At one time, cruise ships were large but not gigantic. Now the newer ones are monsters at sea.
- If you’ve ever seen one in action, you’ll understand why: A vessel like Royal Caribbean’s Symphony of the Seas is longer than 12 blue whales.
- At 228k gross tons, it is 5x the size of the once-formidable Titanic.
It can hold 6,680 passengers and 2,200 crewmembers, the population of a small American town.
These floating virus “death traps” may be heading to the scrap yards after several years in service.
THIRTY MILLION PASSENGERS SPENT $46 BILLION ON CRUISES
In 2018, 30 million passengers — the bulk of them from America — spent more than $46B on cruises globally. The biggest players see annual profits in the billions.
But cruise companies have done more to earn the “monster” moniker than churning out huge ships and market gains.
- A satirical take on the iconic TV Series THE LOVE BOAT theme song just after the coronavirus struck. Since the virus has become so political, I would now include Nancy Pelosi as the co-Captain. Jack Jones sang The Love Boat theme song (except for the last season, where they used the Dionne Warwick version). Paul Williams wrote the lyrics with music by Charles Fox.
CRUISE LINES USE LOOPHOLES TO NOT PAY US TAXES
For decades, these companies have utilized century-old loopholes to avoid paying corporate taxes.
- They’ve gone to great lengths to bypass US employment laws, hiring foreign workers for less than $2/hour.
- They’ve sheltered themselves as foreign entities while simultaneously benefitting from US taxpayer-funded agencies and resources.
Now, in the wake of a coronavirus crisis that has sunk cruise stocks by double digits, these companies are lobbying for federal assistance.
WORLDWIDE CRUISE INDUSTRY
Before we get into how cruise companies circumvent US taxes and regulations, let’s take a quick look at the major players, the money they make, and how they make it.
- The global market comprises dozens of cruise lines and more than 250 ships. But three players — Carnival Corporation & PLC, Royal Caribbean Cruises LTD, and Norweigan Cruise Line HLD — control roughly 75% of the market.
- These companies, which preside over an empire of subsidiary cruise lines, collectively raked in $34.2B in revenue in 2018.
- Cruise ships make this money through two channels: Ticket sales and onboard purchases (e.g., alcoholic drinks, casino gambling, spa treatments, art auctions, and shore excursions), which passengers pay for with pre-loaded cruise cards and chip-equipped wristbands.
- On average, tickets account for 62% of total revenue, and onboard purchases make up the remaining 38%.
- According to several experts, though passenger tickets represent a majority of revenue, onboard purchases account for the lion’s share of the profit.
BIG SHIPS MAY SINK TO THE SCRAP YARD
- As a high fixed-cost business, a cruise ship relies on getting as many passengers as possible on board the vessel — even at fire-sale rates. The major cruise lines will often fill each ship to 105%-110% capacity and upsell its captive consumers on additional services.
- “They have mastered the ability to get their hands into people’s pockets and to take out every last dollar,” says Ross A. Klein, a professor at the Memorial University of Newfoundland, who has carefully studied the cruise ship industry. “They can almost give a cabin away for free and still make a profit.”
- These large crowds yield handsome profits despite sizeable overhead costs — travel agent commissions, fuel, marketing, and payroll. Industry-wide, cruise lines enjoy net margins of 17%, nearly double the average of some comparably large hotel chains:
• Carnival: $3.2B net profit (17% margin)
• Royal Caribbean: $1.8B net profit (19% margin)
• Norwegian: $955m net profit (16% margin)
- To make these figures a bit more relatable, here’s what this works out to on a per-passenger level for a 7-day cruise:
- A passenger will spend $1,060 ($151/day) on a ticket and $650 ($92/day) on onboard purchases. After subtracting overhead costs, a ship will make out with roughly $291 in net profit per passenger, per cruise.
- That means that at full capacity, a single ship like Royal Caribbean’s Symphony of the Seas might make $9.8m in revenue ($1.7m profit) during one 7-day excursion.
- That’s $239k in profit per day at sea.
- As 50% of this money comes from American travelers, one might expect the cruise industry to be a substantial contributor to the US tax system.
But there’s a catch: These companies aren’t technically American. And they harbor what one legal expert calls a “dirty little secret.”
CRUISE LINES AVOID PAYING US TAXES
Carnival, Royal Caribbean, and Norwegian all have headquarters in Miami, Florida, a city that brands itself as the “Cruise Capital of the World.”
- With this homeland base, a broad foundation of US customers, and red, white and blue logos, these cruise lines have manufactured an identity as authentically American corporations. President Trump has even called them a “great US business.”
- Legal paperwork tells a different story.
- International law requires every ship to register with a country and fly its insignia in open waters. A ship is only subject to the laws of where it is registered.
- Under an obscure, 99-year-old section of the US tax code, cruise companies can register their ships with countries that have more lenient laws than the US — an act called flying a “flag of convenience” — and avoid paying into the US tax system.
- It’s a tax loophole big enough to drive a cruise ship through.
“AMERICAN” CRUISE LINES DON’T PAY TAXES
The cruise industry isn’t alone in avoiding Uncle Sam: US companies use offshore accounts to avoid paying an estimated $90B-per-year in taxes.
- But it is especially adept at the practice: Carnival is incorporated in Panama and flies the flags of Panama and the Bahamas; Norwegian is incorporated in, and flies the flag of, the Bahamas; Royal Caribbean has been incorporated in Liberia since 1985, and flies the flags of the Bahamas and Malta.
- These impoverished countries compete with each other to offer cruise lines the cheapest services, much like many US cities groveled for Amazon’s HQ2 by providing massive tax cuts.
- “Cruise lines want to register somewhere where they pay no taxes, are exempt from labor and wage statutes, and don’t have to follow health and safety codes,” says Jim Walker, a Miami-based maritime lawyer. “They’re looking for a place that will leave them alone, not oversee their operations.”
- For the most part, that’s what cruise companies have gotten: According to annual report filings, the major cruise lines pay an average tax rate of 0.8% — for below the 21% US corporate tax rate.
- The benefits of such arrangements are nominal for the countries that register the ships.
- Cruise lines will generally pay a small head tax ($4-$15 per passenger) to call on a port. According to Klein, these countries often spend more on maintaining facilities for cruise ships than they make through the fees.
- They might also promise a boost to the economies they frequent. But Klein says they work out deals with local vendors where they take up to 70% of the onshore revenue — and studies have shown that local populations in foreign ports don’t get much out of such partnerships.
- Cruise ships hire crew members from Southeast Asia, Eastern Europe, and “anywhere else you can find people willing to work for nothing,” The crew member contracts satisfy the greedy management of cruise companies.
- Take a cleaner or a dishwasher’s contract. These cruise line employees must work a mandatory 308 hours a month — 11 hours a day, seven days a week, for as long as 8-10 months, with no days off. Their salary is the equivalent of $400-700 per month or $1.62 to $2.27 per hour.
AMERICAN OWNED CRUISE LINES ARE ANTI-UNION
Unprotected by labor laws and regulations, crew members who get injured are swiftly replaced, like “fungible goods.”
- In its latest report, the Cruise Lines International Association, an influential trade group, argues that the cruise industry has a $52.7B “total economic impact” on the US economy and “supports” 421k American jobs. But Klein says it’s unclear what goes into calculating these figures.
- The Hustle asked several major cruise lines to comment on the concerns raised in this article. None of the companies responded.
- There is one thing the cruise industry has been expeditious about doing on US soil: Lobbying to keep its exemptions in place.
- According to the nonprofit Open Secrets, the cruise industry spent $66.2m in lobbying fees between 1998 and 2019. It also made contributions of at least $1.1m to candidates in cruise ship states, including $29.5k to a US representative from Florida who chairs the Panama Caucus, and $23.5k to a senator who fought to blockade a cruise tax.
CARNIVAL CORP: FROM DUMPING SHIT, PASSENGERS OVERBOARD TO THE COSTA CONCORDIA
In 2016, Princess Cruise Lines agreed to plead guilty to seven felony charges and pay a $40 million penalty for polluting the ocean and then trying to cover it up — the largest criminal penalty involving deliberate pollution by a ship at sea.
- Princess Cruises was ordered to pay an additional $20 million criminal penalty last year for violating the terms of its probation and deliberately discharging plastic in Bahamian waters. At that time, Arison pledged that his company was “totally committed” to curbing pollution.
- $813,807 for a single taxpayer-funded rescue effort
- While cruise ships avoid paying US taxes, they simultaneously benefit from the services of taxpayer-funded federal agencies.
Professor Klein, who has testified before Congress on matters of cruise ship safety, says that in the past 25 years:
• 361 passengers have fallen overboard on cruise ships (14 per year)
• 353 gastrointestinal/norovirus outbreaks have broken out on cruise ships
• 500+ environmental violations have been charged to cruise ships
In many of these cases, US agencies have to intervene — and taxpayers, not cruise companies, usually eat the cost.
- Klein has filed open-records requests and obtained documents on the companies, which he shared with The Hustle. They show that a single cruise ship passenger rescue effort can cost the US Coast Guard and the US Navy from $500k to $1m+.
- One 2009 search for a woman who fell overboard off the coast of Florida set the Coast Guard back $813,807.
- When ships go dead in the water — as was the case with Carnival’s Splendor fire in 2010 and its Triumph disaster in 2013 — these costs can balloon to $5m+.
Walker, the maritime lawyer, adds that, in certain cases, cruise ships also require the resources of taxpayer-funded agencies like the US Public Health Service, Centers for Disease Control and Prevention, United States Citizenship and Immigration Services, and US Customs and Border Protection.
What does this all mean in the context of coronavirus?
In the wake of a COVID-19 pandemic that has infected more than 157k and killed at least 5.8k people worldwide (as of March 14), the hospitality industry is reeling.
Cruise ships — often called “floating petri dishes,” for their adeptness at spreading illnesses — have been hit especially hard. After at least 21 passengers tested positive for COVID-19 aboard Carnival’s Grand Princess, the State Department urged the public to “not travel by cruise ship.”
- Customers clamored to cancel trips, and cruise stocks fell by 60% — the worst stock performance on record for the industry.
- Initially, some cruise lines attempted to weather the storm by selling tickets at all costs. According to emails obtained by the Miami New Times, salespeople at Norwegian were instructed to respond to coronavirus-inquiring customers with scripted one-liners, like “The only thing you need to worry about for your cruise is do you have enough sunscreen?”
- When we called the company’s booking hotline last week, a salesperson told us that coronavirus doesn’t exist in tropical climates.
Zachary Crockett / The Hustle
- Some major lines have since self-imposed suspensions on cruise trips to and from US ports for up to 60 days — a move that further imperils their revenue.
- The Trump administration had hinted at a potential bailout, and the Cruise Lines International Association was urging its 43k travel agent partners to call the White House to express their support for the industry.
- Critics like Klein aren’t having it. “They pay no taxes and now they want taxpayer support?” he says. “What happened to laissez-faire capitalism?”
- But as federal aid begins to look unlikely, some cruise operators have shifted their pleas to a different set of ears.
- In a video posted to Twitter, Jan Swartz, the President of Carnival’s Princess cruise line, called on the American public to help guide the company through dark waters.
- “We ask you to book a future Princess cruise to your dream destination as a sign of encouragement for our team,” she wrote. “With your support, we will emerge from this time of trial even stronger.”