendix I: Scope and Methodology: 

Appendix II: Other U.S. Laws Applicable to U.S.-Flag Vessels on Wholly 
Domestic Cruises: 

NCL's Operations Will Subject Them to the Application of U.S. Tax, 
Labor, and Other Laws Unlike Other Foreign Cruise Lines that Serve the 
United States: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Table: 

Table 1: Key Rulings and Decisions that Have Changed the Types of 
Itineraries Foreign Vessels Can Operate Out of U.S. Ports: 

Figures: 

Figure 1: Percent of Passenger Embarkations/Disembarkations at North 
American Ports by Major Cruise Lines, July-September 2003: 

Figure 2: NCL's Exclusive Hawaiian Itinerary Compared with Hawaiian 
Itineraries of Foreign-Flag Vessels: 

Figure 3: Comparison of Estimated Construction Costs to Complete Project 
America Vessel in a U.S. Shipyard and a Foreign Shipyard: 

Figure 4: Examples of Itineraries between U.S. Ports for Foreign-Flag 
Vessels that Utilize a Nearby Foreign Port: 

Abbreviations: 

CBP: Customs and Border Patrol:

DOT: Department of Transportation:

FTC: Federal Trade Commission:

MARAD: Maritime Administration:

NCL: Norwegian Cruise Line:

PVSA: Passenger Vessel Services Act:

Letter February 27, 2004:

The Honorable John McCain: 
Chairman: 
Committee on Commerce, Science, and Transportation: 
United States Senate:

Dear Mr. Chairman:

All of the passengers embarking[Footnote 1] on large cruise 
vessels[Footnote 2] from United States ports, about 6.5 million in 
2002, went aboard foreign cruise vessels. The three major carriers in 
the cruise industry, Carnival Cruise Lines, Royal Caribbean Cruises, 
Ltd., and Norwegian Cruise Line (NCL) are all foreign corporations 
operating foreign-built vessels, registered under foreign flags with 
predominantly foreign crews. Because trips from and between U.S. ports 
that do not include a stop at a foreign port are prohibited for 
foreign-flag vessels, these vessels must include at least one foreign 
port in their itineraries to serve consumers out of U.S. ports.

Wholly domestic itineraries are reserved for U.S. vessels by the 
Passenger Vessel Services Act (PVSA)[Footnote 3] and U.S. vessel 
documentation laws.[Footnote 4] For example, ferries providing 
transportation in U.S. ports and steamboats providing service along the 
Mississippi are U.S.-built vessels, registered under the U.S. 
flag.[Footnote 5] The PVSA penalizes foreign vessels that provide 
transportation between U.S. ports, at $300 per passenger transported. 
U.S. vessel documentation laws have established the requirements 
vessels must meet in order to operate under the U.S. flag and operate 
in domestic trade.[Footnote 6] These laws require that U.S.-flag 
vessels providing transportation between two U.S. points must be U.S.-
built, owned by U.S. citizens, and operated with U.S. crews. However, 
no large U.S.-flag, overnight, ocean-going cruise vessels are currently 
in operation, and no large passenger liners have been built in the 
United States since 1958. American Classic Voyages, which filed for 
bankruptcy in 2001, was the last company to operate large overnight 
cruise ships under the U.S. flag, offering itineraries among the 
Hawaiian Islands since the late 1970's.

NCL was recently granted a legislative exemption[Footnote 7] from the 
U.S.-built requirement of U.S. vessel documentation law to operate 
three foreign-built cruise ships in limited domestic itineraries under 
the U.S. flag.[Footnote 8] These ships must meet all other requirements 
to operate under the U.S. flag, including U.S. ownership requirements 
and operating with a U.S. crew. NCL has created a U.S. subsidiary, NCL 
America, to meet the U.S. ownership requirements to operate U.S.-flag 
vessels in domestic trade.[Footnote 9] Because the U.S.-built 
requirement is waived and the vessels will be operating under the U.S. 
flag, these ships will be considered qualified to operate in the 
domestic trade. These ships are therefore unaffected by the 
restrictions of the PVSA. However, the exemption limits the markets 
these ships may serve. NCL is required to keep the ships in "regular 
service" in Hawaii and is restricted from using the exempted vessels 
for transporting passengers to ports in the Caribbean, the Gulf of 
Mexico, or Alaska.[Footnote 10] NCL is scheduled to begin service in 
Hawaii in July 2004.

Cruise line officials and others have raised concerns over the 
exemption. The exemption potentially confers a market advantage to NCL, 
since other foreign-flag competitors are unable to offer the same 
itineraries as NCL. This exemption may also affect any future attempts 
to grow the U.S.-flag cruise vessel fleet. As you requested, this 
report discusses (1) the original intent of the PVSA and how rulings 
and decisions regarding the act relate to its original purposes; (2) 
how the exemption provided to NCL may affect the future implementation 
of the PVSA, U.S. vessel documentation laws, or the Jones Act;[Footnote 
11] (3) the potential effects of the exemption on competition in the 
passenger cruise industry and entry into the U.S. domestic cruise 
market under the U.S. flag, and the exemption's broader economic 
effects; and (4) the potential economic effects of granting other 
cruise lines similar exemptions.

To address the original intent of the PVSA, rulings and decisions 
regarding the act, and how the exemption might affect the future 
implementation of the PVSA or other cabotage laws, we reviewed and 
analyzed the PVSA, its amendments and legislative history, U.S. vessel 
documentation laws, the exemption given to NCL, and other related laws, 
regulations, administrative rulings, and judicial decisions. We also 
interviewed officials from the Maritime Administration (MARAD), Customs 
and Border Protection (CBP), and the U.S. Coast Guard responsible for 
implementing and interpreting these laws and regulations. To address 
the potential economic effects of the exemption on competition and 
entry, and the potential effects of additional exemptions, we reviewed 
existing studies examining competition and the economic impacts of the 
cruise industry; and we also interviewed officials from cruise lines, 
cruise industry associations, union organizations, and ports; 
representatives from the shipbuilding industry; and other stakeholders. 
In addition, we analyzed available data on capital and operating cost 
differentials between U.S.-flag and foreign-flag cruise vessels to 
determine the extent to which foreign-flag vessels have a cost 
advantage. Since most of these data are proprietary, we were unable to 
independently verify them because we have no authority to require 
access to the underlying data. However, we applied logical tests to the 
data and found no obvious errors of completion or accuracy. Along with 
our use of corroborating evidence, we believe that the data are 
sufficiently reliable for our use. We conducted our work from August 
2003 through February 2004 in accordance with generally accepted 
government auditing standards. Appendix I contains more information 
about our scope and methodology.

Results in Brief:

The original intent of the PVSA, enacted in 1886, was to protect the 
U.S. domestic maritime transportation industry from foreign 
competition; however, the PVSA does not apply to many of the cruises 
out of U.S. ports because they are international in nature, i.e., from 
a U.S. port to foreign destinations. Over time, several rulings and 
decisions interpreting the PVSA have expanded possible itineraries for 
foreign cruise vessels between U.S. ports. For example, a 1985 federal 
regulation allows foreign vessels to make round trips from a U.S. port 
and make stops at other U.S. ports along the itinerary, with passengers 
allowed to leave the ship and go ashore, so long as a foreign port is 
included in the itinerary; and passengers do not leave the trip at one 
of the intermediary ports. For example, foreign vessels may provide 
cruises originating in a U.S. port such as New York, stop in several 
U.S. ports along the eastern seaboard, make a stop in Bermuda or 
Canada, and return to New York without violating the PVSA. However, 
foreign vessels are still prevented from offering wholly domestic 
itineraries.

The exemption allowing NCL to operate foreign-built ships under the 
U.S. flag in wholly domestic itineraries will likely have little impact 
on how the PVSA, U.S. vessel documentation laws, or the Jones Act--
which restricts foreign vessels from transporting cargo between U.S. 
ports--are administered or interpreted. The exemption is specific to 
the vessels that NCL will be operating, and does not amend the PVSA, 
U.S. vessel documentation laws, or the Jones Act, for future 
implementation of these laws regarding other vessels. In the past, 
Congress has passed several exemptions from the PVSA, allowing foreign 
vessels to serve particular regions of the United States, and 
exceptions to the Jones Act are numerous. These types of specific 
changes to one law have historically not had any impact on other laws. 
For example, one exemption from the PVSA allows Canadian vessels to 
transport passengers between the New York ports of Alexandria Bay and 
Rochester, but foreign vessels are still prohibited from transporting 
cargo between these ports by the Jones Act.[Footnote 12]

The exemption gives NCL a monopoly on the wholly domestic interisland 
Hawaiian cruise market and provides consumers with the option for 
Hawaiian itineraries that have been unavailable since American Classic 
Voyages' bankruptcy. Foreign vessels operating in Hawaii are required 
to stop at a foreign port; and because of Hawaii's geographic 
isolation, these vessels need to sail several additional days, 
precluding them from offering itineraries that compare with NCL's. 
Regardless of its advantageous position, NCL will likely have little 
power to charge higher prices for its exclusive itineraries because of 
the competition it will face from cruise itineraries offered by other 
lines that still include Hawaii, similar types of cruises in other 
areas, and land-based vacations in Hawaii and elsewhere. In addition, 
because NCL is able to operate foreign-built ships in Hawaii--which are 
less expensive than ships that might be built in U.S. shipyards--the 
exemption could provide an obstacle for any potential U.S.-flag 
competitor to enter that market. However, independent of the exemption, 
there were and still are other significant obstacles for any potential 
U.S.-flag cruise vessel due to higher capital and operating costs, such 
as higher labor costs, associated with operating under the U.S. flag, 
as compared to existing foreign-flag cruise vessels running itineraries 
through a foreign port. NCL's exemption also provides some potential 
economic benefits, including jobs for the U.S. maritime sector, and tax 
revenue.

Granting additional exemptions easing entry into wholly domestic trades 
could lead to employment and tax benefits for ports and port cities, 
the merchant marine, and consumers; however, it is unclear how many 
cruise lines would choose to enter wholly domestic trades--even if they 
were permitted to operate foreign-built ships under the U.S. flag--
because of the higher operating costs associated with a U.S.-flag 
carrier operating in those trades, such as higher labor costs, and 
because of uncertain market conditions. Any entry that might occur 
could lead to some economic benefits, such as additional cruise 
itineraries for consumers, increased business in U.S. ports, and 
additional U.S. jobs in the maritime sector. However, most cruise ships 
can avoid the higher labor costs associated with following U.S. labor 
laws and requirements by operating under a foreign flag and including a 
nearby foreign port in their itinerary. Because of the close proximity 
of foreign ports to the coastal regions of the United States, there are 
few domestic itineraries that would likely be attractive to cruise 
lines. Hawaii's relative isolation and the long sailing times 
associated with including a foreign port make it a uniquely attractive 
market segment for an all-domestic itinerary; however, entrants with 
similar exemptions would have to compete with an established 
competitor, NCL, for limited capacity and unknown demand. Two cruise 
lines we spoke with said they would consider entry with similar 
exemptions on routes in Alaska or on short coastal routes. However, 
even these attractive markets have factors deterring U.S.-flag 
operations. For example, in Alaska, foreign vessels making trips out of 
Vancouver, Canada, may still have a considerable cost advantage. In 
addition, because similar exemptions to the U.S.-built requirement 
would allow vessel operators to build cruise ships abroad for domestic 
use, the potential for the U.S. shipbuilding industry to regain a share 
of the cruise vessel market would be negated.

The Departments of Homeland Security and Transportation commented on a 
draft of this report. Both agreed with the findings of the report and 
provided technical comments that have been incorporated where 
appropriate.

Background:

Over time, cruising has developed into a highly concentrated industry 
with three primary carriers. At the end of September 2003, two 
companies, Carnival Cruises Lines and Royal Caribbean Cruises, Ltd., 
controlled 86.4 percent of the market in North America, with NCL being 
the next largest cruise provider, holding a little less than 9 percent 
of the North American market. (See fig. 1.):

Figure 1: Percent of Passenger Embarkations/Disembarkations at North 
American Ports by Major Cruise Lines, July-September 2003:

[See PDF for image] 

Note: Other brands under Carnival included here are Princess Cruises, 
Holland America Line, and Cunard Cruise Line. Celebrity Cruises is 
included under Royal Caribbean. "Other Cruise Lines" includes Disney 
Cruise Line and Crystal Cruises.

[End of figure] 

These companies are foreign-owned and operate foreign-built vessels. 
Carnival Cruise Lines is incorporated in Panama with its North American 
ships flying the Bahamian or Panamanian flag. Royal Caribbean is a 
Liberian corporation, with ships flying the Bahamian or Norwegian flag. 
NCL is a subsidiary of Star Cruises, a Bermuda corporation 
headquartered in Hong Kong, with its ships in North America flying the 
Bahamian flag.

While there are several U.S. companies in the cruise industry, such as 
Disney and Radisson Seven Seas, these companies also elect to operate 
foreign-built vessels under a foreign flag in order to operate under 
the same capital and operating cost structure as their foreign 
competitors. Currently, there are no large U.S.-flag cruise ships in 
operation, and no large new cruise ships have been built in the United 
States since 1958. This use of foreign-built ships is largely due to 
the higher costs anticipated when building a ship in the United States, 
rather than in shipyards in Italy, Germany, and elsewhere that have 
the infrastructure, expertise, and economies of scale for this segment 
of the market.[Footnote 13]

Over the past decade, several bills have been introduced into the U.S. 
Congress with the objective of stimulating the development of a U.S.-
flag fleet and growth in the domestic cruise ship trade, the travel 
industry, and port cities, although none have been enacted. Generally, 
these bills would have allowed foreign ships either to operate in the 
domestic trade or to be reflagged with the U.S. flag under certain 
specified conditions. For example, the U.S. Cruise Vessel Act (S. 
127),[Footnote 14] introduced in 2001, would have allowed U.S.-owned, 
foreign-built cruise ships to enter the domestic market for a limited 
time if the operators agreed to build replacement vessels in the United 
States. This law was designed to allow new companies to enter the 
domestic market with existing vessels and immediately increase the size 
of the U.S. commercial fleet, thus providing new jobs for merchant 
mariners. Under the proposal, these foreign-built cruise ships would 
have been required to fully comply with all applicable U.S. laws, 
regulations, and tax obligations.

Many federal agencies oversee U.S. maritime policy. For example, in the 
Department of Transportation, the Maritime Administration's (MARAD) 
primary mission is to strengthen the U.S. maritime transportation 
system--including infrastructure, industry, and labor--to meet the 
economic and security needs of the nation. MARAD also seeks to ensure 
that the United States maintains adequate shipbuilding and repair 
services, efficient ports, and effective intermodal water and land 
transportation systems. MARAD programs are designed to promote the 
development and maintenance of an adequate, well-balanced, U.S. 
merchant marine. MARAD originally financed two of the ships that NCL 
will be operating in the Hawaiian Islands through MARAD's Title XI loan 
guarantee program under a project known as "Project America," that 
provided loan guarantees to help construct two new cruise vessels for 
American Classic Voyages in a U.S. shipyard for use in the Hawaiian 
Islands. Congress also granted American Classic Voyages a monopoly in 
the Hawaiian market for the life of the vessels. However, American 
Classic Voyages filed for bankruptcy in 2001, and the partially 
completed hull of one ship and parts for the other were purchased by 
NCL for $29 million.[Footnote 15] Subsequent to the purchase, NCL 
obtained the exemption, allowing them to complete these ships in a 
foreign shipyard and still operate them in Hawaii under the U.S. 
flag.[Footnote 16]

The Coast Guard and Customs and Border Protection (CBP), within the 
Department of Homeland Security, are generally responsible for 
administering and enforcing maritime laws and U.S.-flag requirements, 
including the PVSA and U.S. vessel documentation laws, as well as the 
Jones Act.[Footnote 17] The Coast Guard handles documentation 
requirements for U.S.-flag ships--such as determining whether vessels 
meet the U.S.-ownership and crewing requirements in order to operate 
under the U.S. flag--and U.S.-built requirements in order to operate in 
domestic trade. Through this process the Coast Guard provides 
endorsements to vessels defining the type of trade in which they are 
allowed to engage, e.g., foreign trade, domestic trade, or fishing. The 
Coast Guard also conducts quarterly inspections on all vessels 
embarking passengers at U.S. ports. CBP also has a role in 
administering the PVSA, such as publishing rulings on the legality of 
proposed itineraries. CBP also has civil enforcement authority under 
the PVSA, with the ability to levy penalties on any passenger vessel 
operators engaging in service in the domestic market without the 
relevant Coast Guard endorsements. The current penalty that can be 
levied against a ship operator for a violation of the PVSA is $300 per 
passenger.

The Federal Trade Commission (FTC) is responsible for ensuring that the 
nation's markets are vigorous, efficient, and free of restrictions that 
harm consumers. The FTC exists to protect consumers by enforcing 
federal consumer protection laws and conducting economic research and 
analysis to inform all levels of government. In this regard, FTC 
conducted an analysis of competition in the cruise market and the 
potential competitive affects of a merger between two of the largest 
cruise lines and issued its report in October 2002.[Footnote 18] After 
FTC's study of the cruise market, in April 2003, Carnival Corporation 
acquired P&O Princess Cruises. Prior to the acquisition, Carnival 
Corporation was already the world's largest cruise company; after the 
acquisition, Carnival Corporation became even larger, with 13 separate 
brands, 66 cruise ships and 17 more on order, and combined annual 
revenues of $6.9 billion.

Intent of PVSA Was to Protect U.S. Maritime Transportation Industry, 
but Rulings and Decisions Have Expanded Itineraries for Foreign Cruise 
Ships:

In 1886, Congress passed the PVSA to protect the U.S. domestic maritime 
transportation industry from foreign competition. To provide this 
protection, it penalizes foreign vessels that transport passengers 
solely between U.S. ports. Many cruises provided by foreign vessels are 
to international destinations and, therefore, are not affected by the 
PVSA; however, several rulings and decisions interpreting the PVSA have 
expanded possible itineraries for foreign cruise vessels between U.S. 
ports that were once restricted. For example, rulings and decisions 
have found circumstances where voyages between two U.S. ports by 
foreign vessels do not violate the PVSA when the primary purpose of the 
voyage is to visit foreign ports. In addition, rulings and decisions 
have allowed foreign vessels to visit several U.S. ports on an 
itinerary, so long as a foreign port is included and the vessel 
disembarks its passengers at the port of embarkation. In these 
circumstances, the voyages in question are not considered to be 
domestic transportation between two U.S. points.

Original Intent of the PVSA Was to Preserve and Protect the U.S. 
Domestic Maritime Industry:

The PVSA was originally designed to prevent U.S.-based vessels from 
facing strong competition in the domestic transportation market from 
maritime nations, such as Great Britain and Canada. Specifically, there 
was a concern about competition from Canadian vessels that were 
transporting passengers across the Great Lakes. The PVSA originally 
stated "no foreign vessel shall transport passengers between ports or 
places in the United States, either directly or by way of a foreign 
port, under a penalty of $2[Footnote 19] for each passenger so 
transported and landed." Congress originally thought that the $2 
penalty per passenger would discourage this practice.

Some industry associations and U.S. courts view the PVSA, U.S. vessel 
documentation laws, and the Jones Act, as serving other purposes, 
including providing a ready fleet in times of national defense, 
sustaining a U.S. merchant marine, and supporting the U.S. shipbuilding 
industry. U.S. courts have said that the PVSA and the Jones Act have 
helped to secure the national defense by maintaining, "a merchant 
marine of the best equipped and most suitable types of vessels 
sufficientto servein time of war or national emergency."[Footnote 20] 
Because vessels in the domestic trade must be U.S.-crewed, labor groups 
view the laws as protecting jobs for the U.S. merchant marine. 
According to data supplied by MARAD, over 1,000 passenger vessels are 
operating under the U.S. flag, employing U.S. seamen, including 
ferries, steamboats, and small cruise vessels; however, the last large 
U.S.-flag overnight cruise vessels ceased operations when American 
Classic Voyages declared bankruptcy in October of 2001. In addition, 
because the PVSA and the Jones Act protect the domestic maritime 
transportation market for U.S.-built ships, they also support U.S. 
shipyards. While several U.S. shipyards routinely build passenger 
vessels for U.S.-flag operators such as ferry operators and steamship 
operators, U.S. shipyards have not built large overnight, ocean-going 
cruise ships, and the last large passenger liner built in the United 
States was completed in 1958.

Legal and Administrative Rulings and Decisions Have Expanded 
Itineraries Foreign Vessels Can Operate:

Several administrative rulings and judicial decisions have identified 
limited exceptions to the PVSA that allow certain vessel operations 
between U.S. ports by foreign passenger vessels. One significant 
decision--which has allowed passenger travel between U.S. ports by 
foreign vessels as long as a distant foreign port is included--was a 
1910 Attorney General opinion. This opinion states that an around-the-
world cruise that started in New York and touched numerous foreign 
destinations and ended in San Francisco did not violate the PVSA 
because the voyage could not be considered domestic trade.[Footnote 21] 
The Attorney General made this determination on the supposition that 
the purpose of the trip was not to travel from one U.S. port (New York) 
to another (San Francisco), but to travel to different locations around 
the world. In 1940, a federal court also found that the transportation 
of passengers on a foreign vessel from New York to Philadelphia that 
stopped in a foreign port was not "detrimental to the coast wise 
monopoly sought to be assured to U.S. vessels."[Footnote 22] The court 
said this was not a violation of the PVSA because the vessel, which was 
originally scheduled to return to New York, was forced to dock at the 
Philadelphia port because it was carrying perishable cargo, requiring 
passengers to disembark in Philadelphia. The court found that it was 
not the purpose of the trip to transport passengers from New York to 
Philadelphia.

Two regulations and rulings by CBP[Footnote 23] have also contributed 
to expansion of the number and variety of itineraries in which foreign-
flag vessels can engage, from and between U.S. ports. First, based on 
the 1910 Attorney General Opinion, CBP, in its regulations, interprets 
the PVSA to allow a foreign vessel to embark passengers at one U.S. 
port and disembark passengers at a different U.S. port, so long as the 
vessel makes a port of call at what the regulations define as a 
"distant foreign port,"[Footnote 24] such as Aruba or Curacao. Second, 
a 1985 CBP regulation allows round-trip cruises from a U.S. port, that 
touch on a "nearby foreign port"--defined by the regulation as such 
places as Canada, Mexico, or Bermuda--to visit other U.S. ports and 
allow passengers to go ashore temporarily, as long as they return to 
the ship.[Footnote 25] For example, foreign vessels can embark 
passengers in New York, make a quick stop in Canada or Bermuda, then 
cruise to several other U.S. ports and return to New York without 
violating the PVSA. CBP's decision to allow these types of itineraries 
was based on the supposition that the PVSA put some U.S. ports at a 
disadvantage in competition for tourist business. In its response to 
opposing comments, CBP stated that it is "of paramount importance in 
this area to consider the primary object of passengers in taking a 
voyage," citing both the 1910 Attorney General Opinion and the 1940 
court case as the authority for doing so. Table 1 summarizes these key 
rulings and decisions regarding the PVSA.

Table 1: Key Rulings and Decisions that Have Changed the Types of 
Itineraries Foreign Vessels Can Operate Out of U.S. Ports:

28 Op. Attorney Gen. 204; 1910; Allowed passenger travel between U.S. 
ports by a foreign vessel. The circumstance was an around-the-world 
cruise that started in New York and ended in San Francisco. Because it 
was deemed that the ship was not engaged in domestic trade, it was not 
considered a violation of the PVSA.

T.D. 55147(19) of June 3, 1960 (95 Treasury Decisions 297); 1960; 
Allowed passengers traveling on foreign vessels to temporarily 
disembark at ports in the U.S. provided that the passengers and the 
vessel do not remain in port beyond 24 hours (the "24-hour rule").

T.D. 68-285, 33 Fed. Reg. 16558, November 14, 1968; 1968; Introduction 
of the distant foreign port exception. A foreign-flag cruise ship may 
transport passengers between two U.S. ports only if a call is made at a 
distant foreign port. See 19 C.F.R. 4.80a(b)(3).

T.D. 85-109, 50 Fed. Reg. 26981, July 1, 1985; 1985; This decision 
allows round trip cruises from a U.S. port, that touch on a nearby 
foreign port, to visit other U.S. ports and allow passengers to go 
ashore, thus revoking the "24-hour rule." See 19 CFR 4.80a(b)(2). 
"Nearby foreign ports" include all foreign ports in North America, 
Central America, Bermuda, the West Indies (except Aruba, Bonaire, and 
Curacao) and the U.S. Virgin Islands. See 19 C.F.R. 4.80a(a)(2).

Source: GAO.

[End of table]

Interpretation and Enforcement of the Exemption Will Likely Have Little 
Impact on the Implementation of the PVSA and Other Related Laws:

The exemption granted to NCL to be able to operate in Hawaii will 
likely have little impact on how the PVSA, U.S. vessel documentation 
laws, or the Jones Act are implemented by CBP and the Coast Guard. 
NCL's exemption is from the U.S.-built requirement of U.S. vessel 
documentation laws, which allows NCL to operate foreign-built ships 
under the U.S. flag in limited domestic itineraries. Therefore, the 
PVSA will not apply to these vessels, as the PVSA only penalizes 
foreign vessels carrying passengers between U.S. ports. In addition, 
the Coast Guard deals with vessels on a case-by-case basis; and this 
exemption is specific to NCL's three vessels and cannot be applied to 
any other vessels in any other trades. Furthermore, although Congress 
has enacted several specific exemptions to the PVSA, allowing foreign 
vessels to serve particular regions of the United States; no previous 
exemption has had an impact on the implementation of any other related 
laws. Exemptions have also been allowed under the Jones Act with no 
corresponding impact on the PVSA.

The NCL Exemption Did Not Amend the PVSA but Is an Exemption from the 
U.S.-Built Requirement of Vessel Documentation Laws:

In 2003, Congress effectively gave NCL an exemption from U.S. vessel 
documentation laws in order to operate certain foreign-built passenger 
vessels in a limited domestic area. Specifically, NCL is allowed to 
operate the two Project America vessels completed in a foreign shipyard 
and to reflag one additional foreign-built ship under the U.S. flag, in 
"regular service" in Hawaii. These ships are not required to meet the 
U.S.-built requirement in order to provide service in these limited 
domestic itineraries and are considered qualified for this purpose; 
therefore, they are not subject to penalties under the PVSA, since the 
PVSA only applies to foreign vessels carrying passengers between U.S. 
ports.

The exemption requires that NCL operate these ships in regular service, 
as defined in the exemption as the "primary service in which the ship 
is engaged on an annual basis," between the islands of Hawaii and 
specifically prohibits NCL from transporting paying passengers to ports 
in Alaska, the Gulf of Mexico, or the Caribbean. There may be some 
ambiguity on what NCL's obligations are for providing regular service 
to the Hawaiian Islands, as the exemption was silent on service to the 
East and West coasts, and therefore NCL is not prohibited by the 
exemption from providing some service to these destinations, as long as 
the regular service requirement is met.[Footnote 26] CBP officials 
declined to speculate on how the regular service provision might be 
enforced if there is a challenge to the itineraries that NCL operates. 
Several maritime lawyers we spoke with suggested this requirement might 
be interpreted to mean that at least 51 percent of the individual 
vessel's operations must be conducted in Hawaii. NCL officials told us, 
however, that their current plans are to use these vessels in the 
Hawaiian Islands year round.[Footnote 27]

The NCL Exemption Should Not Affect Future Implementation of the PVSA, 
U.S. Vessel Documentation Laws, or the Jones Act:

All of the allowances and restrictions of the exemption are specific to 
the two Project America vessels and the additional vessel to be 
reflagged by NCL and do not amend the PVSA or U.S. vessel documentation 
laws. Coast Guard officials stated that they have already confirmed 
that the vessel NCL has under construction, and the second vessel NCL 
intends to construct abroad, are the vessels referred to in the 
exemption; and NCL has already identified the vessel to be reflagged; 
therefore, the allowances of the exemption apply only to the three 
vessels. Coast Guard and CBP rulings regarding these laws are made on a 
case-by-case basis; and because the exemption is unique to the 
identified vessels, it should create no precedent on the implementation 
of these laws regarding other vessels. NCL's exemption does not allow 
for further exemptions for other foreign cruise lines to be able to 
operate foreign-built vessels in Hawaii or anywhere else in the 
domestic trade. Additional legislation would be required to allow for 
any further domestic operations by foreign-built vessels.

In addition, this exemption will likely not have any legal impact on 
the Jones Act and its restrictions on shipping cargo between U.S. 
points. Although interest groups and labor organizations link the PVSA 
and the Jones Act philosophically, as being parallel laws for 
passengers and cargo, respectively, numerous amendments and changes 
have been made to each law that have not affected the other. For 
example, in 1920, the PVSA was modified to allow permits to be issued 
for the transport of passengers by foreign vessels to or from Hawaii, 
which lasted for 2 years.[Footnote 28] Furthermore, an exception to the 
PVSA was made in 1938 to allow for the transport of passengers by 
Canadian vessels between the New York ports of Rochester and Alexandria 
Bay.[Footnote 29] More recently, Congress passed the Puerto Rico 
Passenger Ship Act, which allows vessels not qualified to engage in the 
domestic trade to carry passengers between U.S. ports and Puerto Rico 
and between Puerto Rico ports.[Footnote 30] None of these exemptions 
has had an impact on transporting cargo, which would fall under the 
jurisdiction of the Jones Act, or on justifying the transportation of 
passengers outside the specific scope of the exemption. Furthermore, 
the rulings and decisions discussed earlier that have allowed foreign-
flag vessels to transport passengers from and between U.S. ports, if a 
foreign port is visited, do not extend to freight transportation. For 
example, a foreign ship can pick up passengers in New York, travel to 
Paris and pick up passengers there, and return to Boston to disembark 
the passengers without violating the PVSA; however, the same ship 
cannot take freight cargo from New York, pick up additional cargo in 
Paris, and drop off the cargo in Boston without violating the Jones 
Act.

Exemption Allows NCL to Offer Exclusive Domestic Itineraries and 
Creates an Additional Barrier to U.S.-Flag Entry, but It Could Generate 
Economic Benefits:

The exemption allows NCL to offer exclusive all-domestic itineraries in 
Hawaii because no other large U.S.-flag passenger ships currently offer 
such service, and no other foreign-built ships can offer all-domestic 
itineraries. However, despite this advantage, NCL will likely have 
limited ability to exert pricing power on its exclusive itinerary 
because it will still have to compete with other vacation options. In 
addition, NCL's exclusive right to operate foreign-built ships in U.S. 
domestic trade creates an additional obstacle for any large cruise 
lines attempting to compete in the domestic market under the U.S. flag. 
NCL is able to complete building the ships abroad at a lower cost than 
they could be completed in the United States, while any would-be 
entrant into the domestic market would have to build a ship in the 
United States and would therefore face a higher capital cost structure 
than NCL. However, prior to the exemption there were already 
substantial barriers to U.S.-flag entrants into domestic trade due not 
only to higher capital costs, but also to higher operating costs 
associated with the U.S. flag. Potential economic benefits from the 
exemption include expanded choice of cruise itineraries for consumers, 
enhanced sustainability of competition in the industry, employment 
growth, and generation of tax revenues. These benefits are contingent 
on NCL's continued U.S.-flag operations, which analysts speculate might 
not be able to compete successfully with lower-cost, foreign-flag 
operations.

Exemption Gives NCL Exclusive Hawaiian Itineraries but Confers Limited 
Pricing Power:

As previously mentioned, the exemption allows NCL the exclusive right 
to operate certain foreign-built, U.S.-flag ships on wholly domestic 
Hawaiian itineraries. No other large U.S.-flag passenger vessels 
currently operate in domestic trade; and foreign-flag, foreign-crewed 
cruise ships cannot offer wholly domestic itineraries because of the 
PVSA. Therefore, although the exemption does not explicitly exclude any 
carriers from offering these itineraries, no other carriers are able to 
offer the same itineraries. In addition, prior to obtaining the 
exemption and prior to the bankruptcy of American Classic Voyages, NCL 
already had an exclusive itinerary stopping at Fanning Island, in the 
Republic of Kiribati, the closest foreign port to Hawaii. NCL's 
agreement with Fanning Island for exclusive access,[Footnote 31] which 
lasts for a limited period, already gave NCL the ability to offer 7-day 
Hawaiian cruises, not feasible for other cruise lines that must include 
a farther foreign port, like Vancouver, Canada, or Ensenada, Mexico, 
which are 4 to 6 days sailing time to Hawaii. Figure 2 compares NCL's 
exclusive 7-day domestic itinerary, scheduled to be available in the 
summer of 2004, with Hawaiian itineraries of foreign-flag vessels.

Figure 2: NCL's Exclusive Hawaiian Itinerary Compared with Hawaiian 
Itineraries of Foreign-Flag Vessels:

[See PDF for image] 

[End of figure] 

Because NCL has the ability to offer unique Hawaiian Island itineraries 
without including foreign ports, NCL's interisland cruises on its 
exempted ships will allow cruisers to spend more daytime hours in ports 
than other existing Hawaiian Island cruises. NCL's proposed itinerary 
for wholly domestic Hawaiian cruises includes 59 daytime hours in port; 
however, NCL's current 7-day cruise, which includes a stop at Fanning 
Island, offers only 28 daytime hours in ports.[Footnote 32] In general, 
the greater number of hours in port is seen as more appealing to 
consumers.

While NCL can operate exclusive itineraries, the exemption likely 
conveys only limited pricing power to NCL, even in the absence of 
another cruise line offering identical itineraries. According to a 
comprehensive cruise market analysis conducted by the FTC in 2002, a 
single cruise itinerary does not constitute a market; rather, 
competitive conditions should be assessed in the context of a market 
that includes all vacation options or, minimally, all other cruise 
options. Therefore, although no cruise lines will compete directly on 
the domestic itineraries, NCL will continue to face competition from 
comparable vacation options, such as land vacations and similar cruises 
in different geographic areas. NCL will also compete with foreign-flag 
vessels that operate with lower costs on other itineraries that include 
Hawaii. Those foreign-flag vessels could offer a lower price than NCL, 
which would make any theoretical attempt at a price increase by NCL 
unsustainable.

One of the reasons for FTC's broad market definition is its finding 
that cruise passengers are highly sensitive to price changes. In other 
words, an attempt by a cruise line to raise prices above competitive 
levels likely results in significantly fewer bookings. NCL anecdotally 
confirmed this finding, citing a decline in its bookings following an 
attempt to raise prices by about 3 to 4 percent on its 2003 Norwegian 
Star, 7-day Hawaiian-Fanning Island itineraries--which had no 
competition from any other cruise line on the same itinerary--after 
showing strong sales during 2002. From the outset, over a year from 
sailing dates, sales were slower than in 2002 for the same cruise, and 
NCL was forced to reduce its prices to fill the ship, resulting in 
approximately 8 percent lower revenue yields by the sailing date on the 
2003 cruises compared with the 2002 cruises.[Footnote 33]

Exemption Adds to Existing Barriers for Potential U.S.-Flag Market 
Entry:

NCL has a large capital cost advantage over potential competitors, who 
might attempt to build ships entirely in the United States for 
operation under the U.S. flag because the exemption permits NCL to 
complete construction of its U.S.-flag ships in a foreign shipyard at a 
lower cost than a comparable ship built in a U.S. shipyard. Unless they 
also receive an exemption from the U.S.-built requirement, cruise lines 
entering the domestic market would have to build their ships in U.S. 
shipyards or refurbish an existing U.S. built vessel overseas.[Footnote 
34] Such building costs, based on estimates from Project America, 
compared with contract costs for foreign-built ships, would likely be 
much higher. For example, we compared the contract cost to construct 
the first Project America ship with the total projected cost for NCL's 
Pride of America, built from the partially U.S.-built hull of the first 
Project America ship now being completed overseas. The Project America 
contract cost was between 35 and 54 percent, or $140 to $190 million, 
higher than total cost projections to complete the Pride of America in 
a German shipyard, as shown in figure 3.[Footnote 35] The disparity is 
likely even larger because the actual costs of the Project America 
ships were expected to exceed the contract costs.[Footnote 36] 
Incorporating adjustments to the Project America contract costs, the 
cost differential ranges from 71 to 95 percent higher, or $284 to $334 
million higher.

Figure 3: Comparison of Estimated Construction Costs to Complete 
Project America Vessel in a U.S. Shipyard and a Foreign Shipyard:

[See PDF for image] 

[End of figure] 

Cruise officials and shipbuilders state that U.S. construction costs 
are higher than foreign construction costs because U.S. shipyards have 
not developed technical capability, a reliable supply chain, and 
economies of scale to build cruise ships competitively. According to 
one shipbuilder we spoke with, while U.S. shipyards are experienced at 
building complex cargo and military vessels, cruise ships require 
wholly different construction techniques; and U.S. shipyards have not 
developed certain technical capabilities. One official asserted that 
U.S. shipyards might become competitive if they partner with foreign 
shipyards to learn the latest technology. In addition, officials from 
the American Shipbuilders Association acknowledge that, while U.S. 
shipyards currently have the ability to build the hull and 
superstructure of a cruise ship, unlike European shipbuilders, U.S. 
shipbuilders do not have established and reliable supply chains for 
certain materials and other structures on a cruiseship, which are 
critical to efficient and timely completion of cruiseships.[Footnote 
37] These officials said that they expect that the capital cost 
differential would be negligible if the U.S. shipbuilding industry grew 
and realized economies of scale; however, such growth seems unlikely 
given the current lack of demand for U.S.-built cruise ships and 
concerns about technical capabilities and undeveloped supply chains. 
Moreover, ships must be built in order for economies of scale to be 
realized, so the first ships that would have to be built for any would-
be U.S.-flag operation will likely have higher capital costs than NCL's 
vessels.

While the exemption affords NCL a capital cost advantage over would-be 
entrants, acquiring financing for U.S. ship construction may not be any 
more difficult because of the exemption. In theory, financiers would be 
less willing to provide financing for capital costs to an operator who 
will compete in a market with an existing competitor who has a lower 
capital cost structure. However, industry financial analysts we spoke 
with said that acquiring financing was equally difficult prior to the 
exemption because of the presence of competing lower-cost, foreign-flag 
cruise lines and would not necessarily be more difficult once NCL 
begins providing U.S.-flag service in the Hawaiian Islands. 
Furthermore, an official from the Office of Ship Financing within MARAD 
said that, while theoretically the NCL presence in the U.S. domestic 
market could affect decisions about applications for new vessels, they 
have not seen and do not expect to see any impact from the NCL 
exemption. They said that they receive so few applications for large 
cruise ships that they are unable to determine if the number of 
applications has declined because of the NCL exemption. Furthermore, no 
applications for financing of large cruise ships have been denied or 
withdrawn because of the NCL exemption or NCL's expected presence in 
the U.S. domestic market.

Prior to the NCL exemption, cruises offered by lower cost foreign-flag 
vessels already limited the likelihood of cruise lines entering the 
domestic market. With the possible exception of Hawaii, the close 
proximity of foreign ports-of-call in Canada, Mexico, Bermuda, and the 
Caribbean allows foreign-flag ships to serve U.S. cruise demand without 
meeting the requirements of operating under the U.S. flag and adding 
significant time or fuel costs to the voyages. Figure 4 shows examples 
of cruise itineraries between U.S. ports that foreign-flag vessels can 
offer. The availability of foreign-flag service on U.S. itineraries 
that include a foreign port-of-call reduces the likelihood that 
potential U.S.-flag carriers can offer competitive prices because U.S.-
flag ships have higher capital and operating costs than foreign-flag 
ships. In addition to higher ship construction costs discussed earlier, 
according to an industry trade organization, wage costs on U.S.-flag 
ships could range between 30 and 100 percent higher than wage costs for 
a similar foreign-flag ship due to compliance with U.S. labor laws that 
require minimum wage, overtime compensation, payment of social security 
tax, and protection and indemnity coverage, which do not apply to 
foreign-flag vessels. According to NCL officials, wage costs for their 
U.S.-flag operations will be 100 to 150 percent higher than wage costs 
for their foreign-flag operations.[Footnote 38] Cruise officials also 
stated that due to regulations pertaining to overtime and labor 
requirements for U.S. seafarers,[Footnote 39] they would likely have to 
hire more U.S. workers at higher wages to serve the same number of 
passengers. Finally, U.S.-flag ships are liable for corporate income 
taxes, while foreign-flag ships typically incorporate in countries 
where their income is tax-exempt, resulting in an additional cost 
advantage for foreign vessels. See appendix II for additional 
information on laws that apply to U.S.-flag ships.

Figure 4: Examples of Itineraries between U.S. Ports for Foreign-Flag 
Vessels that Utilize a Nearby Foreign Port:

[See PDF for image] 

[End of figure] 

Potential Economic Benefits May Result from the Exemption:

Several economic benefits might be generated as a result of NCL's 
exemption. These benefits include expanded consumer choice, continued 
competition in the industry, employment growth and generation of tax 
revenues.

Exemption Generates New Cruise Itineraries for Consumers:

The exemption expands consumer choice by allowing NCL to offer 
previously unavailable cruise itineraries. Hawaiian interisland 
cruises without a foreign port-of-call have not been available to 
potential cruisers since 2001, when American Classic Voyages filed for 
bankruptcy. As previously noted, following the exemption, NCL will 
operate exclusive interisland Hawaiian cruises on certain U.S.-flag 
ships. These new interisland cruises will be provided by cruise ships 
offering many of the amenities previously available only on foreign-
flag ships.

Exemption Could Improve NCL's Competitive Position in the Highly 
Concentrated Cruise Industry:

The exemption could improve NCL's position relative to its competitors 
in the highly concentrated North American[Footnote 40] cruise market. 
According to MARAD data from July to September of 2003, Carnival and 
Royal Caribbean control a combined 86.4 percent of the North American 
cruise market, while NCL is the third largest firm with 8.8 percent of 
the market.[Footnote 41] NCL's ability to offer unique domestic 
itineraries, primarily in Hawaii, affords NCL an opportunity to further 
differentiate itself from its primary competitors. NCL's 
differentiation is important because it provides travel agents with an 
incentive to sell NCL's products. Officials from the American Society 
of Travel Agents and cruise lines agree that recommendations by travel 
agents play a significant role in determining which cruises customers 
choose to buy. While the share of airline and land vacation purchases 
made through travel agents has declined in recent years, travel agents 
still sell approximately 90 percent of all cruises. If NCL only offered 
the same itineraries as Carnival and Royal Caribbean, travel agents may 
have an incentive to discontinue sales of NCL products, because travel 
agents are paid commissions that often increase with the number of 
cruises sold on a particular cruise line. Without travel agents 
endorsing its products, NCL could have difficulty competing with 
Carnival and Royal Caribbean. However, the unique Hawaiian cruise 
products that NCL can now offer help NCL to continue to be the third 
major firm in the market. If there are only two major players in a 
market, there is a much higher probability of the two firms 
coordinating higher prices, thus hurting consumers. The recent 
acquisition of P&O Princess Cruises by Carnival Corporation resulted in 
a reduction from four major competitors to three. The FTC's decision to 
not challenge the merger stated that a reduction from three to two 
major competitors would likely be more problematic for 
consumers.[Footnote 42]

Other Potential Effects of the Exemption Include Employment Growth and 
Tax Revenues:

NCL's operations resulting from the exemption will create jobs on the 
exempted ships and where it offers itineraries, and they will likely 
increase tax revenue. According to NCL's analysis of the Hawaiian 
market, its expanded operations will generate about 2,400 full-time 
shipboard jobs and additional shoreside employment in Hawaii. This 
estimate seems reasonable, because NCL must hire at least 800 U.S. 
employees per ship for three ships, as well as additional land-based 
employees. Some of these jobs might be transfers of jobs from other 
states to Hawaii and, thus, would not represent new benefits to the 
U.S. economy. An NCL consultant estimates total annual tax revenues 
from the exemption operations to be $126.5 million, including employee 
income taxes and social security taxes, airfare taxes, and customs, 
immigration and ship passenger taxes.[Footnote 43] In addition, NCL's 
U.S. subsidiary, NCL America--which will operate the exempted ships in 
order to meet the U.S.-ownership requirements needed to register the 
vessels under the U.S. flag[Footnote 44]--will be liable for corporate 
income taxes on any profits it earns; and it will be subject to the 
payment of employer payroll taxes in Hawaii.

NCL estimates passenger expenditures will bring an additional $355 
million annually to the regions where NCL operates. This value assumes 
that all vessels operate at full capacity. These passenger expenditures 
represent a net benefit to the U.S. economy only when these passengers 
choose the domestic NCL cruise over a foreign vacation or other foreign 
spending. To the extent that the passengers' alternatives were a 
different U.S. vacation or other discretionary spending in the United 
States, then this expenditure figure only represents a transfer of 
revenues to the region where the cruise is operating from other U.S. 
regions.

Realization of Economic Benefits Is Largely Contingent on NCL's 
Continued U.S.-Flag Operations:

Most of the benefits described above will materialize only if NCL 
continues to operate cruise ships under the U.S. flag. However, as 
noted above, industry analysts question NCL's ability to operate the 
interisland Hawaiian cruises profitably. Analysts speculate that these 
cruises might not be profitable since they will still have to compete 
with foreign-flag cruises with significantly lower operating costs than 
NCL, though on different itineraries. Analysts also expressed concern 
that NCL is deploying too much capacity for the uncertain Hawaiian 
market demand. According to Cruise Lines International Association, 
Hawaiian cruises generated only about 3 percent of the business in the 
North American cruise market in 2002. NCL plans to grow the Hawaiian 
market by 23 percent each year for the next 5 years, resulting in 
Hawaiian destinations comprising 6 percent of the North American cruise 
market by 2007. This plan is quite aggressive, considering that 
industry trade groups expect the cruise market in general to grow 10 
percent each year. If NCL is not profitable operating the exempted 
vessels in the United States, analysts speculate that NCL will seek 
government approval to reflag the vessels and operate them in foreign 
trades. NCL could continue to serve the Hawaiian market with the 
reflagged vessels, if the itinerary included a stop at Fanning Island 
or another foreign port. In this case, the exclusive interisland cruise 
options for consumers would no longer be offered, jobs for U.S. crew 
and the associated tax revenue would be lost, and NCL would not be 
liable for U.S. corporate income tax. In addition, if NCL is unable to 
operate successfully under the U.S. flag in Hawaii, possibly the most 
desirable market protected under the PVSA, there will be further 
disincentive for any other cruise line to attempt to operate under the 
U.S. flag, thus limiting the potential development of the U.S.-flag 
cruise vessel fleet.

Unclear if Granting Other Cruise Lines Similar Exemptions Would Lead to 
Entry by Other Cruise Lines and Resulting Economic Benefits:

Granting similar exemption to ease entry into the domestic trade could 
lead to additional benefits for ports and port cities, the merchant 
marine and consumers; however, it is unclear how many cruise lines 
would choose to enter if they were permitted to operate foreign-built 
ships under the U.S. flag. For certain unique itineraries, where 
foreign vessels cannot easily operate with a nearby foreign port, such 
as in Hawaii, one-way cruises in Alaska, or short 3 to 4-day 
itineraries on the east or west coasts, some potential exists for U.S.-
flag ships to enter the market. However, there are substantial 
disincentives to operating under the U.S. flag due to (1) operating 
cost differentials between the would-be U.S.-flag entrant and foreign-
flag ships that still offer somewhat similar itineraries, but include a 
foreign port, (2) labor conditions and ship requirements, and (3) 
uncertain market conditions. Moreover, entry from additional ships 
exempt from the U.S.-built requirement could have a negative impact on 
the U.S. shipbuilding industry and small U.S.-flag cruise ships, though 
these impacts are likely to be minimal if the U.S.-built requirement is 
waived only for large cruise ships.

Additional Benefits Could Result from More Entry into the Domestic 
Markets:

Ports and port cities, the merchant marine, and consumers could benefit 
if additional exemptions to the U.S.-built requirement led to new 
entrants providing U.S.-flag cruise service. Additional domestic 
cruises could create more activity for the ports and result in more 
jobs and increased spending in port cities. U.S.-flag ships also would 
employ U.S. seamen, adding to the base of trained maritime employees 
who could serve the country in a time of emergency. Moreover, potential 
entrants could offer more cruise options and new itineraries to 
consumers. For example, a 1997 study conducted for the California State 
Tourism Board found that with similar exemptions to operate foreign-
built vessels under the U.S. flag, cruise lines could offer cruise 
itineraries on the California coast to smaller ports, such as Santa 
Barbara and Monterey, resulting in more tourist dollars in those 
areas.[Footnote 45] However, if new domestic cruises primarily replaced 
existing foreign-flag service, with minor itinerary changes caused by 
eliminating foreign ports-of-call, the benefits to ports, port cities 
and consumers might be minimal. On the east coast, for example, 
Carnival currently offers cruises on a foreign-flag ship--round-trip 
from New York including stops in Boston, Massachusetts; Portland, 
Maine; and Canada. If U.S.-flag vessels replaced the foreign-flag 
vessels offering east coast cruises and had itineraries running from 
New York to Portland without the stop in Canada--but including the same 
ports-of-call as the former Carnival cruise--ports, port cities and 
consumers would experience very little additional benefit from these 
cruises. Additional cruises to U.S. ports that foreign-flag vessels 
continue to serve and cruises to different U.S. ports than foreign-flag 
vessels currently serve are the only source of benefits to ports, port 
cities, and consumers.

Even with Exemptions from the U.S.-Built Requirement, Other Substantial 
Barriers to Entry Might Limit the Number of Potential Entrants into the 
Domestic Cruising Market:

While some potential benefits exist, industry officials said that most 
cruise lines are not likely to enter the domestic market, even if they 
could build ships outside of the United States because of operating 
cost differentials, different ship standards, and uncertain market 
conditions. As previously noted, U.S.-flag operating costs are 
significantly higher than foreign-flag operating costs. The wage 
differential is so great that an official from one cruise line stated 
that the cruise line would prefer to employ foreign workers for any 
non-U.S. domestic itineraries offered on a U.S.-flag ship. The official 
noted that it would be difficult to hire a separate seasonal U.S. crew 
to work on a U.S.-flag ship, which may operate domestic itineraries 
only at certain times of the year. U.S.-flag cruise ships also must 
meet U.S. building standards, which sometimes conflict with 
international standards. For example, an industry official cited 
different wiring configurations required on U.S. ships. One cruise line 
official stated that the cruise line he represents would not specially 
build a ship to comply with U.S. standards only to be able to operate 
the ship in domestic trade, given the existing operating cost 
differentials. Furthermore, cruise officials and industry analysts 
question whether U.S.-flag operations can be profitable since lower 
cost foreign-flag ships can serve similar itineraries and demand is 
unknown for domestic destinations.

Despite all the expected difficulties and disadvantages, 
representatives of two cruise lines said they would explore entry into 
some domestic markets if they were given exemption from the U.S.-built 
requirement. According to these representatives, they would consider 
testing the Alaskan and Hawaiian markets, and short coastal cruises 
because of their unique attributes. In Alaska, one-way cruises are 
popular and currently cannot be offered from a U.S. port, such as 
Seattle, due to the PVSA. In Hawaii, the nearest foreign port adds at 
least 2 days of sailing time to the itinerary. Short coastal cruises on 
the east or west coasts are attractive because including a foreign port 
would lengthen the cruise.

However, even these attractive markets have factors deterring U.S.-flag 
operations. Foreign-flag ships currently serve the one-way Alaskan 
trade embarking in Vancouver. These operators would still have a 
competitive advantage over U.S.-flag operators granted an exemption 
from the U.S.-built requirement and operating out of Seattle. While 
consumers might face an added land transportation cost to depart from 
Vancouver rather than Seattle, foreign-flag operators would continue to 
have a significant operating cost advantage over U.S.-flag ships and 
thus might offer lower prices. The price advantage of the foreign-flag 
ships is likely to offset the cost disadvantage to consumers of 
departing from Vancouver. Moreover, according to one industry analyst, 
the Port of Vancouver might respond to potential competition from the 
Port of Seattle by lowering its port fees to retain firms operating 
less costly foreign-flag ships.

Hawaii's long distance from most foreign ports creates an especially 
attractive opportunity for entry under the U.S.-flag, but potential 
competitors would have to compete with an established operator, NCL, 
for unknown demand. In addition to NCL's ability to offer wholly 
domestic cruises in Hawaii with the exemption, it has had an exclusive 
arrangement for its ships to stop at Fanning Island, the closest 
foreign port to Hawaii. With this exclusive agreement NCL has been able 
to garner the largest market share of the Hawaiian trade. NCL intends 
to run three U.S.-flag ships and one foreign-flag ship regularly in 
Hawaiian itineraries. As noted previously, some industry analysts do 
not think consumers in the Hawaiian market can support NCL's capacity 
increase; therefore, success might be difficult for any additional 
companies entering the market. In fact, one cruise line we spoke with 
is uncertain about continued operations, given the sales performance of 
its initial entry into the Hawaiian market.

Finally, while short 3-or 4-day cruises along the east or west coasts 
of the United States may hold some attraction for would-be entrants, 
these cruises could still face lower cost competition from foreign 
vessels offering similar itineraries with a foreign port included. In 
addition, while there are some smaller U.S. passenger vessels offering 
short coastal cruises, the potential demand for these cruises may not 
be substantial enough to sustain large cruise ships.

Similar Exemptions Could Negatively Affect U.S. Shipbuilding Industry 
and Small Passenger Vessels:

Granting other cruise lines exemptions to the U.S.-built requirement 
without strict tonnage requirements could negatively affect the U.S. 
shipbuilding industry. If exemptions were granted only for large, 
overnight cruise vessels, the U.S. shipbuilding industry would face 
little, if any, impact given that no such ship has been completed in 
the United States since 1958. However, if the exemptions were broader, 
including small passenger ships, U.S.-flag operators of small cruise 
ships might purchase less expensive ships from foreign shipyards, 
exposing U.S. shipyards to foreign competition that is not subject to 
the same laws, regulations, and taxes.

Another potential adverse effect of similar exemptions is the shift of 
passengers away from small U.S.-flag cruise lines to domestic cruises 
on larger U.S.-flag ships built in foreign shipyards. Small U.S.-flag 
vessels are built in the United States and operate under all U.S. laws. 
A major shift in their customer base could disrupt this segment of the 
cruise industry and negatively affect the shipyards that build these 
small vessels. However, industry analysts suggest that there is a very 
small likelihood that similar exemptions would affect the small cruise 
vessels because they serve different segments of the market. Small 
vessel operators view their products as boutique cruises, as compared 
to mass-market cruises on large vessels. These boutique cruises are 
often shorter voyages, including calls in small ports that large cruise 
ships cannot access due to their size.

Agency Comments and Our Evaluation:

We provided the Departments of Homeland Security and Transportation 
with draft copies of this report for their review and comment. Both 
departments generally agreed with the findings in the report and 
provided technical clarifications, which we incorporated as 
appropriate.

We are sending copies of this report to the appropriate congressional 
committees and to the Secretaries and other appropriate officials of 
the Departments of Homeland Security and Transportation. We also will 
make copies available to others upon request. In addition, the report 
will be available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov.].

If you have any questions about this report, please contact me at 
[Hyperlink, heckerj@gao.gov] or at (202) 512-2834. Additional GAO 
contacts and acknowledgments are listed in appendix III.

Sincerely yours,

Signed by: 

JayEtta Z. Hecker: 
Director, Physical Infrastructure Issues:

[End of section]

Appendixes: 

[End of section]

Appendix I: Scope and Methodology:

To address the original intent of the Passenger Vessel Services Act 
(PVSA) and how pertinent rulings and decisions have affected the 
implementation of the law, we reviewed the PVSA, its amendments, and 
its administrative, legislative and judicial history. We also reviewed 
several listings in the Customs Rulings Online Search System to see how 
the PVSA is currently interpreted and we conducted interviews with 
officials from Customs and Border Protection (CBP) and the Coast Guard 
responsible for documentation of U.S. vessels and for enforcing the 
provisions of the PVSA, U.S. vessel documentation laws, and the Jones 
Act.

To ascertain how the exemption provided to NCL might affect future 
rulings or interpretations on the PVSA, U.S. vessel documentation laws, 
or the Jones Act, we researched the legislative history of the PVSA, 
its prior amendments and exemptions, and pertinent CBP rulings to 
determine what impact they had on future rulings regarding the PVSA or 
the Jones Act. We also reviewed rulings regarding the PVSA to determine 
if any amendments of exemptions provided for under the Jones Act had 
any impact on them. Finally, we conducted interviews with agency 
officials about the implementation of maritime laws.

To determine the potential effects of the exemption on competition in 
the passenger cruise industry, entry into the U.S. domestic market, the 
exemption's broader economic effects, as well as the potential effects 
of granting similar exemptions, we reviewed studies on the economic 
impact of the cruise industry and competition in the industry and 
conducted interviews with officials from several cruise lines, industry 
associations, and a full range of cruise industry stakeholders, 
analysts, and experts. To understand the nature of competition in the 
industry, we reviewed a merger analysis conducted by the Federal Trade 
Commission (FTC) in 2002 that examined, in-depth, competitive 
conditions in the North American cruise industry.[Footnote 46] We also 
interviewed officials and reviewed internal documents from cruise 
lines, including Norwegian Cruise Line, Carnival Cruise Lines, Royal 
Caribbean Cruise Lines, Radisson Seven Seas Cruises, Crystal Cruises, 
the former American Classic Voyages, and CruiseWest to get their 
perspectives on the nature of competition in the industry, the effects 
of the exemption on competition, and the potential of various domestic 
itineraries. We also spoke with several port authorities, individual 
U.S. shipyards, and industry financial analysts for further information 
on the broader economic effects of the exemption and the potential 
effects of granting similar exemptions. In addition, we gathered 
information on the capital and operating costs of foreign-flag vessels 
as compared with U.S.-flag vessels. Since most of these data are 
proprietary, we were unable to independently verify them because we 
have no authority to require access to the underlying data. However, we 
applied logical tests to the data and found no obvious errors of 
completion or accuracy. Along with our use of corroborating evidence, 
we believe that the data were sufficiently reliable for our use.

To analyze the effects of the exemption on the potential for entry into 
the U.S. domestic market, we spoke with industry financial analysts and 
experts, including officials at American Marine Advisors, G.P. Wild, 
and J.P. Morgan Chase to obtain perspectives on whether financing for a 
U.S. built vessel would be more difficult to obtain now that the 
exemption has been granted. We also spoke with officials within the 
Maritime Administration to ascertain whether applications or approvals 
for federal loan guarantees for building large passenger vessels had 
waned or would be more difficult to obtain as a result of the 
exemption. We also spoke with officials from the cruise lines and an 
official representing smaller U.S.-flag vessel operators to get their 
perspectives on the potential for entry into the U.S. domestic cruise 
market. To determine the extent of NCL's capital cost advantage under 
the exemption, we obtained estimates of the final cost to build the 
first of the exempted vessels from the General Disclosure statement 
under the Stock Exchange of Hong Kong of Star Cruises Limited, NCL's 
parent company. We were unable to independently verify these costs 
because we have no authority to require access to the underlying data. 
However, we confirmed the accuracy of these figures with officials 
within NCL and through comparing the figures to publicly available data 
on the costs of vessels of similar size completed for other cruise 
lines. We then compared these costs to the original project costs to 
build the Project America vessels in a U.S. shipyard. We converted all 
figures to 2003 dollars using the producer price index for ship and 
boat building and repairing prepared by the Bureau of Labor Statistics.

We also obtained additional perspectives on the potential economic 
effects of the exemption and of possible additional exemptions from 
various industry associations, including the International Council of 
Cruise Lines, Cruise Lines International Association, the Passenger 
Vessel Association, the American Shipbuilding Association, and the 
American Society of Travel Agents, as well as officials from the 
Maritime Cabotage Task Force, the Maritime Trades Departments of the 
AFL-CIO, American Maritime Officers, and the Seafarers International 
Union.

We conducted our work from August 2003 through February 2004 in 
accordance with generally accepted government auditing standards.

[End of section]

Appendix II: Other U.S. Laws Applicable to U.S.-Flag Vessels on Wholly 
Domestic Cruises:

NCL's Operations Will Subject Them to the Application of U.S. Tax, 
Labor, and Other Laws Unlike Other Foreign Cruise Lines that Serve the 
United States:

Since NCL's vessels will be undertaking domestic travel under the U.S. 
flag, NCL will subject itself to numerous other U.S. laws in the areas 
of tax, labor, immigration, environment and the Americans with 
Disabilities Act. These U.S. laws do not usually apply to foreign-flag 
cruise lines because their itineraries are in international waters, 
either because they include a distant foreign port if they are 
traveling between U.S. ports, or a nearby foreign port if the voyage is 
a round trip from one U.S. port, and thus international rather than 
U.S. laws apply.

NCL Will Be Subject to U.S. Taxation Laws:

Because NCL's U.S.-flag Hawaiian operations--operated by its U.S. 
subsidiary NCL America--will be involved in domestic trade, income 
derived from those operations would be taxable under the U.S. tax code. 
The Internal Revenue Code has special rules for "transportation 
income." If the transportation income is attributable to transportation 
that begins and ends in the United States, it is treated as income 
derived from sources in the United States and therefore fully taxable. 
If the transportation begins or ends in the United States, but not 
both, 50 percent of the transportation income is treated as income 
derived from sources in the United States.[Footnote 47] However, the 
Internal Revenue Code, under 26 U.S.C. 883, also excludes from the 
gross income of foreign corporations income derived from the 
international operation of vessels if their home countries grant an 
equivalent exemption from paying taxes to U.S. corporations. Therefore, 
the income earned from foreign-flag vessels operated by foreign 
corporations operating cruises in the United States may not be subject 
to U.S. corporate income tax.

NCL Vessels under the Exemption Will Be Subject to Several U.S. Labor 
Requirements:

If NCL operates vessels in domestic trade, those vessels will become 
subject to U.S. labor and documentation laws, which, among other 
things, require that the officers and unlicensed seamen on a U.S.-flag 
ship to be U.S. citizens or documented aliens with permanent residence 
in the United States, and that the crew be subject to minimum wage and 
collective bargaining laws. U.S. documentation laws under 46 U.S.C. 
8103(a) require that only U.S. citizens serve as the master, chief 
engineer, radio officer, and officer in charge on a U.S. documented 
vessel. Also, each unlicensed seamen must be a citizen of the United 
States except that not more than 25 percent of that number may be 
aliens lawfully admitted to the United States for permanent residence. 
Under the Fair Labor Standards Act, minimum wage laws would apply to 
the crew, and they would be allowed to engage in collective bargaining 
under the National Labor Relations Act. In addition, where applicable, 
higher state minimum wage laws would apply. For example, U.S.-flag 
interisland Hawaii cruise operations will be subject to the state's 
$6.25/hour minimum wage, which is $1.10 higher than under federal law. 
In addition, crewmembers on U.S.-flag vessels are subject to tax at the 
federal, state, and local levels.

Foreign Cruise Ships Primarily Adhere to International Construction and 
Safety Standards Rather than U.S. Standards:

NCL's U.S.-flag ships will have to adhere to U.S. Coast Guard-approved 
vessel construction and safety standards. As a general rule, foreign 
vessels operating in U.S. waters need only comply with international 
construction and safety standards, as opposed to the often more 
rigorous U.S. standards. An international treaty, the Safety of Life at 
Sea Convention sets forth international construction and inspection 
standards. A foreign vessel from a country that is a signatory to the 
Convention, would be subject to U.S. inspection only as to the vessel's 
propulsion and lifesaving equipment. Finally, according to several 
industry experts and representatives, the application of the American's 
with Disabilities Act could have significant cost implications for 
vessels operating in the U.S. domestic trade because of requirements to 
make the vessels handicap accessible. However, NCL executives stated 
that these requirements would not add significant costs to their ships, 
because even their foreign-flag ships adhere to high standards in this 
regard.

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

JayEtta Hecker (202) 512-8984 or [Hyperlink, heckerj@gao.gov] 
Susan Fleming (202) 512-4431 or [Hyperlink, flemings@gao.gov]:

Staff Acknowledgments:

The GAO staff that worked on this report dedicate it to their late 
colleague, Ryan Petitte, in recognition of the valuable contributions 
he made. Other key contributors include Jay Cherlow, Michelle Dresben, 
Sarah Eckenrod, Colin Fallon, David Hooper, Ron Stouffer, and Andrew 
Von Ah.

(544080):

FOOTNOTES

[1] As defined in 19 C.F.R. 4.80a, "embark" means a passenger boarding 
a vessel for the duration of a specific voyage, and "disembark" means a 
passenger leaving a vessel at the conclusion of a specific voyage.

[2] In the context of this report, we are defining a "large" cruise 
vessel as one that has at least 800 passenger berths. This is 
consistent with S. 127, legislation introduced in 2001 to stimulate the 
U.S.-flag cruise vessel industry, in which eligible vessels were those 
that contained no fewer than 800 passenger berths. Other U.S.-flag 
passenger vessels, including ferries, steamboats, and small cruise 
vessels, serve a market that is fairly distinct from the market served 
by large cruise vessels, according to an official at the Passenger 
Vessel Association.

[3] 46 U.S.C. App. 289.

[4] 46 U.S.C. Chapter 121.

[5] According to a 2000 Department of Transportation survey, ferries 
carried about 113 million passengers in the United States in 2000.

[6] Foreign-built vessels can be registered under the U.S-flag to 
operate in international trade, although these vessels must still meet 
the ownership, crewing and any other requirements of U.S. vessel 
documentation laws.

[7] P.L. 108-7. 

[8] Two of these ships were partially constructed in the United States 
as part of "Project America," while the third ship will be an existing 
foreign-built vessel. "Project America" was a loan guarantee provided 
by the Maritime Administration for American Classic Voyages to build 
two large cruise vessels in a U.S. shipyard for use in Hawaii. American 
Classic Voyages went bankrupt and NCL purchased the partially built 
vessels. 

[9] 46 U.S.C. 12102. 

[10] "Regular service" is defined in the exemption as the "primary 
service in which the ship is engaged on an annual basis." 

[11] The Jones Act restricts foreign vessels from moving cargo between 
U.S. ports. 46 U.S.C. App. 883. 

[12] 46 U.S.C. App. 883. 

[13] Several foreign shipyards have received substantial government 
subsidies over the years to help develop this industry. 

[14] In addition to S. 127, two other similar bills have been 
introduced, S. 1510 and S. 2507.

[15] The partially completed vessels cost $23 million, while the 
construction plans cost $6 million. 

[16] The first vessel scheduled to be completed under the exemption, 
the Pride of America, was damaged in the shipyard causing its 
completion to be delayed. NCL has announced that the existing foreign-
built ship that it was allowed to reflag under the U.S. flag, the Pride 
of Aloha, may take the place of the Pride of America on its scheduled 
cruises, subject to MARAD approval. 

[17] 46 U.S.C. App. 883. 

[18] Statement of the Federal Trade Commission Concerning Royal 
Caribbean Cruises, Ltd./P&O Princess Cruises plc and Carnival 
Corporation/P&O Princess Cruises plc, FTC File No. 021 0041, October 4, 
2002. 

[19] This amount was later increased by law to $200 per passenger in 
1898 and administratively to $300 in 2003 by CBP pursuant to the 
Federal Civil Penalties Inflation Adjustment Act of 1990. 19 C.F.R. 
4.80.

[20] American Hawaiian Cruises v. Skinner, 713 F. Supp. 452, 457 
(D.D.C. 1989).

[21] The Cleveland, 28 Op. Att'y Gen. 204 (1910).

[22] United States v. Honduran S.S. GRANADA, 35 F. Supp. 892, 894 (E.D. 
Pa. 1940).

[23] These decisions were made under the previous guise of CBP, the 
Customs Service, within the Department of the Treasury. 

[24] A "distant foreign port" is defined by 19 C.F.R. 4.80a as being 
any port that is not a "nearby foreign port," which is defined as being 
any port in North America, Central America, the Bermuda Islands, or the 
West Indies. 

[25] 50 Fed. Reg. 26981, July 1, 1985.

[26] The planned initial voyages of NCL's first ship to be deployed 
under the exemption, the Pride of Aloha, are on all-domestic 
itineraries outside of Hawaii between Los Angeles and San Francisco. 
These voyages are known as repositioning cruises, where a ship will 
take passengers on cruises while on its way from a shipyard or another 
trade to its home port. In the case of Pride of Aloha, NCL plans to 
make some initial cruises on the west coast before heading to Honolulu, 
Hawaii, and beginning interisland cruises.

[27] While NCL is not legally restricted from offering cruises on the 
East and West coasts, as long as the exempted vessels are in regular 
service in Hawaii, they are not likely to use the exemption to offer 
non-Hawaiian itineraries for several reasons. From a market 
perspective, other possible itineraries, for which analysts expect 
demand to be limited, are relatively close to foreign ports and thus 
can be served by foreign-flag ships with lower costs. From a business 
perspective, NCL owns two other large U.S.-built cruise ships, the 
Independence and the United States, which each carry more than 1,000 
passengers, and would likely test the markets with these ships to avoid 
deploying too much capacity on itineraries with unknown demand. 
Moreover, using these ships would eliminate the need to challenge the 
regular service definition tying the exempted ships to Hawaii.

[28] P. L. No. 66-261, ch. 250, sec. 22, 41 Stat. 988, 997 (1920).

[29] 46 U.S.C. App. 289a.

[30] 46 U.S.C. App. 289c.

[31] NCL may grant other cruise lines the rights to stop at Fanning 
Island, and it has already done so for Radisson Seven Seas and Crystal 
Cruises and has permitted Hapag Lloyd rights for cruises next year.

[32] We calculated daytime hours in port by adding the number of hours 
between 6 A.M. and 6 P.M. that the vessel is scheduled to be in port. 

[33] NCL made no attempt to control for other factors that may have 
caused slower or reduced bookings in 2003. We confirmed the initial 
raise in price and subsequent reversion to the old base price.

[34] NCL purchased the only other large U.S.-built cruise vessels, the 
United States and the Independence, and has plans to refurbish them.

[35] NCL's Pride of America is expected to cost between $350 million 
and $400 million dollars, including the portion NCL paid for the hull 
of the ship. These figures are commensurate with costs for similar size 
vessels built entirely in foreign shipyards for other cruise lines. The 
cost differential range reflects the low and high Pride of America 
estimates, compared with the construction contract cost in American 
Classic Voyages SEC filing for the Project America ships. All values 
were adjusted to 2003 dollars.

[36] We used the total project cost on MARAD's Title XI loan guarantee 
application documentation for these calculations. The total project 
cost may reflect adjustments to initial contract costs and may include 
ship costs not paid directly to the shipyard, including independent 
design and inspection contracts, interest paid to lenders during 
construction, and supplies purchased by the ship owner directly.

[37] Late delivery of cruise ships can be very costly to the cruise 
companies, as they book cruises over one year in advance and would have 
to refund customers if a ship was not ready to set sail on its intended 
date.

[38] Data on labor costs are scarce, and available data are difficult 
to compare across vessels because of variations in worker productivity, 
on-board amenities, and level of service provided on various vessels. 
While not entirely comparable, we did check these estimates against 
estimates of U.S.-crewing costs provided by a small U.S.-flag passenger 
vessel operator and foreign-crewing costs provided by a potential 
entrant into the cruise industry and found U.S. labor costs to be 
approximately 70 percent higher. 

[39] 46 U.S.C. 8104. 

[40] As defined by FTC, the North American cruise market includes all 
cruises marketed to North Americans. The cruises in this market 
primarily operate in or around North American waters.

[41] Under the FTC's 1992 Horizontal Merger Guidelines, a market is 
considered highly concentrated when the Herfindahl-Hirschman Index, or 
HHI, exceeds 1,800. Using these MARAD data, the HHI for the North 
American cruise market would be over 4,000.

[42] According to the FTC statement, "Absent extraordinary 
circumstances, there is a strong presumption that a three-to-two merger 
of significant competitors in a properly delineated relevant market is 
likely to harm consumers.In this situation, however, there are now four 
major firms and a "fringe" of other competitors." See Statement of the 
Federal Trade Commission Concerning Royal Caribbean Cruises, Ltd./P&O 
Princess Cruises plc and Carnival Corporation/P&O Princess Cruises plc, 
FTC File No. 021 0041.

[43] This estimate does not include corporate income taxes NCL would be 
liable for on income earned on these domestic routes.

[44] 46 U.S.C. 12102.

[45] "Economic Impact of Proposed Changes to the Passenger Services 
Act," prepared by Applied Development Economics for the California 
State Tourism Board. (Berkeley, CA: 1997.) 

[46] Statement of the Federal Trade Commission Concerning Royal 
Caribbean Cruises, Ltd./P&O Princess Cruises plc and Carnival 
Corporation/P&O Princess Cruises plc, FTC File No. 021 0041. 

[47] Internal Revenue Code Sec. 863(c).

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