a

GAO

United States General Accounting Office

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
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. 

Highlights of GAO-04-421, a 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 

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. 

NCL’s 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 

cruises—providing 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. 

NCL’s Exclusive Hawaiian Itinerary Compared to Itineraries for Foreign-Flag Vessels

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. Foreignflagged 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. 
Page i GAO-04-421 Exemption from Maritime Law

Contents

Letter 1

Results in Brief 4

Background 6

Intent of PVSA Was to Protect U.S. Maritime Transportation 

Industry, but Rulings and Decisions Have Expanded Itineraries 

for Foreign Cruise Ships 10

Interpretation and Enforcement of the Exemption Will Likely Have 

Little Impact on the Implementation of the PVSA and Other 

Related Laws 13

Exemption Allows NCL to Offer Exclusive Domestic Itineraries and 

Creates an Additional Barrier to U.S.-Flag Entry, but It Could 

Generate Economic Benefits 16

Unclear if Granting Other Cruise Lines Similar Exemptions Would 

Lead to Entry by Other Cruise Lines and Resulting Economic 

Benefits 27

Agency Comments and Our Evaluation 31

Appendixes

Appendix I: Scope and Methodology 32

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

Domestic Cruises 35

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 35

Appendix III: GAO Contacts and Staff Acknowledgments 37

GAO Contacts 37

Staff Acknowledgments 37

Table Table 1: Key Rulings and Decisions that Have Changed the Types of 

Itineraries Foreign Vessels Can Operate Out of U.S. 

Ports 13

Figures Figure 1: Percent of Passenger Embarkations/Disembarkations at 

North American Ports by Major Cruise Lines, 

July-September 2003 7

Figure 2: NCL’s Exclusive Hawaiian Itinerary Compared with 

Hawaiian Itineraries of Foreign-Flag Vessels 18
Contents

Page ii GAO-04-421 Exemption from Maritime Law

Figure 3: Comparison of Estimated Construction Costs to 

Complete Project America Vessel in a U.S. Shipyard and a 

Foreign Shipyard 21

Figure 4: Examples of Itineraries between U.S. Ports for 

Foreign-Flag Vessels that Utilize a Nearby Foreign

Port 24

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

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-04-421 Exemption from Maritime Law

United States General Accounting Office

Washington, D.C. 20548

A

February 27, 2004 Letr

The Honorable John McCain

Chairman

Committee on Commerce, Science, and Transportation

United States Senate

Dear Mr. Chairman:

All of the passengers embarking1 on large cruise vessels2 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 foreignflag 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)3

 and U.S. vessel documentation laws.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.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 

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.
Page 2 GAO-04-421 Exemption from Maritime Law

meet in order to operate under the U.S. flag and operate in domestic trade.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 exemption7 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.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.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.10 NCL is scheduled to begin 

service in Hawaii in July 2004. 

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.” 
Page 3 GAO-04-421 Exemption from Maritime Law

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; 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 

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

App. 883. 
Page 4 GAO-04-421 Exemption from Maritime Law

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.12

1246 U.S.C. App. 883. 
Page 5 GAO-04-421 Exemption from Maritime Law

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 
Page 6 GAO-04-421 Exemption from Maritime Law

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.) 
Page 7 GAO-04-421 Exemption from Maritime Law

Figure 1: Percent of Passenger Embarkations/Disembarkations at North American 

Ports by Major Cruise Lines, July-September 2003

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.

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,
Page 8 GAO-04-421 Exemption from Maritime Law

Germany, and elsewhere that have the infrastructure, expertise, and 

economies of scale for this segment of the market.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),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 

13Several foreign shipyards have received substantial government subsidies over the years to 

help develop this industry. 

14In addition to S. 127, two other similar bills have been introduced, S. 1510 and S. 2507.
Page 9 GAO-04-421 Exemption from Maritime Law

purchased by NCL for $29 million.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.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.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

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

million. 

16The 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. 

1746 U.S.C. App. 883. 
Page 10 GAO-04-421 Exemption from Maritime Law

report in October 2002.18 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 $219 for 

18Statement 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. 

19This 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.
Page 11 GAO-04-421 Exemption from Maritime Law

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 sufficient...to serve...in time of war or 

national emergency.”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.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 

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

21The Cleveland, 28 Op. Att’y Gen. 204 (1910).
Page 12 GAO-04-421 Exemption from Maritime Law

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.”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 CBP23 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,”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.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.

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

23These decisions were made under the previous guise of CBP, the Customs Service, within 

the Department of the Treasury. 

24A “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. 

2550 Fed. Reg. 26981, July 1, 1985.
Page 13 GAO-04-421 Exemption from Maritime Law

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

Source: GAO.

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 

28 Op. Attorney Gen. 

204

1910 Allowed passenger travel between U.S. ports by a foreign vessel. The circumstance was an aroundthe-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).
Page 14 GAO-04-421 Exemption from Maritime Law

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. 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.27

26The 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.

27While 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.
Page 15 GAO-04-421 Exemption from Maritime Law

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.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.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.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 

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

2946 U.S.C. App. 289a.

3046 U.S.C. App. 289c.
Page 16 GAO-04-421 Exemption from Maritime Law

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. 
Page 17 GAO-04-421 Exemption from Maritime Law

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,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. 

31NCL 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.
Page 18 GAO-04-421 Exemption from Maritime Law

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

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.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 

32We 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. 
Page 19 GAO-04-421 Exemption from Maritime Law

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.33

33NCL 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. 
Page 20 GAO-04-421 Exemption from Maritime Law

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.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 3.35

The disparity is likely even larger because the actual costs of the Project 

America ships were expected to exceed the contract costs.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.

34NCL purchased the only other large U.S.-built cruise vessels, the United States and the 

Independence, and has plans to refurbish them.

35NCL’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. 

36We 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.
Page 21 GAO-04-421 Exemption from Maritime Law

Figure 3: Comparison of Estimated Construction Costs to Complete Project 

America Vessel in a U.S. Shipyard and a Foreign Shipyard

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 
Page 22 GAO-04-421 Exemption from Maritime Law

cruiseship, which are critical to efficient and timely completion of 

cruiseships.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. 

37Late 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.
Page 23 GAO-04-421 Exemption from Maritime Law

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.38 Cruise officials also stated that due to regulations 

pertaining to overtime and labor requirements for U.S. seafarers,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.

38Data 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. 

3946 U.S.C. 8104. 
Page 24 GAO-04-421 Exemption from Maritime Law

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

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.
Page 25 GAO-04-421 Exemption from Maritime Law

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 American40 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.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.42

40As 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.

41Under 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. 

42According 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. 
Page 26 GAO-04-421 Exemption from Maritime Law

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.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. flag44—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 

43This estimate does not include corporate income taxes NCL would be liable for on income 

earned on these domestic routes. 

4446 U.S.C. 12102. 
Page 27 GAO-04-421 Exemption from Maritime Law

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.
Page 28 GAO-04-421 Exemption from Maritime Law

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.45

However, if new domestic cruises primarily replaced existing foreign-flag 

service, with minor itinerary changes caused by eliminating foreign portsof-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. 

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.) 
Page 29 GAO-04-421 Exemption from Maritime Law

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 
Page 30 GAO-04-421 Exemption from Maritime Law

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 
Page 31 GAO-04-421 Exemption from Maritime Law

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 http://www.gao.gov.

If you have any questions about this report, please contact me at 

heckerj@gao.gov or at (202) 512-2834. Additional GAO contacts and 

acknowledgments are listed in appendix III.

Sincerely yours,

JayEtta Z. Hecker

Director, Physical Infrastructure Issues
Page 32 GAO-04-421 Exemption from Maritime Law

Appendix I

Scope and Methodology AAppenednxidexiIs

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.1

 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. 

1

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. 
Appendix I

Scope and Methodology

Page 33 GAO-04-421 Exemption from Maritime Law

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 
Appendix I

Scope and Methodology

Page 34 GAO-04-421 Exemption from Maritime Law

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.
Page 35 GAO-04-421 Exemption from Maritime Law

Appendix II

Other U.S. Laws Applicable to U.S.-Flag 

Vessels on Wholly Domestic Cruises ApendxiI

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.1

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 

1

Internal Revenue Code Sec. 863(c).
Appendix II

Other U.S. Laws Applicable to U.S.-Flag 

Vessels on Wholly Domestic Cruises

Page 36 GAO-04-421 Exemption from Maritime Law

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. 
Page 37 GAO-04-421 Exemption from Maritime Law

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts JayEtta Hecker (202) 512-8984 or heckerj@gao.gov

Susan Fleming (202) 512-4431 or 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)
GAO’s Mission The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal government 

for the American people. GAO examines the use of public funds; evaluates federal 

programs and policies; and provides analyses, recommendations, and other 

assistance to help Congress make informed oversight, policy, and funding 

decisions. GAO’s commitment to good government is reflected in its core values of 

accountability, integrity, and reliability.

Obtaining Copies of 

GAO Reports and 

Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail this 

list to you every afternoon, go to www.gao.gov and select “Subscribe to 

e-mail alerts” under the “Order GAO Products” heading.

Order by Mail or Phone The first copy of each printed report is free. Additional copies are $2 each. A check 

or money order should be made out to the Superintendent of Documents. GAO 

also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a single 

address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00