American Hawaii Cruises Business Turnaround

American Hawaii Cruises anticipates turning a profit in 1996, three years after being rescued from imminent bankruptcy by parent company American Classic Voyages (AMCV) according to AHC President and COO Tony McKinnon.

At the helm of AHC since February 1994, McKinnon candidly said, “It has been a challenging process (to revitalize the company), especially while running the cruise line at full speed.”

However, AHC is “70 percent of the way toward our goals to rebuild the company and will be well positioned in 1996 with both our ships refurbished and sailing.” noted McKinnon. Some objectives that have been met by the Hawaii cruise operator include restructure of the management team, relocation of the headquarters to Chicago. and implementation of a new reservations system.

The question remains as to whether a niche operaror can survive in an enrironment where success is increasingingly determined by economies of scale and operating efficiencies.

Last year, two specialty lines – American Family Cruises and FiestaMarina Cruises – called it quits, even though both companies had the backing of larger, well-established lines. Also, Radisson Diamond Cruises and Seven Seas Cruise Line merged forces, citing better economies of scale and lower operating expenditures.

However, for the past decade, AHC has been the only cruise operator in its niche – Hawaii -benefitting from the Jones Act by being the only American-flagged ocean-going cruise ship company.

When Aloha Pacific Cruises tried to enter the market with the Monterey a few years ago, a legal challenge by AHC forced that start-up venture out of business. (Although the Monterey was originally built in the United States. AHC’s challenge was based on much of the renovation work having been done abroad.)

Still, in spite of its market monopoly, AHC has sailed a shaky course among the Hawaiian Islands with repeated problems with U.S. Public Health in particular before the take-over. Lack of maintenance of the two old ships was seen as one reason for the problems.

After the acquisition, then Chairman of AMCV S, Cody Engle said that the ships were built strong and that. their life expectany was “at least another thirty years, probably indefinite”

Instead, the first major drydock of the Independence showed that a lot of steel work as required.

Refocused Product

Under AMCV, American Hawaii is moving forward, though, to solidify its position and attract new business, mainly by refocusing its product. The line hopes that Hawaii’s popularity, the company’s American-flag status, and the growing appeal of value­ oriented cruise vacations will heighten demand for its sailings. While promoting a freshened on-board product, including folkloric stoly-telling and cultural lessons. Hawaiian cuisine, spruced up uniforms, and a refurbished decor, the company also aggressively capitalizes on its U.S.-registered vessels.

“Our passengers want to visit Hawaii – it’s a great destination – and they can do so on our ships which are American, but which sail to a decidedly exotic destination.” said McKinnon.

The company will also work to increase its recognition factor which McKinnon said is “good, but could be stronger.” Last summer, AHC found that only 40 percent of surveyed travel agents sold AHC.

“We want to build awareness of our product with that other 60 percent segment,” he noted. To do so, AHC will spend about $6 million in trade and consumer advertising, direct mail and brochure distribution, including stepped-up efforts to agents. “We compete for Hawaii’s vacationers and we’re going to emphasize the destination.” said McKinnon.

AHC must also overcome some agents’ perceptions that its cruises are too expensive for some of their clients. The line has to also establish Hawaii cruising as separate from other warm-weather cruise regions, such as the Caribbean which is less expensive. Secondly, it must publicize that it is the only cruise line sailing those waters, and that it has great value and better pricing than land-based vacation alternatives.

AHC is also receiving mixed travel agent reviews. This might be due to the fact that the company is undergoing extensive changes, making for an inconsistent and ever-changing product line run by management that is relatively new to the job.

Numbers Game

McKinnon estimated that AHC “only needs two percent of Hawaii’s total tourism numbers to fill its ships,” accounting for 80.000 passengers annually.

Statistics show that 40 percent of AHC customers have previously visited Hawaii, with only eight percent being AHC past passengers and 60 percent having cruised before. The line will also pursue past passengers with a newly formed repeat passenger program. Overall, AHC passengers average 55-plus years old except for summers when more families sail. AHC per diems are $175 to $180.

Financial turnaround in such a short time period will be dramatic: In 1994, AHC experienced a “substantial net loss.” said McKinnon, who hopes the company will break-even or “do a little better” in 1995.

To accomplish this, AHC must contend with several factors and problems. For example, the company’s anticipated costs to refurbish the Independence on paper have more than doubled, in part because of steel work discovered halfway through the project. The Constitution, awaiting her make-over at the end of June, may be equally as expensive to refurbish because she will also need similar work.

Also, AHC, though seemingly holding an enviable position as the only regularly scheduled Hawaii cruise line, is still a small operation with two small and old ships. The line cannot achieve economies of scale boasted of by larger companies.

In fact, McKinnon confirms that American Hawaii charts “substantially higher capital and operating costs,” including American-standard crew salaries, and more maintenance expenditures for U.S. Coast Guard mandated drydockings.

The distinct advantage of operating as the only American-flagged line in Hawaii, however, outweighs these considerations, said McKinnon.

AHC is also embroiled in a legal battle with Newport News Shipyard concerning the escalated refurbishment costs of the Independence.

Financial Commitment

When AMCV purchased the struggling cruise line for $2.5 million in August 1993, one of the terms was that it spend about $30 million to re-do the vessels. Instead, the company will be spending some $60 million and probably fight more of an uphill marketing battle plus pricing pressures in the cruise market as well.

As AHC works to improve its bottom line, AMCV reported a net loss of $983,000, or $0.07 per share, on revenues of $195.2 million for 1994, compared to net income of $4.2 million, or $0.36 per share, on revenues of $121.7 million for 1993.

AMCV attributed the loss to “canceled cruises and significant operating problems associated with the renovation of the Independence.”

The Independence refurbishment ran a month late – resulting in unanticipated lost revenues. When total costs soared from the anticipated $13 million to nearly $30 million, AHC refused to pay, prompting Newport News to take legal action. However, AHC filed a counter-claim for $148 million in November against the yard charging fraud.

AHC also had problems on board the Independence, such as faulty air-conditioning and hot water systems, upon her return. AHC has since put a project team on the ship to deal with problems, said McKinnon. All work, he added, will be completed by mid-April.

At press time, a district court judge has sent the case to arbitration, a step that AHC has been pushing for, said McKinnon. The judge also gave AHC access to accrued interest from a $20 million escrow account established by AHC to pay the shipyard pending resolution of the matter.

Re-Scheduled Project

The rescheduling of the nearly five-month-long Constitution refurbishment from February to June -­ Hawaii’s high season – means a loss of prime time revenues.

But the ship must undergo her second drydock within the allotted five years – as required by Coast Guard regulations – which soon expires, explained McKinnon. AHC forestalled the project to better assess what has to be done on the Constitution. McKinnon noted, however, that specifications have been tightened and, therefore, costs will be somewhat curbed. This drydock, he added, will focus on marine work. Some Hawaiian design elements that were incorporated on the Independence will wait until the vessel’s next drydock in early 1997.

The Constitution is being examined by five shipyards at press time. McKinnon expects project bids mid-month and yard selection by the end of April.

Meanwhile, because of the short notice of the Constitution’s delayed refurbishment, AHC has been compelled to offer discounts, as well as incentives, on her March to June sailings to stimulate bookings. “We have to sell this last-minute inventory by offering these discounts, “said McKinnon.

MarAd’s Title XI loan guarantees may provide some financial ease for AMCV which has applied for its American Queen newbuilding for its other subsidiary, Delta Queen Steamboat Co., said McKinnon. They are also “actively investigating” financing opportunities for the Constitution. and retroactively, for the Independence, he added.

Also in 1995, American Hawaii will make some itinerary changes, reverting back to original programs. These include: Sunday instead of Tuesday departures for the Constitution; docking both ships at Kahului, Maui instead of Lahaina Harbor; and re-installing a full day at sea instead of overnight in Kona.

Tax Exemption

Intact American Hawaii will also keep its exemption from a four percent state public service company tax that the line has held since inception in 1981. Due to expire in July 1996, the tax break is worth approximately $3 to $4 million annually. However, McKinnon said that AHC, which has received two five­ year extensions, will not apply for a third. It also successfully escaped having a six percent transient accommodation tax slapped on its ships that could have cost AHC an estimated $106.000 more per year.

The line chooses to remain “in a neutral position” about incorporating shipboard gambling. Recently, the Hawaii Senate passed a bill allowing gaming in Hawaiian waters, although McKinnon doubts if the measure will sail through the House.

Regardless, American Hawaii contributes about $55 million to the state’s economy annually.

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