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Under cruise lines' carefree image lies hardball industry

By STEVE HUETTEL
Published September 12, 2005

A couple of recent news items reveal volumes about what's beneath the fun-and-games public image of the cruise business.

Maybe you chuckled over the federal government's plan to put up Hurricane Katrina evacuees on three chartered Carnival Cruise Lines ships for six months. You'll stop laughing when you hear how much they're charging: $192-million, according to the Miami Herald, plus as much as $44-million for fuel and other costs.

Then, on Sept. 2, crew members were working to fix a pipe below decks as a Royal Caribbean cruise ship docked at the Port of Los Angeles. Sewage and deadly levels of hydrogen sulfide gas spewed out, killing three crew members from the Philippines, Bulgaria and Croatia. Passengers smelled the stench but weren't hurt or even aware what had happened.

The $13-billion cruise industry is a money machine that keeps chugging through economic downturns, cutthroat competition, even natural disasters.

But the formula for success relies largely on unseemly, though legal, business practices: an exemption from most U.S. taxes and employing a Third World work force that toils for measly pay under difficult conditions.

Kristoffer A. Garin, a police beat reporter in New York, smelled an expose as he began research for a book on the cruise industry.

There was plenty of well-documented fodder for a scandal story. Cruise lines have been caught dumping trash overboard, covering up sexual assaults by crew members and hiring ship doctors with questionable qualifications.

But Garin said in an interview recently that he also became fascinated with how a handful of small-time operators built "a perfect business, able to operate in the most secure and wealthy market in the world . . . in a virtually tax-free environment."

His book, Devils on the Deep Blue Sea, which was published this summer, chronicles how the business evolved. Before World War I, steamships made money crossing the frigid North Atlantic with socialites relaxing in first-class cabins and poor immigrants packed uncomfortably below.

Prohibition brought the "booze cruise," popularizing the concept of leisure trips on the seas. Jet aircraft made cruise ships obsolete as long-distance transportation in the 1950s.

Cruising morphed into cheap, sunny escapes for winter-weary northerners with Miami as its Mecca. Colorful, fast-dealing operators included Israeli-born Ted Arison, whose Carnival Cruise Lines began with a rust bucket that ran aground on its first trip out of Miami.

The industry finally reached the mass market, middle-class customer through a stroke of luck. ABC in 1977 launched a weekly series The Love Boat, which portrayed cruising as all-American, if slightly naughty, fun for regular folks.

Cruising boomed as lines built bigger and bigger ships, capitalizing on economies of scale to lower prices and fatten profits.

Companies also took advantage of laws created to benefit cargo shipping. By registering vessels in countries like Liberia, Panama and the Bahamas, cruise lines avoid paying many U.S. taxes.

Carnival and Royal Caribbean, the two largest cruise companies, would have paid a combined $518-million in income taxes at the standard 35 percent corporate income tax rate in 2003, Garin writes. That doesn't count sales taxes, payroll taxes or Social Security contributions.

Squeezing the most out of employees and paying as little as possible is another standard practice. Maids, waiters and kitchen workers sometimes labor for 10 to 14 hours a day for 10 months at a stretch without a day off, Garin writes. Base salary can be as low as $50 a month plus tips.

Still, wages that barely approach Western standards are attractive to Third World workers trying to support families back home.

The financial formula and rapid consolidation have created two industry giants. Carnival Corp. and Royal Caribbean subsidiaries make up 10 of the 16 cruise lines operating out of American ports. Nearly half of the industry's capacity is controlled by Micky Arison, chief executive of Carnival Corp. and son of founder Ted Arison.

Can anything stop these juggernauts?

The season's hurricanes forced them to move ships and passengers to different ports. Carnival recently advised that earnings would fall slightly below analysts' estimates as a result. But now, even Uncle Sam is a multimillion-dollar customer.

Carnival spokesman Tim Gallagher defended the deal, noting that the cruise line had to cancel cruises for about 100,000 passengers booked on the chartered ships. "We got a fair price," he said. "Doing what we're doing is very disruptive to our business."

Steve Huettel can be reached at 813 226-3384 or huettel@sptimes.com

[Last modified September 10, 2005, 01:30:01]